Digital identity in payments: Building the trust backbone of a digital economy

The concept of verifying identity has underpinned human civilisation for millennia, from Mesopotamian seals to ink signatures and passports.

Today, as the payments industry undergoes rapid transformation, digital identity (DI) has emerged as a foundational infrastructure enabling security, trust, and inclusion in an increasingly interconnected economy.

The Evolution of Digital Identity

Digital identity in payments: Building the trust

A digital identity is a trusted digital representation of an individual’s or organisation’s unique attributes, verified through credentials such as biometrics, cryptographic keys, or official records.

Unlike physical documents, DI allows instant verification online or in-person, simplifying complex financial processes.

In the context of payments, DI plays a pivotal role.

It enables consumers, merchants, financial institutions, and governments to authenticate transactions securely, reducing fraud risks while complying efficiently with regulatory requirements.

As Visa’s 2025 whitepaper highlights, over 850 million people globally still lack official ID, with an even greater number excluded from digital identity systems.

This exclusion restricts access to basic services, banking, and e-commerce, hindering financial inclusion and economic development.

The McKinsey Global Institute estimates that widespread digital ID adoption could unlock economic value equivalent to 3–13% of GDP in some countries by 2030.

This figure underscores DI’s transformative power not only in emerging economies but also in developed markets aiming to digitise public services and payments infrastructures further.

Why Digital Identity Matters for Payments

As financial transactions increasingly move online, digital identity provides the security backbone necessary for efficient payments.

Traditional authentication methods relying on passwords and manual document checks are not only time-consuming but also vulnerable to fraud and breaches.

One of DI’s greatest advantages is fraud prevention.

By enabling robust user authentication, DI minimises the risk of identity theft and unauthorised transactions.

India’s Aadhaar programme, the world’s largest biometric ID system, has drastically reduced welfare fraud by verifying beneficiaries biometrically before disbursing payments.

In the private sector, biometric authentication for payments has strengthened defences against credential stuffing attacks, a growing concern as digital commerce expands.

Regulatory compliance is another area where DI proves invaluable.

Under Europe’s PSD2 regulation, Strong Customer Authentication (SCA) is mandatory for most electronic payments.

Digital ID technologies simplify compliance with such requirements through multi-factor authentication processes that combine something the user knows (password), something they have (device token), and something they are (biometric data).

This enhances security while ensuring frictionless user experiences.

Moreover, digital identity builds consumer trust by simplifying account onboarding and transactions.

Instant identity verification reduces the friction of manual data entry, enabling seamless checkout processes in e-commerce and faster onboarding for banking services.

The Forrester Consulting study commissioned by Regula forecasted that digital identity would have the most significant impact on online financial transactions, account openings, and e-commerce, highlighting its crucial role in shaping user experiences.

Digital Identity Transforming Payments Ecosystems

The applications of DI within payments are extensive and transformative.

In cross-border payments, where identity verification requirements vary widely across jurisdictions, interoperable digital identities simplify processes and ensure compliance with anti-money laundering and counter-terrorism financing regulations.

Initiatives such as the World Bank’s ID4D and the European Union’s eIDAS 2.0 regulation aim to create interoperable DI systems, enabling secure cross-border payments while fostering global commerce.

In Open Banking, digital identities empower consumers with granular consent mechanisms, allowing them to decide which data to share and with whom.

This addresses privacy concerns while enhancing trust in third-party providers.

As Open Banking expands globally, DI will underpin its success by securing data flows and ensuring user-controlled consent frameworks.

Tokenisation, another crucial security layer in modern payments, benefits significantly from DI integration.

Tokenisation replaces sensitive payment credentials with secure tokens during transactions. When combined with DI, as seen in Apple Pay or Visa Payment Passkeys, tokenisation becomes even more robust. Users can authenticate payments biometrically, while their actual payment data remains securely stored and tokenised, creating a frictionless yet highly secure payment experience.

Biometrics: Opportunities and Risks

Biometrics sit at the heart of many DI solutions, offering quick, secure, and user-friendly authentication.

However, as Visa’s whitepaper cautions, biometric data introduces new risks.

Unlike passwords, biometrics cannot be changed if compromised, making data security paramount. Biometric templates must be encrypted to prevent reverse-engineering of physical traits.

Bias and fairness also remain concerns.

For instance, fingerprint recognition performs less accurately for children under 12 and adults over 70 due to underdeveloped or fading prints, while facial recognition accuracy varies across ethnic groups.

Ensuring inclusivity in biometric systems is essential to prevent discrimination and exclusion.

Interoperability is another hurdle.

Currently, many biometric systems are proprietary and fragmented, requiring users to re-enrol their data across services, increasing data breach risks and undermining user convenience.

Global standards will be critical to building unified DI ecosystems that work seamlessly across borders and platforms.

Case Studies: Global Leaders in Digital Identity

Ukraine’s Diia app illustrates DI’s potential vividly. Launched in 2020, it transformed smartphones into digital wallets storing passports, driver’s licences, and other documents, enabling access to over 70 government services.

Its success lies in leveraging mobile-first strategies to integrate public services and payments seamlessly.

Belgium’s itsme app, launched in 2017, is another example. It enables users to authenticate for banking, government services, and online transactions with high security and ease, demonstrating how public-private partnerships can build trust and adoption.

Bhutan’s National Digital Identity programme offers a unified interface for accessing both public and private services, reducing fragmentation and enhancing interoperability across sectors.

These examples underscore the importance of government leadership, private sector partnerships, and mobile-first strategies in successful DI deployment.

Payments and Digital Identity: A Virtuous Cycle

Payments and DI reinforce each other in a virtuous cycle.

Payments offer frequent, familiar authentication use cases that build consumer trust in DI systems, while DI enhances payment security, efficiency, and user experiences. Visa’s Payment Passkeys exemplify this synergy.

By combining device-bound cryptographic credentials with biometrics, Passkeys allow seamless payment authentication across platforms while maintaining robust security.

Integrating DI with payments also has macroeconomic benefits.

For example, combining DI with Visa Direct’s cross-border capabilities could improve Know Your Customer (KYC) compliance and reduce transaction times and costs for remittances, benefiting individuals and small businesses globally.

Overcoming Implementation Challenges

Despite its benefits, DI implementation faces challenges. Privacy and consent remain critical.

Users must trust that their data will be used only with their consent and protected against breaches.

Legal frameworks must be technology-neutral yet robust, defining clear liability structures while allowing innovation.

Interoperability is perhaps the greatest barrier. Fragmented systems prevent global DI functionality.

International standards bodies such as ISO, the FIDO Alliance, and the OpenID Foundation are working to establish open standards that enable DI solutions to operate seamlessly across borders and industries, fostering innovation and inclusivity.

Towards a Future-Proof Financial Ecosystem

Digital identity is redefining the payments landscape. It enhances security, reduces fraud, simplifies onboarding, and enables financial inclusion, forming the trust backbone of the digital economy.

As AI, IoT, and programmable payments emerge, DI will underpin new use cases such as machine-to-machine payments and personalised financial services.

However, its success depends on collaboration between governments, industry, and users to ensure privacy, interoperability, inclusivity, and security.

In a world where digital interactions increasingly define daily life, DI will not only verify who we are but also empower how we participate in economic, social, and civic life.