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Digital ID: The opportunities and

the risks
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By Deepa Mahajan
Advises executives working in nancial services, technology, and their intersection ( ntech) as they set e ective growth and
go-to-market strategies and build new digital businesses

By Owen Sperling

By Olivia White
Leads research on global economic, business, and tech trends and brings deep expertise in strategy, risk management, and
operational transformations to nancial institutions worldwide

Risk | Digital and analytics

Digital identi cation, or “digital ID,” provides a new frontier in value creation for individuals and
institutions around the world. Nearly one billion people globally lack a legally recognized form of
identi cation, and can be denied access to government aid, health care, nancial services, the
labor market, the ability to secure property rights and register a business. And digital ID can also
help the rest of the world’s inhabitants, about 6.6 billion people, who either have some form of ID
but limited access to online services, or are active online but struggle to keep track of their digital
footprint securely and e ciently.

August 19, 2019 - For all these individuals, “good” digital ID can unlock access to a safe and
secure digital world in the economic, social, and political realms. Good digital ID provides
veri cation and authentication to a high degree of assurance, uniqueness, individual consent,
protection of user privacy, and control over personal data. This can be a boon for individuals and
societies as a whole if implemented correctly. According to research from the McKinsey Global
Institute , countries implementing digital ID could unlock value equivalent to 3 to 13 percent of
GDP by 2030. Already, digital ID systems have been implemented with some success in a few
countries, spearheaded by government agencies (such as eID in Estonia and Aadhaar in India), or
consortia of institutions (such as the nancial institution-led digital ID systems of SecureKey
Concierge in Canada and BankID in Sweden).

For banks, digital ID can improve customer experience and boost productivity, while improving
risk management. In the United Kingdom, for example, nearly 25 percent of all nancial
applications are abandoned due to di culties in the registration process,[1] which digital ID could
help smooth by enabling streamlined authentication. Digital ID can also improve the quality and
lower the cost of ongoing customer service–one study found that about 30 percent of calls to
banks’ call centers were requests for account access due to misplaced or forgotten passwords.
Moreover, as employers, banks can use digital ID to extend and improve talent matching and
streamline employee authentication, thereby lling open positions more rapidly with better
quali ed candidates.

At the same time, digital ID can help banks improve risk management, including through
streamlined know your customer (KYC) processes, better fraud management, and improved
protection of customer data against cyber threats.

KYC rules require banks to verify the identity of individuals opening an account. Institutions can
use digital ID to expand their customer base rapidly and cost-e ectively by using digital ID to
comply with these requirements. This would mean eliminating manual processing of paper
documentation and the need for in-person veri cation of the account holder’s identity. For
example, in India, the use of Aadhaar-enabled e-KYC for registration accompanied an increase in
nancial accounts from 48 million in 2016 17 to 138 million in 2017 18.[2] At the same time,
Aadhar reportedly reduced the cost of KYC veri cation for nancial institutions from
approximately $5 to approximately $0.70 per customer.[3] In other markets, we anticipate that
moving from paper to digital ID-based KYC will yield similar cost reductions, while also reducing
error.

McKinsey estimates that synthetic identity fraud–in which criminals use ctitious IDs to secure
credit–is the fastest-growing type of nancial crime in the United States, and that in 2016 it was
responsible for up to 20 percent of defaulted credit card debt, costing lenders worldwide an
estimated $6 billion. Financial institutions can reduce such forms of theft and fraud through the
use of high assurance method of identity veri cation enabled by digital ID.

Low-assurance interactions also contribute to the potential of cybersecurity breaches, which

pose increasing risk for the digital economy, including to banks and their customers. Digital ID
can help assure online transactions in a way that is safer and easier to manage than having a
multitude of online accounts, as is common for people in many developed economies today.

Despite the signi cant promise, digital ID presents risks of its own that need proper controls. To
start with, there is the potential for misuse: digital ID technologies are akin to “dual use”
technologies—such as social media, GPS, or even nuclear energy—that can be used both to
bene t society and for undesirable purposes by governments, institutions, or individual actors.
History provides ugly examples of misuse of traditional identi cation programs, including tracking
or persecuting ethnic and religious groups. If improperly designed, digital ID could be used in
targeted ways against the interests of individuals or groups by governments or the private sector.
To guard against such misuse, the individual consent and protection of user privacy and control
over personal data components of “good” digital ID are critical.

But even when digital ID is used with good intent, risks of two sorts must be addressed. First,
digital ID is inherently exposed to risks already present in other digital technologies with large-
scale population-level usage. Indeed, the connectivity and information sharing that create the
value of digital ID also contribute to potential dangers. Whether it is data breaches and cyber-
intrusions, failure of technical systems, or concerns over the control and misuse of personal data,
policy makers around the world today are grappling with a host of potential new dangers related
to the digital ecosystem.

Second, some risks associated with conventional ID programs also pertain in some measure to
digital ID. They include human execution error, unauthorized credential use, and the exclusion of
individuals. In addition, some risks associated with conventional IDs may manifest in new ways as
individuals newly use digital interfaces. Digital ID could meaningfully reduce many such risks by
minimizing opportunity for manual error or breaches of conduct.

Capturing the value of good digital ID is by no means certain or automatic. However, the
magnitude of the opportunity heightens the imperative for understanding and addressing the
very real risks and potential for misuse of digital ID. Careful system design and well-considered
government policies are needed to promote adoption and manage associated risks. When in
place banks, together with individuals and society at large, stand to gain.

[1] Private sector economic impacts from identi cation systems, World Bank, 2018.

[2] Ronald Abraham et al., State of Aadhaar report, 2017 18, IDinsight, May 2018.

[3] Alan Gelb and Anna Diofasi Metz, “Identi cation revolution: Can digital ID be harnessed for
development?” Center for Global Development, October 2017.

 Back to Banking & Securities matters

European Private Banking Survey

2023: Strong interest margins

mask a drop in profitability

Our 21st annual survey nds the industry facing challenges to growth and pro tability of invested
assets but armed with plenty of ideas on how to succeed.

  

By Sid Azad
Advises banks, asset managers, and life insurers across Europe on retail banking, private banking, and wealth management,
particularly go-to-market strategies, operating-model design, end-to-end (E2E) transformation, and M&A

By Cristina Catania
Coleads McKinsey’s work in wealth and asset management in Europe

By Marius Huber
Serves nancial services companies with a focus on private banks, investment banks, and nancial markets infrastructure
players on strategy, transformation, and technology innovation

By Jan Quensel
Helps nancial services companies, in particular wealth and asset managers, to de ne group and divisional strategies as well
as to design and implement a t-for-future operating model

By Christian Zahn
Combines deep knowledge and rst-hand expertise across asset and wealth management, corporate and investment banking,
as well as strategy and corporate nance, with a focus on M&A and transformation

Private Banking

August 18, 2023 - European private banks enjoyed higher deposit margins in 2022, which helped
them weather a drop in revenues from invested assets and another increase in the cost of doing
business. As a result, pro tability (as measured by the cost-to-income ratio) trended sideways.
Private banks desiring to accelerate structural pro tability in 2023 and beyond can bene t from
looking to the balance sheet, accelerating the industry’s push for recurring revenues, and
spurring cost-e ective growth, particularly through their relationship managers.

Those are some of the key ndings from McKinsey’s 2023 survey of European private banks—the
latest  in a series we have conducted annually since 2003 . We also reviewed the recent nancial
results of more than 100 institutions, gathering details that add to our understanding of the
pressure banks are facing in 2023 .

In this article, we describe the trends that have shaped the business of private banking in Europe,
the position of the industry today, and our forecast of where it may be headed. We also sketch the
moves that many successful private banks are making to get ahead of the trends.

State of the private banking industry

First, the good news. Industry pro ts in Europe rose 1.7 percent to €22 billion in 2022, a new
peak driven by high assets under management (AUM) at the beginning of the year and a
substantial rise in net interest margins (Exhibit 1). Interest margins on deposits rose 13 basis
points (bps) and contributed nine bps to total private banking revenue margin in 2022, up from a
contribution of just ve bps the previous year.

Exhibit 1

However, all in all, AUM decreased 7 percent in 2022 from the previous year. The overall
decrease re ects a 10 percent decline due to market performance and a one-point decrease in
net in ows to 3 percent, versus 4 percent in 2021. The drop in AUM diminished much of the yield
private banks made during the past ve years, with banks’ individual results varying in response
to many factors, such as asset allocation. Pro t margin, at 22 bps, was at; revenue and cost
margins increased by one point year over year, reaching 71 and 49 bps, respectively.

After the 2021 cost hike, absolute cost growth slowed to an annual increase of three percentage
points in 2022. However, the ve-year trend of increases continued unabated, up 11 percentage
points cumulatively between 2018 and 2022.

As costs mount, banks are under pressure to keep revenue growing. In that area, the results have
been mixed. Revenue margin on invested assets declined by four bps in 2022 as a result of
declines in brokerage revenue margin (down two points), recurring revenue margin (one point),
and retrocession margin (one point). Clients divested and moved into cash, were less active in
markets, and deleveraged their portfolios. At the same time, valuations fell for riskier investments
like equities, a ecting mandate revenues.

Compensating for this, the deposit margin increased from 17 to 30 bps (Exhibit 2). This change
contributed an overall four-point increase in total revenue margin, considering the 30 percent
share of cash in the total asset allocation of client AUM at private banks.

Exhibit 2

Ultimately, responses to the survey suggest the that the two-pillar business model of private
banks was resilient in 2022 while investment-type products were less in favor with clients, the
second pillar, deposit margins, strengthened. The resilience continued in the rst half of 2023,
according to most rst-half results communicated.

However, the industry’s structural pro tability net of interest rate e ects has declined as costs
increased further in 2022, revenue margin from invested assets dropped, and the tailwind in
revenues from increasing AUM performance vanished. Further, as in ows slowed, most private
banks struggled to attract new clients, leading many to hire new relationship managers at scale.

In addition, the industry needs to articulate its value proposition to clients: from 2018 to 2022,
balanced risk pro les, the most common choice among clients, returns were zero or negative.

Future wealth growth

During the next three years, projected growth in personal nancial assets will create more
opportunities for private banks. We expect most growth to come from onshore, primarily in North
America, Asia–Paci c excluding Japan, and Western Europe (Exhibit 3).

Exhibit 3

In terms of nancial centers, Switzerland still leads, with Hong Kong and Singapore catching up
quickly. Singapore shows the fastest growth, at 8 percent, which is double the rate of the top
nine other private banking centers.

The increased opportunity from new wealth creation contrasts sharply with the potential
development of wealth owned by high-net-worth (HNW) people. A new report from McKinsey
Global Institute, The future of wealth and growth hangs in the balance , nds that global assets
have almost doubled in value and decoupled from GDP development over the past two decades,
but executives expect a potential reversal. In the two macroeconomic scenarios for 2030 that
respondents deemed most likely, real client wealth could be at risk due primarily to a long-term
reversal in equity and real estate prices.

Potential pathways to restore structural

profitability

A clear challenge for private banks is to restore growth over the next 12 months and beyond.
Leaders can consider several paths for the short term and a key action to boost long-term
growth. Some of these might be familiar, but in our experience, they remain the most e ective for
revenue growth. given details on building resilience by means of cost optimization on many
di erent occasions.

Options for action in the short term

In the short term, look to the balance sheet. Private banks can optimize both assets and liabilities.
To get started, banks can run some technical optimization of foreign exchange and liquidity. For
example, deposit pricing is often highly relevant. Banks can vary the interest rates they o er to
clients based on factors such as their assets with the bank and likeliness to leave; or they can
propose more restrictive terms for clients on withdrawing these deposits.

Then, to manage both lending and deposits, banks can focus on the following ideas:

Look to loans. Private banks can increase lending penetration by converting more of the
pre-authorized Lombard limits pledged by existing client collateral. Relationship managers
(RMs) would need to work with clients to understand if they want to take out the remainder
of already authorized loans.

Help new relationship managers grow their client book. Several private banks have
recently announced the hiring of new relationship managers (RMs). However, our survey
results show that adding RMs does not necessarily result in commensurate revenue
growth. The odds that RMs can succeed are greater when private banks actively manage
their new hires by emphasizing practices associated with strong sales growth.

Create new in ows. RMs can tap their client network for referrals and look harder for new
prospects. To boost the former activity, leading banks are implementing at-scale referral
programs. To achieve the latter, they search public information (e.g., media, commercial
registries) to identify clusters of prospective clients for future net new money growth.

Options for the longer term

Over the longer term, banks can improve their margin on current AUM. As a rst step, private
banks can review their pricing and the level of service they o er. Our experience shows that
proactively managing pricing is often more valuable than relying on automated pricing engines.
Smaller HNW clients in particular deserve a second look. Banks can often lower their price for
these customers while also automating the advice they receive. Banks can also ask RMs to upsell
some client clusters, to deliver on customer preferences with respect to market volatility,
environmental, social, and governance (ESG); and alternatives. Across all mandates, banks can
look to expand share in higher-margin alternatives, such as structured products and private
markets.

These sample pathways may help private banks increase their resilience for any of the
macroeconomic scenarios we surveyed. As we cross the halfway mark of 2023, our survey
suggests private banks have adapted to unforeseen shifts – but they will need to be just as
nimble in the years ahead.

Sid Azad is a partner in McKinsey’s London o ce; Cristina Catania is a senior partner in the
Milan o ce; and Marius Huber is an associate partner in the Zurich o ce, where Jan Quensel
and Christian Zahn are partners.

The authors wish to thank Rashi Dhingra, Saksham Kalra, Ankit Khandelwal, Shaurya Khanna,
and Marlitt Urnauer for their contributions to this article.

Copyright © 2023 McKinsey & Company. All rights reserved.