As 2025 draws to a close, the financial sector is caught between volatility and acceleration. AI-driven fraud, new faster payment rails and regulatory pressures are rapidly reshaping the industry.
Regularly overlooked in the background, however, is one development, both inevitable and transformative: the convergence of payments and digital identity.
And it’s already begun. Regulators are laying the groundwork with initiatives like eIDAS2. Technology giants are embedding digital IDs into their ecosystems. Governments and private players are rolling out trusted digital credentials at scale, many with banking and payments at the center. Europe’s latest pilots focus specifically on integrating digital identity into financial services.
While the momentum is undeniable, for financial institutions (FIs), the path forward will likely be anything but smooth.
Disruption Before Opportunity
Once the convergence becomes mainstream, FIs will need to support identity verification alongside existing Strong Customer Authentication (SCA). Consumers will welcome the simplicity of privacy-preserving, mobile-based credentials, but FIs face the cost and complexity of enabling multiple authentication mechanisms.
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And wherever confusion exists, fraud follows. New digital wallets will attract fraudsters eager to exploit fake apps, social engineering and identity spoofing. So, unless FIs apply risk-based authentication consistently across both old and new methods, trust will falter at the worst possible time: when a fierce battle for customer loyalty is looming — Mastercard, Visa, Apple, and Google are all vying to become the default digital wallet.
FIs wanting to stake their claim in the ecosystem need to remember that consumers don’t care about technical complexity — they care about convenience. They’ll want one identity to open an account, authorize a high-value transaction or recover access, without juggling passwords or recovery codes.
Done right, the convergence will offer this frictionless simplicity and build lasting loyalty. Done wrong, fragmented or clunky experiences will lead to banks losing customers or further exposing themselves to fraud.
Learning From the Past Will Pave the Road Ahead
The rollout of SCA under PSD2 offers a cautionary tale. Many FIs treated it as a compliance exercise, delivering fragmented authentication journeys that frustrated users. In today’s environment of rampant social engineering and account takeover fraud, that approach is untenable.
Authentication alone will not be enough. Banks must build holistic defenses that integrate signals across devices, behaviors, and channels, protecting the same customer consistently — whether logging in, paying or recovering access.
And, while the convergence will likely reduce costs for FIs in areas like onboarding and verification, the risk is undeniable: the larger prize may be claimed by global networked players, whose scale positions them to drive adoption — and potentially disintermediate traditional providers.
What happens next will vary across geographies. In regulation-driven Europe, for example, adoption will follow mandated standards. In market-driven regions like the U.S., however, consumer convenience will set the pace. Some frameworks may merge; others will coexist. Which one delivers the best results is yet to be seen. But the winners will be those who deliver trust, choice and simplicity without sacrificing security.
Defining 2026
The convergence of payments and digital identity will define the next era of financial services. FIs that prepare now — by embracing flexible authentication, learning from past missteps and collaborating on standards — will be positioned to not just survive the disruption, but lead in the future that follows.
