Digital payment methods have rapidly proliferated due to the clear value they provide to consumers, merchants, and financial institutions. Digital identification could be just as valuable, yet its adoption has lagged behind due to prolonged regulatory processes and the lack of real-world applications.

In their latest report, Where Are the Digital IDs? Three Questions You Must Ask, Christopher Miller, Lead Emerging Payments Analyst, and James Wester, Co-Head of Payments at Javelin Strategy & Research, examine the obstacles to digital ID adoption. They spotlight how accelerating digital ID acceptance can create a powerful opportunity for financial institutions.

Unnecessary Duplication

Recent Javelin data found that roughly 50% of consumers have used a digital wallet. Now that all the early adopters have tried the technology, the remaining group of consumers has several objections to digital wallet adoption.

There is a segment of the population that has never used a digital wallet and likely never will. This could be because they aren’t tech savvy or prefer  the relative comfort of the payments options they trust.

However, many consumers who haven’t tried mobile wallets fall on a spectrum from hesitant to resistant. One of the main reasons for their reluctance is that digital wallets seem like an unnecessary duplication—consumers still need to carry physical wallets to hold their driver’s license or identification card.

“They just don’t see the value in switching to a digital wallet,” Miller said. “Even in the cases where a consumer has a digital ID, they’re not accepted in every situation. If they have to think too much about which ID works where, most people will simply default to the tried-and-true solution every time. Much like a payment, your identification is something that has to work when you need it.”

The Three Questions Around Digital ID

To understand the state of digital ID adoption, Miller and Wester asked three main questions:

• Are consumers interested in digital IDs?
• Are digital IDs available?
• Are they accepted?

After researching consumer preferences, the study found that consumers are largely interested in digital IDs. Unfortunately, they aren’t often available.

“Slow progress is being made on the availability front, and there are only nine states that have a form of digital ID that is compatible with a digital wallet,” Miller said. “There are more states that have launched digital IDs in a stand-alone app, but that creates limitations. Your digital ID might be accepted at DMV offices, but not at very many businesses.”

There are a multitude of instances where organizations need to verify a customer’s identity, from opening a checking account to buying age-restricted items like alcohol. However, even in states where digital IDs are available, they aren’t widely accepted by businesses.

“We still haven’t reached the point where you can leave your physical wallet at home, so it constitutes a barrier,” Miller said. “There have been debates and proposals in states like Michigan, Ohio, and Minnesota, but my best view is that this is probably a 10-year process, maybe even longer. It’s a fragmented and confusing situation where some states do and some states don’t, which frankly isn’t very inviting for consumers.”

A Slow Cycle

Many states have announced plans for digital IDs or digital wallet compatibility. Unfortunately, the approval process often depends on budgeting cycles, which can take years. Additionally, launching a digital identification isn’t always a top priority for lawmakers. Even when it is, the laws in some states might have to be amended before they can be accepted as a valid form of identification.

“The cycle always moves slower than consumer interest and willingness,” Miller said. “There have been talks that California will offer a digital ID in an app in the next year or so, and that’s a big step. However, it still won’t be compatible with digital wallets, so it isn’t likely to change payment behavior. Once digital IDs are available in Apple and Google wallets, that’s what will drive widespread adoption.”

A Path Forward with Digital ID

Given the correlation between digital ID and mobile wallet adoption, payments companies can actively promote digital wallet usage by teaching their merchant clients about the benefits and applications of digital identification.

In many states, digital identification regulations are developed based on merchants’ preferences. Merchants have the power to choose whether to accept digital IDs, create the standards governing them, and build training programs for their industry.

“Those are all good things, but most businesses aren’t going to take that initiative on their own, especially smaller businesses,” Miller said. “There’s an opportunity here for payments providers to supercharge digital ID acceptance by providing guidance to their merchants. It could differentiate them for other financial companies and potentially create a path forward for digital wallet acceptance.”

The post How Digital IDs Can Impact the Adoption of Digital Wallets appeared first on PaymentsJournal.

Digital wallets are becoming more like the real thing with every passing day. No longer just a vehicle for payments, Google Wallet and Apple Wallet are expanding their use to include identification functionalities.

California’s DMV is testing support for ID cards within the Google Wallet app, according to 9to5Google. Currently in beta, this feature is only available to state DMV employees at the moment.

Earlier this week, California was also testing a measure that would allow individuals to store their ID in an Apple Wallet. Currently, California users who want a digital ID on their phones must use the state’s DMV Wallet app.

As of July 2024, 11 states offer some form of digital ID to residents. Of these, four states have integrated their digital IDs into various digital wallets such as Apple, Google, or Samsung. A similar number  of states, such as Connecticut and Ohio, have announced digital ID initiatives but have yet to launch them.

Laying the Groundwork for Acceptance

Christopher Miller, Lead Analyst of Emerging Payments at Javelin Strategy & Research, recently published a report, titled Where Are the Digital IDs? Three Question You Must Ask. To understand consumer adoption of digital wallets, Miller addresses three key aspects: the availability of digital wallets, where they’re accepted, and the level of consumer interest in using them.

“Early adopters have already begun using them for digital IDs,” Miller said. “We’re looking for what the next key threshold will be for adoption.”

California could serve as a bellwether, given it’s the most populous state in the nation. Moreover, as Miller points out, its cultural status could help with acceptance as well.

“If people see someone using a digital wallet on TV or in a movie, it starts to seem normal to them,” Miller said.

The transition from state-issued IDs to digital versions is also significant. As Miller’s report notes, digital IDs are accessible through both mobile digital wallets and state-issued mobile ID apps. However, the availability of digital IDs via mobile digital wallets is likely to have the greatest impact on adoption. 

Google has long planned for its wallet to be used for more than just money. Last year, Dong Min Kim, Director of Product Management at Google Wallet told PaymentsJournal: “A lot of the things that you used to carry around with you are becoming digitized, and people are getting a lot more comfortable about what their mobile device can do. There’s the payments experience to Google Wallet, but we also want to support non-payment use cases that are coming online more and more.”

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Digital identification is an inevitability, as evidenced by the accelerating adoption of digital driver’s license programs across the U.S. While consumers are beginning to understand the security and convenience benefits of digital IDs, many financial institutions aren’t prepared to support the emerging technology.

The Promise of Digital IDs: Reduced Fraud and Efficient ID Proofing, the new report by Kevin Libby, Fraud and Security Analyst at Javelin Strategy & Research, examines the advantages of digital identification and the challenges it presents for consumers and financial institutions.

The Coming Wave

Consumers crave convenience and security, and digital IDs have become increasingly popular because they can deliver both aspects. Recent data showed a 4% year-over-year increase in the number of U.S. consumers who would support a national digital identification program, so long as it is voluntary and secured by biometric data.

Digital ID advocacy is even higher among consumers who experienced identity fraud in the past, or had their personal identifiable information exposed in a breach. That implies those consumers believe digital credentials are more secure than physical IDs.

“Financial institutions and service providers, along with any other company that relies on effective and efficient identity verification, should prepare for the coming wave of digital identification issuance,” Libby said. “They will have to develop systems to interact with those credentials and keep those processes up to date.”

Privacy Concerns

There are privacy concerns with digital IDs. A physical ID is under a person’s control, so they are likely to know if it has been lost or stolen. On the other hand, digital credentials could be accessed, and their information could be captured without a customer ever knowing it.

Some people might be reluctant to adopt digital IDs because they don’t want their activity tracked. It’s why most consumers prefer a decentralized digital ID model, where the credential is fully contained on a mobile device instead of a government server. That would mean the digital ID is only as secure as its wallet, however.

One of the privacy benefits of the decentralized model is users only share pertinent information with retailers. When a customer buys an age-restricted product like alcohol, they don’t have to present identification that details their name, address, and exact date of birth. The retailer could scan the digital ID and get a simple confirmation the customer is of the proper age for the purchase.

As more organizations begin to trust digital IDs, fewer companies will need to collect and store personal information. Many organizations will then become much less susceptible to data breaches.

New Types of Fraud

Even though large-scale breaches might be mitigated, criminals will target the remaining personal data repositories. That includes government systems, banks, and other organizations that have the legal requirement to capture personal information.

Financial institutions must enhance security protocols and protect servers that house personal information because they will increasingly be targeted in the future. Banks often already have strong security measures, but criminals will test those defenses if institutions are one of the few sources of personal financial data.

“Another downside of the decentralized digital ID model is it could open avenues for new types of fraud,” Libby said. “There have already been cases where criminals drugged an individual and used their biometrics to unlock their phone. Once they have access, criminals can get to all the person’s accounts and drain them. It might be less scalable fraud, but it’s just as impactful for consumers.”

Because of the new fraud trends, organizations can’t become totally dependent on digital IDs as the sole form of verification.

Onboarding Friction

If the identity verification process becomes too intense, especially during the onboarding phase, consumers might abandon the institution entirely. For example, a customer might not have their ID available, or they don’t want to take a picture of their ID and upload it. Those are privacy- and convenience-centered friction points that cause people to drop out of the onboarding process.

“If banks don’t create pathways for users to bypass friction points by accepting digital IDs automatically in their website or mobile application, consumers might move on,” Libby said. “It could cause financial institutions to lose market share, and it could be as much as 3% to 6% of consumers who depart each year.”

Even though digital IDs are likely to become the standard, physical identification won’t be eliminated. There will always be consumers who don’t have mobile devices that support digital IDs. Physical IDs will also be a backup if digital credentials are unavailable or corrupted. Consequently, financial institutions should develop two separate pathways to accommodate all users.

Like Wildfire

Despite privacy and security concerns, consumers are likely to continue to adopt digital IDs. Perhaps the biggest hurdle to widespread adoption is many customers don’t know digital identification is available. Once consumers understand a digital driver’s license, for example, is issued in their local geography, the convenience benefits will likely spur them to acquire it.

“Not only should banks and credit unions prepare for digital IDs, but they should also implement multi-layered identity verification systems,” Libby said. “It’s imperative to act quickly, because digital credential adoption is accelerating. As more and more consumers understand the use cases for digital IDs, it will take off like wildfire.”

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