The Significance of Customer Identity Verification in Banking

The onset of neo-banking has eased the customer onboarding process.

As financial institutions increasingly shift their operations online, setting efficient and secure Digital Identity Verification mechanisms becomes imperative.

Banks must tighten the rope around KYC (Know Your Customer) and CIP (Customer Identification Program) due to the increased threat of financial and identity fraud.

It has created opportunities and challenges, especially with customer identity verification (CIV).

This article explores the significance of customer identity verification in banking and the benefits of implementing a CIV system.

What Is Customer Identity Verification?

Identity verification refers to the process of confirming a customer’s identity to ensure that they are the account’s rightful owner.

How Do Banks Verify Identity?

Bank identity verification validates the authenticity of the customer’s personal information provided by them.

Banks typically use passports, driver’s licenses, or other government-issued documents to verify customer identity.

Essential Customer Identity Verification Methods in Banking

Banks must verify customer identity as a part of compliance under KYC. As per the Bank Secrecy Act of 1970, financial institutions must maintain internal CIP to aid the government in Anti-Money Laundering (AML).

Such regulations help banks to prevent financial crime and monitor transactions for suspicious activities.

Let’s discuss a few key customer identity verification methods.

Knowledge-Based Authentication (KBA)

KBA is one of the methods used by financial institutions to verify customer identity. Knowledge-based authentication requires customers to answer security questions that only they would know. (as the answers chosen by the user will be specific and unique)

Document Verification

Bank identity verification may also be done by verifying customers’ documents. In document verification, details of physical or digital ID, such as name, date of birth, address, face, and security features, are examined and validated.

Multi-Factor Authentication (MFA)

As the name suggests, multi-factor authentication allows banks to verify customer identity through more than two tokens or a one-time passcode (OTP) to sign in.

For example, a customer may be asked to authenticate using the OTP sent via email and phone along with the login password.

Biometric Verification

Biometric verification is another method banks use as a part of digital identity verification.

The device captures biometric information such as face, voice, fingerprint, and eye scanning (iris and retina). This information is then used to match against the database to verify customer identity.

Apart from the above-listed key methods to verify identity, a few others are Database Identification Methods, Online Verification, Two-Factor Authentication, Device Verification, and Credit Bureau-based Authentication.

Benefits of Implementing a Robust Customer Identity Verification System

Enhanced Security

KYC and KYB (Know Your Business) mandate verifying customer identity before establishing relations.

This ensures that only authorized individuals can access services and confidential information. Thus, reducing the risk of identity fraud, data breaches, and cyber-attacks.

Streamlined Onboarding

Digital identity verification technologies such as biometrics promote self-service onboarding in banks.

The automated ID verification includes the following steps:

  • Document scanning
  • Reading digitally signed data from the chip
  • KYC process
  • Taking a video selfie
  • Performing liveness detection
  • Face comparison

Compliance with Regulations

Customer identity verification solutions must comply with AML, CFT (Countering Financing of Terrorism) laws, and FATF (Financial Action Task Force) guidelines.

Failing short in customer verification services can result in penalties and sanctions and can put reputation on the line.

Financial institutions adhering to a structured Customer Identification Program (CIP) and Customer Due Diligence (CDD) ensure up-to-date compliance.

Reduced Operational Costs

Manual ID verification is time-consuming and prone to errors. A bank identity verification solution eliminates manual checks and ensures cost savings.

Digital identity verification also automates these processes, thus reducing significant human efforts. By ensuring the customer identity verification process is digitized, operational costs are also reduced.

Improved Customer Experience

Remote customer verification services, such as self-service login, auto-filling forms, and quick access through QR code, deliver instant verification results.

This eliminates the need to visit the banks physically, reduces wait times, and ensures higher customer satisfaction and lower abandonment rates.

Reduced Fraudulent Activity

Customer identity verification prevents financial crime and fraud by validating an individual’s identity.

Advanced ID verification technologies like biometric authentication or AI-assisted image processing can significantly reduce fraudulent activities.

Biometric documents that contain contactless NFC chips are becoming popular mainly because they are more secure and difficult to counterfeit.

Global Presence

With digital identity verification methods in place, banks can expand their operations globally.

With digital IDs, biometrics, MFA, etc., banks can seamlessly onboard customers from anywhere in the world without the need for a physical presence.

Biometric Authentication: A Game Changer in Banking Security

Biometric verification in banking is a revolutionary step towards simplifying transactions and securing financial fraud.

It uses the physical traits of an individual to validate the identity, which ultimately enhances the user experience.

The main advantage of biometrics in banking, besides security and user experience, is compliance with the regulatory authorities. Biometrics in banking happens in the following ways:

  1. Processing and validating biometric identity documents (including biometric information embedded on a chip inside the document)
  2. Verifying facial biometrics

Implementing a Customer Identity Verification System

Financial institutions must integrate a robust customer identity verification system to avoid risk and fraud and maintain compliance. Here is how banks can manage and verify customer identity and system access.

Choosing the Right Solution

An ideal customer identity verification solution should have features such as Advanced Document Scanning, Biometric Authentication, Data Extraction, Liveness Testing, Cross-Referencing from Multiple Sources, AI-based Verification, KYC and KYB compliance, etc.

Balancing Security and User Experience

A digital identity verification solution can bridge the gap between banks and customers.

Digital identity verification offers many advantages, making it an essential investment as it manages data collection, record-keeping, securing customer identity, and complying with regulations.

Manual methods of ID verification take a long time, present inconvenience to customers who must physically visit bank branches and are prone to errors, leading to a poor user experience.

Ongoing Monitoring and Updates

A system that adheres to KYC programs has three components: Customer Identification Program, Customer Due Diligence, and Ongoing Monitoring.

Bank identity verification is the primary step in performing due diligence, followed by risk assessment and ongoing monitoring to report any regulatory violations, such as fraudulent transactions or suspicious activity in the account.

Wrapping Up

As the banking industry continues its journey towards digital transformation, the role of customer identity verification becomes much more evident.

To build trust, transparency, and user-friendliness in digital identity verification systems, it is a must to integrate various technologies to enhance the verification process.

Digital ID verification is crucial for complying with KYC/AML/CFT laws, enhancing customer experience, and facilitating quick onboarding.

Bank identity verification solution offers significant ROI through increased customer satisfaction rates and decreased operational costs.