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While the COVID-19 pandemic has caused the virtual shutdown of certain industries, it has caused others to boom, including the global online payments and online retail markets. This trend is fuelled by the rapid adoption of instant, cardless and contactless payment methods – a shift that is being encouraged by the World Health Organization (WHO) because of how easily COVID can be transmitted on cash and credit card surfaces. The dark side of this shift, however, is the concomitant growth of online payment fraud. 

All of these trends are driving the growth of an important development in today’s rapidly digitised world of commerce: the fast growing demand for digital identity verification solutions to help businesses and organisations determine who their true users are and to root out fraudsters who try to infiltrate their platforms and swindle them and their customers. 

To understand the growth and importance of digital identity solutions in today’s rapidly digitised world, we bring you a Q&A with Mark Heymann of the South African banking and payments SaaS company Direct Transact and its award-winning Digital Identity platformDirect Transact’s digital identity platform helps banks and non-banks verify the true identity of their users before they can transact on their online payment platforms. 

Q&A with Mark Heymann on the growing importance of digital identity verification:

  1. What is digital identity and why is it becoming important? 

Digital identity refers to the acceptable and trusted digital format of a person or company’s identity. Digital identity verification is becoming increasingly crucial for the onboarding of customers at banks, telcos, retailers/ e-tailers and insurance companies as the world rapidly digitises right now. Big global retail trends like buy-now-pay-later (BNPL) are also fuelling the need for shopper identity verification. In the process of digital identity verification, a person’s ID or passport, photos, company documents and address information can be verified against golden source (definitive) data and biometrics, and in some cases even their online activities and public records. The COVID pandemic has led to a massive boom in online transactions globally. The global digital payment market is expected to grow at a compound annual growth rate of 19.4% from 2021 to 2028 to reach a value of almost USD 240 billion by 2028, according to market research firm Grand View. With this also comes a huge spike in online fraud which is estimated to cost the global economy $5 trillion in losses in 2021, according to Stripe. Digital identity verification will continue to stop online transaction fraud in its tracks – and this is very important for the health of the global economy and safety of consumers everywhere. 

  • How does digital identity fit into the digital transformation picture?

The digital transformation of businesses is experiencing a quantum leap at the moment due to the shifts brought on by the COVID pandemic, whether it be related to the adoption of cloud computing, big data, ecommerce, more software or app-based business management solutions, or moving workforces online. Within this context, the global payments ecosystem is believed to be experiencing five years worth of growth in just one year, according to McKinsey. Within this context, digital identity verification plays a vital role in safeguarding the entire global payments ecosystem, and all the billions of people who rely on it daily, against online financial crimes which unfortunately are also on the rise. 

  • What are the current market needs and use cases for digital identity? Where do you see opportunities for the identity verification industry in the next few years?

The major drive within the market is to give customers a frictionless experience to consume services or buy products. For example, in China customers can buy groceries using their digital identity to pay for the goods in an unmanned retail store (Bingo Boxes). The European Commission also recently announced its plans to deliver a digital identity and wallet framework to its citizens in the next few years. They are urging member states and the private sector to collaborate on the delivery of its first identity verification toolbox by September 2022, as part of its greater mission to achieve an Open Finance and Open Data economy. Other countries will follow suit. As the world moves towards the universal adoption of digital identity, I see a major opportunity in the creation of digital identity distributed ledger technologies that will give individuals and companies the ability to have their own self-sovereign identity (SSI). SSI is a model for managing digital identities in which an individual or company has sole ownership and control of their accounts and personal data, which can be shared safely when transacting with a bank, telco or retailer. 

  • What role will digital identity play in the unfolding digital currency space going forward, in your opinion?

Digital identity will be used to onboard digital currency customers in the future. In fact, as most countries now move towards the launch of their own Central Bank Digital Currencies (CBDCs), it is expected that central banks the world over will require rock-solid digital identity verification of users to onboard users and stamp out illicit finance and bank disintermediation risks. The Financial Times wrote an in-depth report on it recently. Digital ID solutions will protect users against the abuse of personal data on the one hand, while protecting the payment system against money laundering and financial crime on the other.

  • Do you agree that there is a race currently happening between payment leaders to find and offer the perfect digital identity solution and if so, why? 

Yes, there certainly is a global race at the moment between payments providers to provide frictionless and customer-centric digital identity verification processes to enable faster, safer, slicker money flows for individuals and organisations. 

  • Who is your target market for digital identities and how do you differ from your competitors?

Our simple and effective digital identity verification solutions are useful to a variety of industries, including telecommunication, financial services, retail, manufacturing and agriculture businesses. They all handle online payments and therefore they are all vulnerable to fraud.

Most competitors focus on the workflow and onboarding processes for their customers, and sell a full package solution to customers. We focus on giving our customers a Software as a Service (SaaS) model for digital identity verification at the intervention point, which means customers pay for the data they use at this intervention point, thus reducing costs. Customers only use what they need.

  • Please explain to me why the European Commission is moving so fast on digital identity now, and whether this is a global trend? 

In Europe they want to start connecting digital payment wallets to each citizen’s digital identity. The European Union has already established regulations regarding an e-ID in 2014 and multiple versions of the GDPR (General Data Protection Regulation).The EU has proposed to create a framework for a “trusted and secure European e-ID” that will be available to all citizens, residents and businesses to make it easier to use as national digital identity to prove who they are in order to access public sector or commercial services regardless of where they are. The reason for the acceleration of the digital identity project, I believe, is to support the digital transformation process in key areas like payments, banking and public sector services. This will become a worldwide trend. 

  • Why are credit card companies investing in digital identity solutions?

Credit card companies have invested in payments and digital identity companies in order to solve a whole host of problems that have traditionally plagued the credit card payment ecosystem, from fraud to regulatory compliance issues.

A few examples: 

  • Mastercard recently completed its acquisition of digital identity verifier Ekata for $850 million, apparently to create a safer, seamless way for consumers to prove who they say they are in the new digital economy and to enable greater financial inclusion for law-abiding citizens. 
  • American Express recently boosted its fraud identification solution Accertify by collaborating with other online fraud prevention companies to help tackle “card-not-present fraud”. They believe merchants and card issuers need to share more data with each other at the moment an online purchase is happening to instantly identify and block fraudulent purchases. 
  • In 2016 already, Visa acquired CardinalCommerce, a leading digital authentication company, to support their focus on accelerating the growth of digital payments and commerce, and to secure the next generation of payments be they via browsers, mobile apps or connected devices.

I also believe digital identity verification will be crucial to the credit card companies when it comes to converting digital money, whether that be Bitcoin or CBDCs, into fiat currency – for instance, when someone pays for goods in a real shop using their credit card out of their digital currency account. Digital identity gives credit card companies the ability to enable the transferring of value using token-based money by transferring the token from one identity to another identity, for instance, if you’re giving a R20 digital bill to your friend.

Understanding the picture in numbers: 

  • Growth of the online payment market: 
    • According to a June 2021 report by the global market research firm Fortune Business Insights, the global online payment market size was USD 3,286.52 billion in 2019 and is projected to reach USD 17,643.35 billion by 2027, exhibiting a Compound Annual Growth Rate (CAGR) of 23.7% during the forecast period.
    • According to a February 2021 report by multi-country market research firm Grand View Research, the global digital payment market size was valued at USD 58.30 billion in 2020. It is expected to expand at a compound annual growth rate (CAGR) of 19.4% from 2021 to 2028.  The global digital payment market is expected to grow at a compound annual growth rate of 19.4% from 2021 to 2028 to reach USD 236.10 billion by 2028. The market is expected to benefit from the high adoption rate of smartphones, rise in e-commerce sales, and improved internet penetration globally. Governments across the globe are undertaking initiatives to digitise payments. This is promoting economic growth and is benefitting end-users in many countries across the globe. For instance, in February 2019, the central bank of Mexico announced the launch of its smartphone payment system, known as CoDi, to reduce cash transactions in the country.
    • An October 2020 report by McKinsey & Co, states that the crisis is compressing a half-decade’s worth of change in the global payments ecosystem into less than one year—and in areas that are typically slow to evolve: customer behaviour, economic models, and payments operating models. McKinsey notes a rapid global decline in cash and ATM usage, and a massive shift from physical (branch) to virtual banking. 
  • Growth in online retail: 
    • The UN trade arm UNCTAD has noted a sharp increase in online retail worldwide due to rapid digitisation brought on by the COVID-19 pandemic and the retail sector’s need to adapt for survival in a changed world. Retail remains one the biggest drivers of economies and job creation in the world. According to UNCTAD’s figures, online retail made up 14% of the US retail market in 2020 versus 11% in 2019, and 23.3% of all retail in the UK in 2020 versus 15.8% in 2019. Globally, the dramatic rise in e-commerce amid movement restrictions induced by COVID 19 increased online retail sales’ share of total retail sales from 16% to 19% in 2020, according to estimates in an UNCTAD report released in May.
  • Growth in online payments fraud: 
    • According to global online payments facilitator Stripe, which recently launched Stripe Identity, online fraud is now estimated to cost the global economy an estimated $5 trillion dollars this year. As ecommerce has skyrocketed during the COVID pandemic, unfortunately so has fraudulent transactions – and unfortunately the biggest pain points faced by businesses today is the ability to separate legitimate users from fraudsters. 
    • According to an April 2021 report by global market research firm Prophecy Market Insights, the global online payment fraud market accounted for US$ 4.6 billion in 2019 and is estimated to be US$ 18.6 billion by 2029 and is anticipated to register a CAGR of 15.0%.
    • According to research by global insights company TransUnion, scam artists are ramping up their efforts in the financial services industry. When comparing figures recorded between September 1st to December 31st 2020, and January 1st to May 1st 2021, the percentage of suspected digital fraud attempts within the financial sector increased by an alarming 149%. Across industries, the rate of suspected digital fraud attempts globally rose by 24% when comparing the first four months of 2021 with the last four months of 2020.
  • Growth of the digital identity solutions market: 
    • ResearchAndMarkets.com predicted in 2020 that the global identity verification market was expected to grow from $7.6 billion in 2020 to $15.8 billion in 2025 – but could be boosted even further by the current flurry of government-led initiatives around the world to promote and support digital identity verification.