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Building Trust in the Digital Age: The Importance of Identity Verification in Financial Services

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22/06/2023 |

8 min read

Dominika Reszke,

Piotr Wawryka

Making business in the digital age calls for effective digital identity verification. With mobile banking and financial services apps commonly available, assuring security in banking, as well as theft and fraud prevention, are getting more important than ever.

Making online payments easier and enhancing customer experience is essential, but security in banking and financial services definitely should not be neglected. This issue is vital since data breaches of various kinds (that can be done to perform identity theft or get access by an unauthorized party) are very common and very costly.

But money is only some of what can be lost. Various types of cybercrime, money laundering, terrorist financing, and even criminal liability can all be in the mix when identity verification is not properly handled. Luckily, identity checks not only reduce the risk of identity theft but also helps track, report, and prevent suspicious financial transactions.

In this article, we’ll discuss the immense importance of identity verification in the digital era and how crucial it is to monitor customer risk. Some of the most interesting digital identity verification methods, as well as some identity verification regulations, like KYC (Know Your Customer) identity verification, will be described.


Table of contents:

1. Banking and financial services in the digital age

2. Why is identity verification so important?

3. Digital identity verification methods

4. Identity verification in financial services – key takeaways


Banking and financial services in the digital age

Digital transformation is taking over, and banks and other financial institutions are certainly at the very center of this revolution. Providing new, faster, and more convenient payment methods, modern apps, and communication channels, such organizations belong to huge beneficiaries of the process – of course, if they take care of security right.

In digital times, people want to gain access to their banking apps promptly or do online shopping quickly. For example, in the 4th quarter of 2022, most of the digital commerce website visits (74%) worldwide, as well as orders (63%) were made via smartphones, Statista’s data shows.

Of course, cybercriminals are well aware of the new developments in e-commerce and e-finance areas, and their activities may pose a serious threat to both vendors and users. And here’s where identity verification comes to the rescue, being the first major barrier and a vital security measure.

Banks and financial institutions – as well as retailers that accept online payments – need to stay connected. Access control is an indispensable part of modern apps, but not the only security measure taken by such companies to mitigate the safety risk.

Interestingly, in the US, there is a Customer Identification Program (CIP) – a legal requirement that calls for financial organizations to verify the identity of their future clients or users before establishing a business relationship. Companies perform this due diligence practice, also known as KYC compliance programs, in line with a broader AML verification, which stands for Anti-Money Laundering.

Of course, prevention is better than cure – and that’s why identity verification is so important. Another thing is being able to identify and tackle traces of financial fraud – and there is a specific tool for this, which Codete helped to enhance.

Financial fraud detection

In 2021, we became a trusted partner of B4 Investigate – a FinTech company that offers a unique, highly-specialized online platform for financial fraud detection – which enabled this Scandinavian business to improve its project, enter a new market, and grow steadily.

Codete supported B4 Investigate in creating a B4 PreCrime Cloud platform on the technical side – and the aim was to make it accessible for the subscribers to detect potential financial damage. With this useful tool, users can find traces of crime in the activities within their organizations.

Financial fraud detection improvement is something Codete can help you with, too.

IT consulting services by Codete >

Why is identity verification so important?

Identity theft can be used for things like credit card fraud, tax fraud, applying for a loan in somebody else’s name, or illegally obtaining state benefits – to name a few common cases. In fact, any person or entity can be harmed – from governmental institutions (and thus taxpayers) to online retailers and financial institutions, including banks.

If we have a closer look at identity-related crimes, the number of victims impacted was on the sharp rise in 2022. As many as 422.1 million people were affected – the 2022 Annual Data Breach Report by Identity Theft Resource Center showed. Digging into particular data breach attributes, name, social security number, and date of birth were in the top 3, but bank account number came 7th.

Clients can lose a lot of money in a crime like this – and have a lot of trouble when trying to solve the problem with particular institutions – and financial companies can suffer from huge reputation losses. Once eroded, consumer trust is very hard to regain – which, in the long run, can even lead companies to bankruptcy and losing businesses.

For these reasons, ensuring the validity of customers’ details is crucial, and any negligence in this area can have grave consequences. As far as personal and corporate finance is concerned, modern identity checks can be performed instantly, document-free and hassle-free, e.g., through face authentication.

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Investing in security and solid digital identity verification may be costly, but it's worth it – it can save your business from both financial and reputational damage.

These days, many people want to open a bank account and go through the onboarding process digitally via online and mobile channels, which can pose a serious threat to the parties involved. Luckily, financial institutions equipped with the right tools can detect application fraud even during account opening.

Digital identity verification methods

In simple terms, identity verification is checking a person’s true identity, which is a critical step in online customer onboarding. In the process of identity verification, you need to prove that you are a real person and who you claim to be.

But how does the identity verification process work? 

Well, it depends on the digital identity verification method. Here are some of the forms that digital identity checks can take.

Biometric verification

Biometric verification means checking if biometric data from verified sources match the person that undergoes the verification procedure. Unique, distinguishing biological traits that can be analyzed include voice prints, fingerprints, finger geometry, earlobe geometry, waveform, iris and retina patterns, vein patterns, ear shape, DNA, and other body measurements.

Facial recognition

Facial recognition fits into the biometric verification category but deserves to be described in more detail. It may cover things like recording a short video containing a random phrase said by the person being checked or comparing a 3D face map with the picture submitted in the official ID document stored in the database.

Liveness detection

Liveness detection, a part of facial recognition, proves that a given person is actually alive – and not asleep, unconscious, or wearing a mask. The thing is that threat actors may use fake representations or recreated images of particular people to perform spoofing – and liveness detection is used to prevent it.

Other ways that financial organizations use voluntarily include selfie identity verification, two-factor authentication, digital ID document verification, and 3D secure authentication – extra fraud protection that covers additional transaction authorization methods.

Here is a video where you can see what identity verification may look like in practice:

Emerging technologies – like machine learning, blockchain, or biometrics – can be successfully used for identity verification within online transactions. For example, identity verification tools with very high accuracy of 99.9% are based on artificial intelligence.

However, the identity verification methods are imperfect, as false rejects are possible, and these systems may suffer from security vulnerabilities, too. For example, in 2019, it turned out that it was possible to hack Apple Face ID in less than 2 minutes.

Identity verification in financial services – key takeaways

With so many online payment methods, financial services, and apps out there, ensuring secure access and providing appropriate online identity verification is vital to minimize the risk of data breaches and money-related crimes.

A thorough digital bank verification or customer due diligence can prevent identity theft and further crimes, and ensure data privacy and trust payments. More and more businesses see the need for providing the right identity verification. Some companies even go the extra mile and hire an identity and access management consultant for digital identity management.

Hundreds of millions of people are caught up in data breaches every year, affecting not only them but the economy as a whole and particular businesses, too. Reputation problems can frighten away customers and cost companies a fortune, and so can legal costs and fines, equity value decrease, as well as productivity and intellectual property losses.

Investing in a reliable identity verification tool, although costly, can prevent all these scenarios.

Want your clients to trust you and feel secure when making online payments or using financial and banking apps? If you wish to know more about identity verification in financial services and use it to your advantage, contact Codete now.

Rated: 5.0 / 2 opinions
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Dominika Reszke

IT Content Writer with 12 years of professional writing experience. Prefers facts and figures to any kind of fiction.

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Piotr Wawryka

Piotr has over 5 years of commercial experience writing Python applications. He is a software developer and data scientist at Codete since 2017 and a Ph.D. student at AGH University of Science Technology. His main field of interest is Neural Networks and their practical applications. He gives speeches at meetups and international conferences.

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