What is Digital Identity Verification? A Definitive Guide

Yuka Yoneda
October 16, 2023

What is Digital Identity Verification and How Does It Work?

Digital identity verification is the process by which people's identities are validated online when they are signing up for new digital services or transacting digitally. If you think about how critical it is for businesses to know who they are interacting with online and verify that they are indeed transacting with the correct user, you can see why identity verification has become a core function for almost every business that operates online today.

In this guide, we'll go over the following areas of digital identity verification (use the table of contents below to skip to the parts you are most interested in):

Why is Digital Identity Verification Important?
How is Identity Verification Different from Authentication?
Different Ways of Verifying Identity
Consequences of Poor Identity Verification
Consequences of Lengthy Identity Verification Processes
Downsides of Document Scanning
A Better Way of Verifying Identity

Why is Digital Identity Verification Important?

According to reports by the Identity Theft Resource Center (ITRC), data breaches rose by 17% between 2020 and 2021, and the FTC received more than 1.4 million reports of identity theft in 2021. Moreover, Javelin Strategy & Research’s 2022 Identity Fraud Study reported that in 2022, identity thieves stole around $52 billion from Americans. Identity fraud will continue in 2023 and beyond as fraudsters devise more ways to compromise mobile apps, P2P services, and digital wallets. With such a high probability that the person a company is interacting with online is NOT who they say they are, it is no surprise that identity verification is one of the key regulatory requirements that many industries today, including healthcare, finance, and sports betting, must abide by. 

Identity verification plays a major role in preventing new account fraud. It’s an important step in the Know Your Customer (KYC) process and key to complying with Anti-Money Laundering (AML) regulations. Identity verification also helps financial organizations to evaluate and monitor customer risk. 

Through mobile and online channels, identity verification can - if done correctly - provide an easy, fast, and secure remote onboarding process for customers opening new accounts and those borrowing funds from a financial institution.

But What Exactly is a Digital Identity?

A digital identity is a unique identifier that establishes a person's identity online. This information may be stored online or it may be encrypted for privacy reasons. These unique identifiers enable businesses and organizations to determine who their customers and partners are.

How is Identity Verification Different from Authentication?

Although often used interchangeably, there’s a difference between verification and authentication. 

Identity Verification is the validation process of confirming that a person is actually who they say they are. It is typically done at the early stage of onboarding a new client. During verification, the company or organization requests proof of personal data from the customer, such as a digital copy of a government-issued ID and phone number.

Identity Authentication is the continued validation of an already verified client to ensure the person accessing the account is actually the rightful owner. Authentication is typically done whenever an individual uses the company’s system. 

The most commonly used authentication procedures include the following: 

  • Knowledge-based challenges such as usernames, passwords, and secret questions. KBA creates friction for prospects, leading to higher abandonment rates.

  • Data possession challenges such as a one-time passcode sent via text message or an authentication app. These are vulnerable to SIM Swap and Porting attacks.

  • Biometric checks such as fingerprint, facial, or walking recognition technology via a mobile device.

In a nutshell, verification is when a company validates a client’s identifying documents during the onboarding process or when processing a lending application, while authentication is the process of validating the identity of an individual to confirm they are indeed the rightful owner of the account. 

‍What is Digital Identity Verification - Person verifying identity

Different Ways of Verifying Identity

There are several ways of verifying the digital identity of a person, including the following: 

Verification by government-issued Identification Documentation (ID): This involves a customer taking a photo of their government-issued identity document and uploading it to the company’s security and verification department. This method can be compromised when you don’t have the right software to detect fake or tampered ID documents.

Verification by other types of documentation: Businesses and organizations also use personally-identifying documents such as utility bills as proof of address to verify new customers. The customer can upload a copy of their electricity bill, water bill, bank statement, or internet bill received in the last two to three months to show where they live. With mail theft on the rise, this verification method has a critical weakness. 

Verification using biometrics: Biometrics can also be used to verify the identity of a new client. Biometric verification, which may include facial or fingerprint recognition technology, can match a person to the data contained in the document they have provided, such as a government-issued ID. Biometric verification can help to detect and mitigate illegal activities such as account takeover, fraud, and identity theft. 

Verification by One-Time-Passcode (OTP): Many companies often use phones as both verification and authentication methods. A company can verify a new user's identity by sending one-time authentication codes via text message. The process can also be used to authenticate that the person accessing the system is the account's true owner. However, as mentioned above, this method is seriously vulnerable to SIM Swap scams and Porting attacks

The Prove Approach: For most people, their phone is never out of arm’s reach, making the phone-centric approach an easier and faster way to verify digital identity. It ensures maximum efficiency without compromising user experience.

Phone-Centric Identity™ relies on billions of signals from authoritative sources pulled in real-time, making it a powerful proxy for digital identity and trust. If you think about how many people have mobile phones, how long they have had them, and how often they use them, it’s logical why these attributes and related telephony signals can be highly correlated with identity and trustworthiness.

As a leading identity verification solutions provider, Prove leverages the power of the mobile phone to provide a smarter and more convenient way to verify a user’s identity. Instead of scanning IDs and uploading them to the company’s system, Prove establishes trust across the customer journey.  

Consequences of Poor Identity Verification

Most online fraud results from identity theft and uncontrolled access to confidential data. Poor identity verification controls often result in increased cases of fraud and loss of customer trust. For instance, in 2020, while the world was in lockdown, more than 49 million identity theft cases resulted in losses of over $56 billion. To better mitigate fraud, financial institutions, businesses, and organizations should proactively ensure they have highly efficient and agile identity verification measures in place. 

And this is not a one time investment in upgraded controls. As fraud techniques become more sophisticated, companies need to continue evaluating and updating their identity verification and authentication processes to prevent fraud-based losses. Identity verification should also be tailored to address the various types of fraud, including identity theft, credit card fraud, fake identity, and account takeover. 

Consequences of Lengthy Identity Verification Processes

Finding the perfect balance between security and customer experience is one of the challenges many companies and financial institutions often face when dealing with identity verification. It’s no secret that most identification verification methods today are painful for the customer, resulting in a negative experience that reflects back on the business. Relatedly, a recent report by Ernst & Young on identity verification stated that the lack of standardized authorization mechanisms often “leads to poor customer experience.”

Consumers find the identity verification process tedious and time-consuming, often leading to frustration and enrollment abandonment. Some of the more obvious challenges that impact the customer experience typically include:

  • the amount of time the entire process takes 
  • the number of steps involved in the process
  • the amount of data the customer is required to provide during the process
  • the number of disconnected phases a customer has to go through to complete the process

To find a balance between security and customer experience, organizations need to use an automated and fully integrated frictionless identity verification process, such as the Prove Pre-Fill®.

Downsides of Document Scanning

Document scanning has become a standard security and new customer onboarding procedure for most banks and financial institutions. However, relying on documents alone poses a major risk of fraud, given the advanced document editing technology today. 

There are many other reasons why companies should not rely on document scanning alone in their identity verification, including the following:

  • Customer abandonment: Increased cases of onboarding abandonment. Although most people opting to use your company’s services are legitimate, many are not comfortable offering their documents to another entity, especially with the rising cases of fraud and hacking. Document scanning could be why legitimate customers abandon your business in pursuit of other companies with easier, faster, and less intrusive verification methods.
  • High Cost: The cost of document scanning can be quite high, especially when done in large volumes. 
  • Extra Privacy Concerns: Document scanning requires extra maintenance efforts to comply with data regulation laws and customer information security requirements. 

Prove’s phone-centric identity verification provides a more frictionless, less intrusive, and easier-to-maintain identity verification process than traditional document scanning processes. 

A Better Way of Verifying Identity

The digital identity market is shifting towards smarter verification methods, providing a high level of security while moving away from physical ID scanning.

Prove does just that by swiftly checking a phone's reputation and ownership status, and Prove Pre-Fill® uses pre-populated application forms to provide up to 79% faster customer onboarding. The Pre-Fill function also helps financial institutions comply with all CIP+ (customer identification program), including  KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations. 

To enhance security, Prove compares customer data against global screened lists, including OFAC SDN, UK Financial Sanctions (HMT), US Consolidated Sanctions List, DFAT, AUSTRAC, and all the major PEP and Sanctions lists, just to mention a few. 

Trusted by over 1,000 leading companies to reduce fraud and improve the consumer experience, Prove is the world’s most accurate identity verification and authentication platform. 

The Prove approach to identity verification helps accelerate onboarding and prevent fraud without compromising user experience. Want to up-level your company’s identity verification capabilities? Speak with a digital identity expert at Prove.

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