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.”
