Credit unions are experiencing pressure from a multitude of sources and can no longer rely solely on traditional methods and technology. From an ever-changing regulatory environment to meeting the digital demands of members to keeping bad actors away, credit unions are fighting to keep pace with the rapid changes brought on by the Fourth Industrial Revolution.
To address these challenges, credit unions around the world are turning to a new technology built to streamline processes, reduce costs and create a one-of-a-kind member experience. Decentralized identities can replace identifiers, such as usernames with IDs that are self-owned, independent and use distributed ledger technology to protect privacy and secure transactions. Decentralized identities are being adopted by credit unions today to tackle historically timely, costly processes, including new member onboarding, authentication and compliance management.
Speed Up the Authentication Process
Usernames and passwords are quickly becoming a thing of the past. With autosave on internet browsers and biometric “scanning” on most smartphones, consumers have become reliant on technological advances to easily and seamlessly login to their accounts. Conversely, this makes it easier to forget usernames and passwords. According to recent Ponemon Institute research, the average consumer spends 10.9 hours a year entering or resetting passwords, and organizations spend $5.2 million annually on password management.
Recently, SMS authentication has become a popular method of verifying identities. Unfortunately, SMS authentication runs the risk of interception by bad actors and is not considered to be a viable or secure method of authentication, according to National Institute of Standards and Technology (NIST).
Self-sovereign identity (SSI), a decentralized identity built on distributed ledger technology, is one new method credit union leaders are turning to address the authentication issue. SSI allows members to control their personal identifiable information by utilizing a digital identity wallet provided by their credit union to verify their identity within seconds online, on the phone or in a branch, eliminating the need for usernames, passwords and knowledge-based questions. And, since it does not depend on any central authority, it is nearly impossible for hackers to steal or corrupt.
Ease the Pain of New Member Onboarding
SSI opens the door for credit unions to easily solve several business challenges credit unions face. One of the most challenging is the account opening and new member experience. Onboarding new members can be a strenuous, tedious process for many credit unions. It requires extensive paperwork, multiple forms of identification and a lengthy amount of time.
In addition to onboarding being a strenuous process for employees, this interaction can be off-putting for members as well. According to research conducted in 2018 by BAI, consumers find the account opening process to be difficult and time-consuming. This outdated experience is often the first one a member has with their credit union and can risk leaving a negative lasting impression.
Instead of relying on processes of the past, credit unions are now exploring new account opening methods leveraging decentralized identities. This highly secure technology enables credit unions to automate the onboarding process with SSI, replacing the long forms with simple, digital verification processes. Credit unions leveraging this new tech can quickly verify new and current members’ identities while staying in compliance, cutting down costs and time associated with traditional processes.
Minimize Compliance Costs and Risk
Compliance is a necessary burden for every credit union. While regulatory requirements keep credit unions and their members safe, it can create a hefty financial burden on financial institutions. According to a LexisNexis report, mid-to-large sized firms average $18.9 million a year in compliance costs related to Know-Your-Customer (KYC) and Anti-Money Laundering (AML) regulations. Credit unions can leverage DLT and SSI to manage compliance-related burdens and reduce costs associated with them.
Additionally, verifying identity information requires a deep level of trust between a member and credit union: the credit union must trust that the person is truly who they say they are, and members need to feel as if their information is safe to share with the person on the other end of the phone, the website or employee in the branch. For example, every interaction a member has with their credit union starts by verifying their identity, often in the form of verifying a member’s address, transaction history or the last four digits of their social security number.
DLT-based SSI eliminates the need for manual human verification by relying on the automated safeguards built into the technology. Additionally, it eliminates the need for members to verify personal identifiable information, such as their address, since they control what information is shared during each interaction. By relying on this secure authentication method, credit unions can reduce time and costs associated with KYC and be able to exchange KYC information with other credit unions for shared branching and for other digital credential exchange purposes.
Decentralized identities are no longer a far-off dream – it is being adopted by U.S.-based credit unions today. The credit unions currently leveraging this technology are experiencing first-hand the benefits that come along with SSI and DLT-based solutions, including eliminating the middleman and putting the credit union back in control of their member relationships. Even more, SSI is highly defensible: once members have selected a solution, network effects will make it very difficult for them to switch.
In the coming years, decentralized identities will touch every industry around the world. Credit unions leveraging decentralized identities will be well-prepared to tackle the challenges of today and trials of tomorrow. SSI is a major business opportunity for credit unions, one that places financial institutions back at the center of their customers’ lives and provides value beyond simple deposit, transaction and lending services.