In an effort to diversify its revenue base,
) is branching out into the identity proofing business, according
Wall Street Journal
report. The business is considered as fast-growing and Citi is the
sole financial institution to have a clearance to vend identity
Citi will commence issuing digital identity cards to the U.S.
Department of Defense employees later this month. The company,
however, sees a vast scope to build a new fee-based revenue source
from this identity proofing business. With technological support,
the identity cards may be used to get paychecks as well as make
payments for business. This would enable Citi to generate fees from
The deal could provide Citi an opportunity to seize considerable
market share in a business which is projected to generate billions
of dollars in annual sales. Currently, the prevailing rate for the
nature of cards that Citi will issue is between $250 and $350 per
piece. Moreover, considering the mix of several U.S. as well as
foreign government agencies, the potential market is a huge
However, there are several issues involved in this business,
which are helping deter other big banks from entering this market.
Notably, upfront costs of a significant amount are being incurred
by Citi for opening offices, equipment purchases as well as costs
for getting access to required data bases. There are also concerns
about security difficulties and cyber attacks.
In fact, in the past, a conglomerate named IdenTrust was formed
in 1998 by Citi,
Wells Fargo & Co.
Bank of America Corp.
) and another 11 lenders. This business unit suffered problems
related to increasing costs and incongruity with respect to
As a result, the identity verification business has run into
troubled waters. Moreover, there are liability concerns as well for
cases of erroneous identity approvals.
However, according to the report, matching the identities on the
government-issued papers is Citi's responsibility. The company is
liable for breaching any Defense Department rules.
Citi has two dozen contenders in the identity proofing business.
Verizon Communications Inc.
Northrop Grumman Corp.
This move of Citi comes in the midst of tepid economic growth,
stringent regulatory environment and increasing competition. Though
upfront costs are involved, the revenue diversification that this
business allows is encouraging. In fact, Citi is one of the top
companies in the payments business.
Going forward, we believe that investments and efficiency
savings would help in garnering solid market share. Improved credit
trends are encouraging. Expense outlook is also impressive. In
fact, one can consider a company like Citigroup as a value
investment given its global footprint and attractive core
We also believe that the strategic business diversification
measures will bear fruit in future for the company and its
shareholders. Yet, a low interest environment along with a tough
regulatory scenario raise our concern.
Citi shares currently retain the Zacks #3 Rank, which translates
to a short-term Hold rating. Considering the fundamentals, we also
maintain a long-term Neutral recommendation on the stock.
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