How to mitigate fraud with ID verification

Financial institutions are a high-value target for fraud. In 2023 alone, they lost $485.6 billion globally to fraud and scams. And recent research revealed that roughly a third (33%) of fraud is detected during customer onboarding. This is alarming considering the evolution of consumer preferences for online banking.

One effective strategy to combat fraud is for financial institutions to implement a robust ID verification process.

ID verification: How it works and the benefits

Digital identity verification is an important step in any online financial interaction. Whether it’s used to support digital account openings, user onboarding, loan applications, financing, insurance claims, or digital agreement processes, it allows financial institutions to verify identities in real time to better detect financial identity fraud before a contract is signed.

How digital identity verification works

ID verification leverages artificial intelligence (AI), machine learning, and authenticity algorithms to analyze an image of an ID document—such as a passport or driver’s license—and cross-references it with a “selfie” of the end-user.

Not only is this process convenient and quick for financial institutions to reduce the chance of fraudsters securing loans, credit cards, BNPL (buy-now-pay-later) products, or other financial resources, but the consumer experience is equally as easy. In fact, consumers find the experience quick and simple because they can authenticate IDs within seconds, and they appreciate knowing their financial accounts remain secure.

Effective ID verification can provide multiple benefits:

• Customer acquisition: ID verification can help businesses acquire more customers by enabling online channel growth and encouraging digital account openings.
• Reduced fraud: One of the most important benefits of ID verification is that it helps reduce fraud. It does this by confirming the identity of the person involved in a transaction, like opening a bank account.
• Compliance: Many industries are subject to regulations that mandate ID verification, so maintaining compliance is crucial.
• Customer trust: Businesses earn consumer trust and build long-term relationships with customers by providing enhanced security, transparency, personalization, and more.
• Reduced abandonment: Streamlining the onboarding process and improving user experience helps businesses reduce abandonment rates in their digital and online banking channels. 
• Improved customer experience (CX): ID verification provides a better customer experience without the need for in-person branch visits or manual identity verification processes.

Best practices for implementing ID verification

Choosing the right verification method—whether manual, automated, or hybrid—depends on an organization’s unique needs.

For instance, some organizations or industries need to abide by strict regulations to comply with legal standards. Financial institutions in particular must abide by the Know Your Customer (KYC) regulations. This regulation mandates that financial institutions confirm a customer’s identity before providing them with financial services.

Like any security process, implementing ID verification has the potential to be cumbersome. However, with careful planning and execution, financial institutions can ensure a successful and seamless adoption. Consider the following best practices:

1. 1. Know your audience. Different audiences may have varying levels of comfort with technology, so tailor your verification methods accordingly. This also means understanding which identification documents are likely to be used by your audience. For example, what are the different nationality groups among your customers? Expand the list of government IDs that meet the requirements for a successful ID verification process to provide a seamless experience for customers.
2. Education is also important since customers also have different levels of exposure to fraud attempts. Providing clear information on how to identify phishing scams or suspicious activity can empower individuals to act proactively. Well-informed employees are also imperative for effective implementation.
3. 2. Be transparent. Providing clear instructions and support during the verification process can make a big difference. Organizations that are transparent about why ID verification is necessary can enhance user trust.
4. 3. Regularly update your systems. The cybersecurity landscape is continuously evolving and organizations must be ready to update their ID verification processes to address emerging threats. Regular audits can help teams identify areas for improvement and determine what updates they need.

Future-ready ID verification

Financial institutions that invest in innovative technologies — such as biometric authentication, AI-driven document verification, and deepfake detection — enable stronger ID verification processes during the digital onboarding process. Doing so can help mitigate the risk of fraud and impersonation.

Additionally, when complemented with a secure eSignature solution, financial institutions can strengthen their defenses against fraud while offering their customers a seamless user experience during the remote account opening process.

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