Open Banking and the Convergence of​ Identity Verification

Open banking is a revolutionary financial innovation that enables third-party access to customer banking data through APIs, contingent on customer consent. This system replaces the outdated “screen scraping” method, which necessitated the storage of user banking credentials, thereby significantly enhancing cybersecurity. Consumers now benefit from precise control over the data they share and can revoke access instantly.

Currently, in the US, the primary use of open banking APIs is restricted to transaction-related data, such as account balances, funds transfers, interest rates, and historical transaction data. However, future advancements in open banking APIs may allow access to identity attributes verified by banks, including names, dates of birth, addresses, and government identification numbers. This would facilitate accurate and low-friction identity verification (IDV) by third parties.

The synergy between open banking and IDV holds the potential to foster increased collaboration between financial institutions and other economic sectors. This integration offers enhanced data protection for consumers and reduces onboarding friction, enabling open banking platforms to broaden their services into digital identity.

Amidst concerns about big tech’s dominance in digital identity, leveraging open banking for identity verification is a promising strategy for US banks, which have struggled to establish themselves in the reusable digital identity market. Nevertheless, a significant challenge remains: major banks must overcome competitive barriers and fully commit to reusable Know Your Customer (KYC) processes for this innovation to succeed.

The market for identity verification is worth $10B and is expected to grow to $17B by 2027 at a 14% compound annual growth rate (CAGR).

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