Banks should take the lead in developing a trusted digital ID system

The Federal Trade Commission’s recent findings reveal that fraud losses in 2024 alone crossed $12.5 billion, a jump of more than 25% over 2023. Of this, imposter scams were the most commonly reported scam category — and identity theft alone comprised 11% of all reports received. Staggering as these figures are, the underlying factor of outdated, fragmented identity verification systems are even more alarming — especially as financial interactions are being rapidly digitalized.

Dissecting why the U.S. finds itself in this situation could fill volumes — especially as several other countries have zoomed ahead with digital identification of their citizens. Clearly, it has not been for lack of effort — but equally clearly, it points to a lack of unified and outcome-driven action. As early as 2004, the National Institute of Standards and Technology, or NIST, outlined guidelines for federal agencies to implement digital identity services. Four revisions later, the status quo remains. When the National Strategy for Trusted Identities in Cyberspace was set up in 2011, with an ambitious road map for public-private sector collaboration, it seemed a promising step forward. Yet, 14 years later, its progress remains unclear.

So, let’s set our sights on the future. What will it take for the U.S. to architect a digital identity ecosystem that works for all — and especially for the banking and financial services sector?

A unified digital identity infrastructure can help banks eliminate siloed and disparate identity verification mechanisms. This means significant duplication of effort and escalating costs can be avoided while bridging critical security gaps. No more friction-filled onboarding journeys and customer attrition — and a big yes to the inclusion of underserved populations and Gen Z customers.

Minimizing identity fraud losses (including synthetic identity fraud) is another clear incentive. Secure digital identity standards can significantly slash digital document forgeries that swelled by 244% year-on-year in 2024.

A recent U.K. study found that banks leveraging Corporate Digital Identity achieved a 32% reduction in onboarding time. U.S. banks could see similar gains. And, consider the potential for financial inclusion among the 1% of adult U.S. citizens who currently do not possess any form of government-issued photo identification.

A fundamental requirement of digital identity is a trusted identity provider. In most countries, the government plays this role through the issuance of national identities, primarily to access online public services.

However, could the U.S. think differently about public-private collaboration? As it stands today, the U.S. banking and financial services industry, due to its highly regulated ecosystem, has developed deep expertise in identity-based networks — however individualized it may be. Banks and financial services companies could well come together to take a leadership role in creating a secure, interoperable and efficient digital identity ecosystem. Sweden offers a compelling model, where bank-provided identities grant access to both public services and private platforms.

This is precisely what U.S. banks should do. They can adopt federated and portable ID solutions, while engaging in public-private pilots, such as mobile Driver’s License rollouts, NIST sandbox pilots and industry-led identity consortia. Investments in verifiable credential infrastructure and digital-first, AI-powered identity platforms will be key — modernizing legacy ID systems and enabling seamless integration with both public and federated ID frameworks.

U.S. banks can also leverage the country’s global leadership in blockchain to enhance cybersecurity, digital identity and innovation. Blockchain-enabled digital identity offers the tremendous advantages of decentralization, security and interoperability. It allows verifiable credentials and selective disclosure of identity data and eliminates the need for centralized databases, which is a great boost for privacy and security. Furthermore, it supports cross-platform and cross-state recognition of identities — a great advantage for the U.S., with its diverse state systems.

Here’s another exciting possibility for banks to consider. Integrating with open banking ecosystems can create decentralized, interoperable and trusted networks. Data can be the proxy to build a functionally equivalent digital identity ecosystem.

The government will still need to assume responsibility in terms of implementing a relevant digital identity strategy and national standards — as it attempted to do with its Improving Digital Identity Act in 2021. It should enable digital versions of existing physical forms of identification and provide the right budgets for such transformation. It could also work with device manufacturers to ensure seamless and secure access and use of digital IDs.

The need for action could not be more critical. Driven by a surging demand for secure online identity verification across banking, e-commerce and health care, the U.S. digital identity market is currently valued at about $34 billion. And there is good news on the U.S. public-private partnership scene. Last year, the Department of Homeland Security partnered with major technology firms to build interoperable digital identity systems across states. Other public-private partnerships have led to investments of more than $4 billion in digital identity initiatives. This could well be the much-needed momentum to drive innovation and foster nationwide adoption.