The UK currently enjoys a dominant position in European financial services, including fintech. London fintech firms have enjoyed £3.5bn of investment over the last five years—more than five times any other European city—with 2017 a record year. The hottest and most digitally advanced companies base themselves in London, with the effect that digitisation is sweeping the financial services market.
The UK attracts the talent, it is home to some of the most technologically ambitious companies in Europe, its regulatory structure encourages innovation and, as a global metropolis, it has the infrastructure needed to facilitate global trade. At first glance the UK is in an enviable position as the rest of the world focuses its attention on the wave of innovation in financial services, but all is not as rosy as it seems.
One key area of infrastructure has slipped through the cracks and now threatens to topple the UK from its perch. The state of Identity in the UK is far behind that in the rest of Europe. It might seem completely unconnected but it is, in fact, central to the success of consumer-focused fintech and financial services. The UK still operates a paper-based identity infrastructure where identity is proven with a passport, driving licence or other item such as a utility bill. This is then checked and verified by hand by someone not necessarily trained to do so. This takes time, is expensive, inefficient and subject to a catalogue of mistakes.
Why is identity central to financial services?
In order to access any financial service, a customer's identity has to be established and proven to the satisfaction of regulations. Signicat's survey in 2016 found that 40% of people have abandoned a signup process in the UK because of the time it took and the difficulty in proving their identity. If customers are unable to access services, how are businesses expected to succeed? Financial services companies have made much of being 100% digital, but for the moment access remains a barrier to that goal. In the UK, the vast majority of financial services organisations do not allow for anyone to prove their identity digitally to the satisfaction of regulations. Identity remains analogue and paper-based, relying on passports, driving licenses and even utility bills. A report into bank onboarding by analyst house PAID Strategies found that nearly all high street banks require consumers to go through manual processes for ID—and the only one that did have a digital process didn't work on smartphones or tablets.
If consumers cannot access financial services digitally, the UK will face two main consequences. Firstly, thanks to the EU's labour laws, Europe's population enjoys freedom of movement and the right to work in any member state. As part of this, through the eIDAS regulation, the EU is mandating that electronic identity (eID) schemes are interoperable across the region. This helps with opening bank accounts, applying for mortgages and accessing other essential services. Since the UK does not have an eID scheme that satisfies financial regulations, it will be left out in the cold. If people are unable to open bank accounts, rent or buy properties or use government services, why would they choose to come?
Secondly, this inability to onboard new customers will make the outlook for these businesses rather bleak. For smaller fintech companies, funding and investment will start to dry up with countries that have embraced eID (such as those in Scandinavia, already a hotbed of fintech innovation) reaping the benefits. For the largest financial services firms, the millions spent on becoming digital businesses will be wasted.
GOV.UK Verify to the rescue?
All is not as dark as it seems however. The UK's digital identity scheme, GOV.UK Verify, was created with big ambitions. In 2015, a business case predicted a 90% success rate for those people and businesses looking to identify themselves through the scheme. It was also predicted that up to 77 different public services would be likely to use the system.
GOV.UK Verify has, to date, fallen well short of these aims. Only fifteen services use it, and only 37% of those who have attempted to create a digital ID have been able to access the service they intended to.
On the face of it this looks like one more government IT failure of the type that so often gets press attention, as lofty goals don't match the results achieved. But GOV.UK Verify isn't fatally flawed—it actually needs to be more ambitious in order to succeed.
Unlike other European digital ID schemes GOV.UK Verify is limited to the public sector, does not support financial services and is not interoperable with its continental counterparts. Currently there are no plans to extend the schemes capabilities beyond vague promises with no timeline.
The UK needs to look to digital identity schemes elsewhere; to find success, they need to emulate success. One of the world's leading digital ID successes is Norway's Bank ID. Bank ID is used by 3.7m Norwegians, with over a million using the system on mobile. As the name suggests, its original use was for banking products, but this has now extended to signing leases, accessing secure post, and more.
GOV.UK Verify aimed to conquer public services first and then be made available for use by private services, and herein lies the flaw. People simply don't engage with public services often enough for digital ID to be a regular part of their lives. Filing tax returns and renewing vehicle tax are performed annually, while other services such as renewing driving licenses are only necessary every decade. It's unlikely that people will remember their credentials with such a long gap between uses. Using GOV.UK Verify won't be a simple process for most—instead many users will need to go through the rigmarole of resetting passwords and recovering IDs, sometimes via post. If the process of using GOV.UK Verify is so painful, why would anyone want to use it more regularly?
The private sector provides online services people use every day. For example, people use banking for regular tasks such as paying bills, moving money between accounts, and checking their balance. Identity and signing is also common for more than just financial services: signing leases, receiving recorded deliveries and secure post, and proving your age when buying age-restricted items. Using eID for these purposes is far more convenient than the current methods that involve card readers, presenting utility bills or passports.
The new Public/Private Partnership
To make a success of digital identity, it's vital to have buy-in from those corporations that have already performed the due diligence on so many identities—retail banks. A public/private partnership of government and banks is the only way l to get a digital identity system working across multiple sectors and—a must for success—getting individuals and businesses to see the benefit of such a system and use it.
It's crucial to build a digital identity system that will be popular with everyone using it as Europe makes efforts to make each country's digital identity interoperable. The EU's eIDAS project is a framework where the ambition is that anyone or any business in the EU can safely and securely identify itself to any other business in the EU. eIDAS is part of the EU's plan to create a digital single market, which aims to "tear down regulatory walls" and make goods and services more universal. If the plan is successful, there's no reason why a business in Barcelona could not take advantage of an innovative new service created in Tallinn.
The EU estimates that a single digital market could contribute €415 billion per year to the economy and create hundreds of thousands of new jobs. Without a suitable digital identity scheme, the UK will be locked out of this opportunity, and may have to abdicate its financial services crown—a second tier digital identity scheme will ultimately simply mean a second-tier economy.
Gunnar Nordseth is CEO of Signicat.