What is Digital Identity Verification? A Guide to Securing Your Fintech Startup

Few sectors epitomize the importance of data security and privileged user access like fintech. Cybersecurity is crucial for maintaining customer trust. It also poses a serious risk to a company's financial health. A recent Forbes report estimated that financial organizations lose roughly $5.9 million per cyber incident.

Digital identity verification has become a cornerstone of security and compliance, helping startups confirm user identities swiftly and effectively. By implementing robust verification processes, your fintech startup can safeguard against fraud, adhere to regulatory requirements, and build trust with your customers. And you can achieve all that while providing a seamless user experience.

Let’s go over what you need to know about digital identity verification for your fintech business

What is Digital Identity Verification?

Digital identity verification is the practice of using computer technology to confirm a person is who they claim to be, usually the account holder for whatever they’re trying to access. It’s the approach used by most modern businesses today. It includes simple forms of verification like usernames and passwords, as well as more complex approaches such as biometrics.

Digital verification offers greater efficiency and accessibility than traditional methods. But be sure to remember your cybersecurity commitments regarding fintech access and sensitive user data. Part of the role of an internal audit is to test for inefficiencies in your systems – this includes weaknesses in your cybersecurity.

The Different Types of Identity Verification

Of course, identity verification as a concept has been around for more or less as long as a society. Signatures, wax seals, photo IDs, and passwords are but a few examples. Of course, some forms of verification like ID traditionally rely on employee decision-making. Let’s look at some digital approaches, and how they can reduce the risk of human error.

Knowledge-Based Authentication

Knowledge-based authentication sounds much fancier than it is. It just means requiring information that only the user or account holder would have. Usernames and passwords are the most common examples.

In this case, it’s information generated specifically for account protection. As such, it’s not recommended you use any personal information to create them.

Recovery questions are another example. They come into play when someone can’t access their fintech account. Unlike usernames and passwords, these are based on personal info. This makes them memorable in situations where you might forget a password or username.

Common examples include the name of your first pet or your mother’s maiden name. That said, due to the popularity of social media, it’s never been easier for cyber criminals to scour your personal info. That’s why you need to be sure recovery questions don’t pose a security risk.

Biometric Authentication

Biometric digital identity verification means using a digitized system to scan someone’s physical characteristics. For example, fingerprint or iris scanning, as well as facial recognition. While it may be possible to steal information like passwords or recovery questions, biometric readings are very difficult to fake.

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Although there are various applications for AI in fraud detection like behavioral analytics, biometric authentication is the only one we’re talking about today. Although it’s vital to train and test your algorithms, AI facial recognition can be a highly effective security barrier.

Two-Factor Authentication

Another fancy name for another simple concept. Two-factor authentication just means using two different types of digital identity verification for additional layers of security. For instance, combining security questions with a thumbprint scanner. Even if a prospective criminal has the means to bypass one measure, the other can still trip them up.

Why Identity Verification Matters

The main purpose of identity verification is obviously to serve as a means of fraud prevention. Whether you’re running a small fintech startup or a major finance management services company, you must protect client assets.

Demonstrable, effective ID verification practices are also essential for establishing a relationship of trust with customers. Trust is important for any successful business model, but doubly so for fintech companies.

Of course, this isn’t just about business success. It’s also about managing your regulatory commitments for offering financial technology services.

Fintech startups must continuously adapt to changes in the regulatory landscape and ensure that their digital identity verification processes also remain up-to-date and compliant. This includes understanding and implementing requirements from laws such as the General Data Protection Regulation (GDPR), Know Your Customer (KYC), and Anti-Money Laundering (AML).

The Benefits of Digital Identity Verification

With so many businesses maintaining an online presence, digital identity verification has become extremely common. From online banking and asset management tools, to non-fintech services like streaming and gaming platforms, digital ID verification has become truly ubiquitous.

Improved Accessibility

Digital identity verification is uniformly easy to provide, whether someone is right in front of you or on the other side of the country. Since a digital service is equally accessible in all areas, it removes barriers for people who may struggle with in-person manual verification, such as:

• Those living in remote locations
• People with disabilities
• Anyone with professional or personal obligations

Streamlined Customer Experience

Digital identity verification is a big part of self-service culture. Why go out to a physical branch or spend ages stuck on a call center phone line when you can log onto your account and handle things yourself? Thanks to biometric authentication, you can even set up an account for the first time from the comfort of your own home.

Digital authentication also eliminates the need for lengthy onboarding and authentication procedures. This helps to reduce the risk of abandonment by customers, meaning they’re more likely to engage with what your service has to offer.

Cybersecurity Protection and Regulatory Compliance

Fintech services take on a duty of care to safeguard sensitive data and access to the financial assets of clients. You’re legally required to comply with legal regulations in your country, or even internationally, such as AML and KYC regulations.

Of course, your business may already be meeting these requirements as part of fraud monitoring responsibilities under the current SOX compliance definition.

Digital identity monitoring helps you comply with these regulations by preventing fraud and identity theft. Two-factor authentication in particular offers a lattice of protection to trip up would-be cyber criminals.

Greater Cost-Effectiveness

Digital identity verification solutions, while initially costly, can lead to long-term savings by reducing the need for physical infrastructure and manual verification processes. Their capacity to streamline and improve customer service makes them even more cost-effective, as they help to increase customer retention.  

Nonetheless, don’t forget to consider any ongoing costs related to maintaining and updating security systems. You’ll need to ensure that your digital solution can handle new threats and compliance requirements. This means some extra investment now and again, which should be incorporated into your budget.

The Challenges of a Digital Approach

For all its benefits, digital identity verification also has its share of challenges. Here are three things you need to be mindful of when implementing it for your fintech startup.

Balancing User Experience Against Security Needs

Like every online service, digital identity verification must strike a balance between fraud prevention and smooth customer experience. More layers of multi-factor authentication means greater security, but likely also more time spent by users verifying their identities.

If you want users to be able to sign into your finance platform quickly, too many authentication processes may be a problem. So, it’s important to choose a combination of authentication factors that grants you the best coverage. To strike the best balance, consider:

• Reserving some authentication factors for major account changes.
• Measures that only require user input once (such as IP and device registration or geotracking).
• Minimizing false positives. This is when the system erroneously flags activity as suspicious, leading to extra security steps and user frustration, ultimately impacting customer retention and acquisition.

Privacy Concerns and the Threat of Cybercrime

Digital identity verification can indeed help keep user information secure. However, the reason for that is because there’s an active cybersecurity market in response to the needs of consumers.

Data security tips for small businesses and major corporations alike stress the importance of things like choosing the right security vendors. Offering digital identity verification means your fintech platform is accessible online. For all its benefits, this means it can be targeted by malicious actors.

This is a major reason why consumers are often reluctant to give personal information to companies. Demonstrably secure digital authentication practices are essential to alleviate customer privacy concerns and build trust in your fintech platform.

The Lack of a Standardized Approach

The customizability of digital ID verification based on your needs is arguably one of its biggest strengths. However, this also presents a slight issue. Companies might implement any number or combination of authentication factors in their fintech platform.

Put yourself in the shoes of a user migrating to your platform from a different service. Your ID verification system might bear little resemblance to the one they previously worked with. To minimize how long it takes new users to adapt, digital identity verification needs to be intuitive and user-friendly.

Compare this to the setup of a basic user profile on a website. A social media account or forum profile, for example. Anyone who’s ever been online has probably seen a sign-up screen with the following:

• Username field
• Password field
• Confirm the password field
• Account recovery email field
• Anti-bot measures such as CAPTCHA

For what these may lack in complex authentication security they make up for in recognizability. Consider how you can use visual language to guide first-time users through the verification steps and incorporate that imagery into your branding.

Digital Identity Verification has Become the Standard

Modern fintech services prioritize user convenience. They emphasize the ability for users to access them via phone, tablet, or computer, from any location. Digital identity verification plays an unavoidable role in this.

Although digital authentication practices come with the added necessity for cybersecurity regulation, it’s worth it for the improvements to customer experience, accessibility, and cost-effectiveness. That’s why you should start implementing digital ID verification for your fintech startup today.