Identity Verification Landscape: Traditional Banks Versus Digital Banks

Tony Raval is the CEO & Co-Founder of IDMERIT, provider of identity verification solutions to mitigate fraud/risk & KYC/AML compliance.

Today, two broad categories of banks exist: traditional and digital.

Traditional banks are household names and operate out of brick-and-mortar locations. They usually do not offer the same level of online services because they do not consider it to be as high of a priority.

Digital banks, on the other hand, can be divided into two types: challenger banks and neobanks. Challenger banks offer the same banking services as traditional banks but are backed by sophisticated technology and innovations drawn from the fintech sector. Neobanks serve customers in a much different way as they deliver banking services entirely online. As of August 2021, for example, the four largest U.S. "digital-only" banks (in terms of user accounts) are: Varo (2.7 million), Aspiration (3.0 million), Current (4.0 million) and Chime (13.1 million).

While the digital banking trend is promising, the main drawback is that these digital banks sometimes lack proper identity verification during new customer onboarding.

Customer Onboarding Challenges

Bank customer onboarding is quickly changing from in-person, drawn-out meetings to purely remote account creation, which can take only a few minutes. Anyone with a laptop, webcam and the internet can apply to open an account at one of the many neobanks. This scenario differs drastically from traditional banking, where customers must typically bring a long list of prerequisites and paperwork into a physical branch.

The main issue with the way many banks are implementing a digital-only banking model is the lack of stringent identity verification during the onboarding process. Identity verification impacts most areas of banking, including account opening, Know Your Customer (KYC) and anti-money laundering (AML) regulatory compliance, credit card applications, high-risk transactions and consumer lending.

Identity verification, when done incorrectly, creates friction for customers and more work for bank employees, who may need to perform manual identification verification and/or participate in fraud investigations. Friction usually happens with manual identification of identity documents, the need for physical signatures or the requirement of in-person meetings. 

Many banks (no matter which category they fall into) are now facing budget constraints and staff shortages due to the Covid-19 pandemic. Complying with AML or Combating the Financing of Terrorism (CFT) regulations isn't cheap, and it takes a trained team to provide internal controls (including purely digital banks).

Technology To Establish Trust Amid Rapid Growth

As barriers to entry for competing neobanks remain relatively low, many neobanks are looking to scale quickly and gain as many customers as possible in the shortest amount of time. New technologies — artificial intelligence, machine learning and behavior and transaction monitoring — are avenues for building trust and fighting fraud.

Regulatory burdens and costs seem to be increasing, so traditional and digital banks alike need to be forward-thinking and leverage technology to hedge off the competition and new entrants that may be looking to capitalize on the bank's ill-preparedness. 

Application program interfaces (APIs), for example, have powerful benefits for modern banks (traditional or digital), including the ability to seamlessly transfer data and synchronize your bank's system with identity verification services. An example would be a RESTful API (paywall), which can be integrated into legacy or modern banking websites to provide accurate, lightning-fast responses to identity verification queries.

Different Technologies For Identity Verification 

Even with new technologies, proper identity verification remains complex with multiple layers required for a thorough check. Aside from the traditional AML and KYC, newer technologies have emerged to ensure banks are secured with end-to-end solutions. The most popular solutions to identity verification are as follows:

• Social media checks to trace an individual's digital footprint. 

• Live agent verification for individuals that are difficult to verify.

• Device analysis to uncover signs of potential fraud through a device's setup and how information is accessed. 

• Assessment of an individual's fraud risk using a combination of email, phone and IP data points.

• Remote scanning of a government ID and facial biometrics to confirm identity.

All of the new technologies listed above are fundamental for proper identity verification during the onboarding process for digital and neobanks, but these banks may face many challenges even when they outsource these solutions.

Banks (especially challenger banks) must ensure that they remain compliant with requirements such as ISO 27001 and SOC 2 in order to avoid fines or security breaches. Banks also need a clear understanding of data processes and a solid data processing agreement established between vendor and bank. Most solution providers use APIs to produce results in a matter of seconds, so a bank must also be technologically advanced enough to incorporate an API into their system.

Identity Verification Industry Outlook 

The identity verification landscape is expected to grow at exponential rates in the next five years. According to Mordor Intelligence, "[t]he global identity verification market was valued at USD 7.66 billion in 2020. It is expected to reach USD 16.65 billion by 2026, registering a CAGR of 13.29% during the forecast period (2021-2026)." Fraud continues to rise as the pandemic continues to affect both financial systems and the everyday lives of people around the globe.

Despite huge challenges and fines, many banks continue to avoid implementing strong KYC processes and many avoid adopting identity verification altogether. These issues will not go away, but banks will need to keep all of the above in mind in order to be the ones left standing after this transformative period.

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