Banking Beyond the Digital Wallet

Even a routine purchase, such as putting gas in your car, requires you to think through how to make the payment. Will you use a physical credit card, debit card, cash, or use a digital wallet to present your credit or debit card? Then, you have to navigate through your wallet (digital or physical) and make the payment. Finally, after completing paperwork or a digital entry, you can pump your gas.

Imagine a simplified version where you pull up, pump the gas and drive away. This type of “invisible transaction” may sound far off, but in the emerging world of open banking, this will soon be a reality and your gas purchase might look like this:

•    You grant the company permission to access your digital identity and payment information.

•    When you pull up to the gas station, cameras identify you and your license plate.

•    When you finish the purchase, the gas company’s point-of-sale system submits the payment via your bank’s open-APIs. Banks establish open APIs to allow authorized third parties to use their own software to connect to the bank directly and execute transactions.

Not only is this a faster, more convenient scenario for consumers, this model also provides consumers opportunities to protect their data and receive the differentiated service consumers are beginning to crave.

A digital identity protecting the customer

In the past, banks and vendors needed to hold lots of information about their customers. In the era of the Internet and cloud, there is no reason customers can’t have a digital identity that is online with the same availability as any cloud service.

Using distributed ledger technology, often referred to as a blockchain, consumers can securely store their personal information in a way that even they can’t tamper with it after it has been verified. For example, they couldn’t edit the expiration of their driver’s license after the document had been verified to be correct. Digital identities, as they move from the lab to the mainstream, will allow customers to control who and how their identity is accessed.

In the gas station scenario, they would be able to provide permission for the oil company to access their face via facial recognition, as well as their bank information to complete the payment. If a customer changes their mind, they can revoke access at any time without having to ask the oil company. Since identity and payment information is no longer being spread or stored across numerous vendors, the issue of information lockup, or having vendors requiring their own copy of personal information, and the risk of data breach is reduced.

An opportunity for banks to provide differentiated services

As open banking becomes mainstream, the nature of payments will change. For example, large merchants will likely embrace open banking to avoid the fees associated with using payment networks. Many see this as a threat to banks, but it is really an opportunity.

By leveraging Artificial Intelligence (AI), machine learning, and various forms of automation, banks can delivery services to individual clients that are today reserved for commercial clients. A common challenge for both consumers and companies is liquidity management. Both need to have money to meet their short- and long-term obligations.

Banks work with their commercial clients to establish a variety of tools companies can use to do this, such as loans, lines of credit, commercial paper, capital raising services, etc. Consumers also have a smaller variety of options. Unless consumers choose to seek help, they are left to manage their own problems.

By using existing data, as well as data they will accumulate and data they are given permission to use, banks can leverage AI and automation to build more tailored models of each consumers funding needs. This will allow banks to be more proactive and engage customers with recommendations for managing their short- and long-term funding goals.

As each customer’s situation changes, the models can adjust. A recent study by NTT DATA found that consumers want more advice on their spending, and in some cases, expect a bank to intervene in transactions to help them stick to their budget.

So instead of banks pushing loan rates to their customers when they see they are walking to a car dealership, a bank would be alerted when its customer is on a Ferrari lot. The bank is now positioned to say, “A Ferrari is probably not a wise choice at this time based on your student loan payments. If you really want one, let’s build a plan to get you to that goal.”

Still a way off

Although distributed ledger technology has been with us for some time, we have yet to see wide adoption. Over time, digital identity may emerge as one of the widely adopted use cases for this technology.

Although it may never be as fully distributed as the bitcoin blockchain, by introducing a small amount of trust, many technical challenges would be simplified. Similarly, financial institutions are just starting their journeys toward ubiquitous AI and most still have a fair amount of work to do so they can ensure their data is in good shape and prepared to use it to drive the AI models of the future.