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Done right, digital IDs can open more markets to competition

by Matthew Lynn, Financial columnist for The Telegraph and The Spectator

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Hunting around for your driving licence only to find you haven’t changed your address yet. Snapping a picture of your passport on your phone only to find there is too much glare for it to be accepted. Trying to find a utility bill that you haven’t already chucked away or waiting for the postal strikes to end so that a paper bank statement will finally arrive.

We have all experienced the full nightmare of trying to buy something online only to find it is virtually impossible to prove who we are, at least to the standards demanded. It is enough to make you nostalgic for the dim distant days when you could just walk into an office or bank branch with your passport, sign a form or two and finish everything on the spot.

But hold on. That may finally be about to change. The UK government has just launched a consultation on a standardised form of Digital ID that will massively simplify the process.

It is still in the early stages, and we will have to see what finally emerges. And yet, if that is done in the right way, it could not just make life much simpler for companies and consumers, valuable though that would be in itself; it could open up lots of markets to fresh competition – and in the medium term that would be great for the economy as well.

No one would question that the internet has simplified our lives in many ways. From shopping, to streaming music and films, to sending money around the world, booking planes and hotels, and swapping messages instantly with everyone we know, it has transformed the economy, and mostly for the better.

It has one big flaw, however. It is wide open to fraud, with online crime running into billions every year. Understandably, most companies need to know who we are before they will do business with us, they need to check that our accounts have not been hacked, and they need to comply with a complex set of money laundering regulations.

What should be a simple transaction, completed with a few clicks of a button, can turn into a frustrating hour spent trying to prove who we are. It is expensive for companies, and annoying for customers.

The solution is not hard to figure out. A single digital ID that is 100% secure, unique, and which will be accepted everywhere. There are plenty of issues around for which technology should be adopted, of course, and it remains to be seen whether it will be politically acceptable in a country that has no tradition of identity cards, and has always been reluctant to accept them.

Even so, the prize is a big one. A digital ID system could potentially boost growth, in two ways.

First, it lowers costs. It is expensive for companies to have to keep checking our identity, and the more chaotic it is, and the more documents that have to be rejected for not ticking the right boxes, or for being out of date, the more that adds up. If it could be standardised across the country and the economy, then companies could replace all the staff and IT systems devoted to checking who everyone is. The UK’s digital businesses – and almost every company has some form of online presence these days – could save huge amounts of money. That, in turn, could be recycled into higher profits, or bigger salaries and dividends.

Next, and more importantly, it opens up lots of markets to more competition. Take banking for example. There are lots of challenger banks in the UK, as well as a host of sparky, innovative fintech start-ups, all of them challenging the traditional ‘Big Four’ high street giants.

Yet, even though they often have a better product, few of them have taken any significant share of the market. The reason? It is just too much hassle to switch an account. If a digital ID made it simpler, the market would be a lot more competitive, and a host of new companies would have the space to establish themselves. The same is true of insurance, of estate agencies, law, or dozens of other products and services that have remained remarkably closed to fresh competition. It might well extend to day-to-day shopping as well. With the right kind of ID, the limits on contactless cards could be dramatically raised, making it easier for small chains to compete with the giants.

One of the enduring challenges for the UK economy had been that in many sectors inefficient, complacent semi monopolies lumber on for decades. While there are plenty of start-ups, very few of them ever manage to achieve the scale necessary to genuinely break through.

The result? Growth is slower, and fewer genuinely high-growth companies ever emerge. True, it will take a lot more than just a digital ID to break that pattern. Even so, it will be a start on finally making many markets more competitive – and even by itself that will give the economy.

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