A Guide to Identity Verification for Fintechs

The financial industry has experienced a flurry of changes and digital advancement since the Covid-19 pandemic began in 2020. The pandemic caused an unprecedented number of customers to move online, with almost all now relying on Fintech apps to handle finances. In the US, 90% of individuals are using some form of Fintech apps for their financial activities.

Types of Fintechs

As the market continues to expand, driven by high demand, there are now a myriad of different types of Fintechs. These include:

•       Crowdfunding platforms
•       Open banking
•       Robo-advising
•       Credit reporting and monitoring
•       Digital lending
•       Stock trading apps
•       Crypto and blockchain platforms
•       Mobile payments
•       Consumer budgeting apps
•       Digital/neo banks
•       Online financing
•       Insurtechs

Challenges for Fintechs 

Ensuring customer satisfaction is a crucial aspect of achieving long-term business success. In today's digital age, customers have come to expect quick and hassle-free experiences, which necessitates adaptation to ever-evolving digital and mobile trends and landscapes. For companies to remain competitive, it is essential to have secure digital onboarding processes that can onboard customers across all channels while maintaining a seamless user experience. 

Fintechs of all sizes face several challenges in achieving this goal. These include concerns over data privacy, difficulty in verifying all demographics, expensive compliance procedures, and onboarding friction. These challenges highlight the need for continuous innovation and development of effective solutions that can help Fintechs overcome obstacles and deliver optimal customer experiences.

Minimizing Onboarding Friction

Businesses must prioritize customer satisfaction and loyalty to achieve profitability and success. However, ensuring customer satisfaction during the onboarding process can be a challenging task, especially in today's digital-first landscape. Consumers expect consistency and minimal friction across all channels, which places significant pressure on businesses to deliver seamless experiences. 

While customers understand the need for identity verification when setting up a new bank account or securing a loan, they still expect the process to be efficient and hassle-free. If the onboarding process is too cumbersome or time-consuming, customers are likely to abandon the process and seek alternatives. For these reasons, it’s critical that Fintechs strike a balance between identity proofing and minimal friction in order to provide a satisfactory onboarding experience that meets customers' expectations. By doing so, they can build trust, increase customer loyalty and establish a reputation as a reliable and efficient service provider.

Catching Sophisticated Fraud

In today's environment, companies cannot afford to focus solely on seamlessly onboarding new and repeat customers — they need to also prioritize fraud prevention. Fraudsters use a variety of tactics, such as money mules, account takeover, credit card fraud, chargeback fraud, and sophisticated fraud like synthetic identity fraud (SIF), to gain financial benefits. 

As technology evolves, so do fraudsters' methods, making it difficult to detect and prevent fraud and other financial crime effectively. The financial industry has suffered losses amounting to hundreds of millions of dollars due to ineffective detection of SIF. Moreover, the demand for convenient onboarding and shopping experiences creates opportunities for fraudsters to use stolen or fictitious personally identifiable information (PII) to pose as legitimate customers. 

To address this issue, companies must have solutions that can accurately validate identities and authenticate identity documents without compromising the customer experience. It is essential to find an optimal balance between fraud prevention and a seamless customer experience to build trust, prevent losses and safeguard business reputation.

Complying with Data Privacy

In addition to complying with Anti-Money Laundering (AML) regulations and protocols to prevent financial crime and money laundering, Fintechs must also comply with data privacy regulations. With heightened scrutiny from national and international regulators on the importance of data privacy and data protection, companies will need to ensure they are jurisdictionally compliant with evolving privacy laws. Ineffective identity verification processes can result in dissatisfied customers and business lost, and in some cases, hefty fines for noncompliance.

Fintech Regulations

Fintech companies — as providers of financial services and access to digital assets — operate in a highly regulated environment and must comply with strict national and international regulations. These regulations include stringent AML guidelines and reporting standards such as the EU's AMLD5 and AMLD6 regimes, the US' FinCen regulations, and other national and regional guidelines outlined by the Financial Action Task Force (FATF). Regulators worldwide view the fintech sector as a crucial battleground in the fight against money laundering and terrorist financing, resulting in diverse and wide-ranging regulations governing compliance and AML processes for fintech companies.

While regulators may have some variations in their AML requirements for fintech companies, all emphasize the importance of robust and effective Know Your Customer (KYC) protocols. KYC is critical to AML as verifying the identity of a financial service customer is the first and most crucial step in reducing the risk of money laundering. If a fintech customer can access financial services anonymously or using fraudulent identity, they can use those services with little accountability to the law, which can lead to increased risks of criminal activity.

As a result, fintech companies must prioritize and implement effective KYC protocols to ensure they are meeting compliance standards and mitigating the risks of money laundering and other illicit activities. By doing so, fintech companies can build trust, safeguard their reputation, and establish themselves as reliable and compliant service providers in the financial industry.

Establishing Trust, Complying with Regulations & Combatting Fraud

Because the challenges faced are not siloed, the pressure Fintechs face is immense. Companies must deploy technologies and processes that can effectively and simultaneously respond to all challenges or face negative returns to their bottom line. And while customer and regulatory demands are indeed high, Fintechs do have resources that can be leveraged to successfully meet these ongoing demands. Utilizing intelligent, flexible and multi-layered identity verification will help Fintechs drive revenue, prevent fraud and be compliant — only adding friction as needed to suspicious transactions.