Envision a world where your digital identity travels as freely as you do, allowing you to access financial services anywhere with a simple click.
In today’s interconnected global economy, seamless cross-border financial transactions are no longer a luxury but a necessity.
Open finance is transforming this landscape, enabling individuals and businesses to access financial resources more efficiently by sharing data across different financial institutions.
Open Finance, globally interconnected, can be particularly beneficial for expats, frequent travelers and multinational businesses, simplifying the complex process of identity verification across borders.
This article, part 3 of the series, explores the future of identity verification in cross-border open finance networks and how it can redefine the way we think about international financial transactions.
Identity Verification in Cross-Border Open Finance Networks
A friend in the UK is looking to open a bank account in the US for his new startup based there. However, most major banks require a physical visit to a branch to verify his identity and review his documentation.
The physical visit could be avoided if he could share his information from his UK bank with the US bank through a safe and secure network using Open Finance. This would include his identity and banking details. The US bank could then cross-verify his identity and mitigate risks associated with identity verification and fraud prevention.
Once verified, the opportunities across borders through Open Finance open up. By sharing his bank information from the UK when starting up, he can not only set up a bank account but also access credit from vendors, obtain loans from financial institutions in the US, and seamlessly start his operations in the US.
Unlocking Opportunities with Real-Time Identity Verification Across Borders
A plethora of opportunities open up once real-time identity verification is enabled by Open Finance across borders.
For instance, imagine a freelancer in Australia seeking to work with clients in Japan. Real-time identity verification can streamline the process of setting up bank accounts, receiving payments, and accessing credit without the need for extensive paperwork or physical presence. Similarly, a multinational corporation expanding to new markets can quickly establish financial operations, secure loans, and manage transactions efficiently across different countries.
How can real-time identity verification be achieved in an interconnected global financial network, and what obstacles must we overcome?
Navigating Cross-Border Regulations
While at the core of open banking and open finance is explicit consent from users to share their financial data, there are regulations and laws that protect the user’s privacy and right to control their data sharing.
Regulatory compliance is both a challenge and a necessity in cross-border identity verification. Financial institutions must comply with the regulations of both the origin and destination countries. These regulations can vary significantly in terms of data privacy, security standards, and reporting requirements. Successfully navigating these regulatory landscapes demands extensive knowledge and resources, often posing a barrier to seamless cross-border financial transactions.
Regulations are necessary to mitigate risks of fraud and money laundering more so in global data transfers and money transactions scenarios. While compliance could mean a lot of legal paperwork, they are imperative to protect consumers and businesses.
Shannon Yavorsky, Global Chair, Cyber, Privacy & Data Innovation Practice Group at Orrick, Herrington & Sutcliffe, pointing out the nitty gritties, says “ To mitigate the risks of fraud and money laundering in cross-border data transfers, especially for identity verification, it is essential to comply with each country’s regulations, such as the GDPR in the EU.
Currently, the EU-US Data Privacy Framework (DPF) facilitates the free movement of data between the EU and the U.S. However, for data transfers between the EU and countries like India, which may not provide adequate protection by EU standards, safeguards must be implemented.”
Global Standards for Identity Verification
Having standards that are accepted globally would be ideal for cross border identity verification and data transfers. These are still work in progress and will take a lot of effort and time before being accepted.
Barry O’Donohoe, CEO of Raidiam, a provider of trusted ecosystems to countries and enterprises for Open Banking and Open Finance says, “
We are enabling digital identity ecosystems too such as providing the technical underpinning for schemes such as ConnectID in Australia which is a commercial ecosystem. And we are seeing proposals to replicate this model across borders.
We can effectively support the cross-border federations between different national networks such as Japan and Australia or other national digital ecosystems built using the open international standard – OpenID Federation specification of which we are a listed contributor: – this essentially provides the connective tissue between multiple national ecosystems. “
In cross border use cases, identity verification could happen between financial institutions in each country or geography based on the KYC information available at both ends.
While achieving universal acceptance of a single set of standards may be challenging, bilateral agreements between countries and direct deals with financial institutions could serve as a starting point.
Open Finance in Countries with Digital Identities
India’s open finance network called Account Aggregator works to strengthen digital identities to expand credit availability and expedite processes, especially for small ticket loans.
B.G. Mahesh, CEO of Sahamati, India’s Account Aggregator (Open Finance) Collective, explains: “Let’s consider the example of a user seeking a loan. The user shares their digital identity with the lender and other related information to apply for the loan.
Digital identity is used along with other information that provide address and other details to determine the identity of the user. The user’s identity is then cross validated by digitally signed bank statements from banks via the Account Aggregator network, India’s Open Finance network.
Most of the verification happens in real time. The last part of the verification by the lender is an online video KYC process that takes a few minutes which, by the way, is becoming more and more popular than paying a physical visit to a branch office. “
Jonathan Holman-Rohwer, Author and Module Tutor at CCAF, Cambridge Judge Business School, highlights the impact of digital identity. He states, “ When banks across countries can leverage each other’s Know Your Customer (KYC) records and validate them alongside intertwined digital identity schemes, it can streamline international banking. This mutual benefit could enable near real-time account setup, enhance customer experience, and accelerate cross-border financial transactions.
National Digital identity schemes can significantly simplify verification for international transactions. There are many great examples across the Gulf Cooperation Council (GCC). They allow citizens, residents and even visitors to access many digital and physical services seamlessly.”
Having a digital identity that can be easily verified by financial institutions would enhance the ability of global financial institutions to offer financial services and products seamlessly through interconnected Open Finance networks.
Open Finance in Countries Without Digital Identities
In countries lacking comprehensive digital identity infrastructure, open banking and open finance can play a pivotal role in identity verification.
Henk Van Hulle , CEO of Open Banking Limited (OBL),the entity that built the UK’s Open Banking standards and industry guidelines, explains: “In countries lacking a comprehensive digital identity infrastructure, open banking and open finance can play a pivotal role in identity verification.
By leveraging consent-driven data sharing between financial institutions, these systems can provide a more accurate and holistic view of an individual’s or business’s financial behavior. This includes transaction histories, account balances, and payment patterns, which can be used to authenticate identities and assess trustworthiness.
Open banking/finance APIs enable third-party providers to offer innovative solutions that allow individuals or businesses to establish their financial identity through this alternative data source, giving a financial signature that could be used instead of a traditional digital identity. Then this identity could be used as a signature to attest the individual or businesses identity beyond open banking.
Open banking trust services can also be used to enroll the individuals and businesses into a directory where identities can be created using traditional verification techniques (AML, Sanctions, etc) to assess these individuals or businesses and issue a digital certificate that can be used to attest identity.
This is the model used in the UK open banking ecosystem. This decentralized approach helps bridge the identity verification gap and fosters trust within the open banking ecosystem and beyond without the need to rely on digital identity verification processes.”
There is an effort being made in the UK to set digital identity standards.
As mentioned in the previous article, 60 countries around the world are using the UK’s blueprint to build their own Open Banking frameworks. It will be interesting to see if they adopt the UK’s digital identity standards, once they are ready, to make cross-border movement of data and money seamless across these countries, or if they develop their own standards.
Conclusion
Achieving seamless and secure identity verification in cross-border open finance networks requires overcoming significant challenges, including establishing global standards, managing diverse identity document formats, and navigating complex regulatory landscapes.
While these obstacles are substantial, the potential benefits of streamlined identity verification and financial transactions across borders make the effort worthwhile.
As technology advances and global standards are adopted, the vision of a truly interconnected global financial network becomes more attainable, promising a future where cross-border financial data transfers and transactions are as straightforward as, or even better than, domestic ones.
Can Open Finance transform digital advertising?
Open Finance enables individuals and businesses to access services and products from financial institutions, fintechs and related businesses whenever they need them.
Let’s flip this over.
Can financial institutions, fintechs, and other businesses use Open Finance to reach out to people like my friend and offer financial services? What about privacy concerns? Is it possible for them to advertise to potential customers in acceptable formats while making a more “judicious” use of data and respecting their privacy?
Digital advertising is often frowned upon by regulators worldwide, primarily due to the indiscriminate use of user data by adtech and digital advertising companies without respecting user privacy.
The Consumer Financial Protection Bureau (CFPB) has made it clear that they are not in favor of digital advertising gaining access to users’ financial data, although the final rules are expected in October 2024.
Adtech folks often say that people don’t value privacy as highly as regulators assume and that concerns about privacy harms from digital advertising are overstated.
The question is: Can Open Finance catalyze a change in digital advertising and make it safer and palatable to regulators, privacy activists and people?
