Why Banks Verify ID and the Drive to a Digital Future
Posted on: October 23rd, 2020
After the terrorist attacks on September 11, 2001, Congress passed legislation known as the Patriot Act that required banks to obtain photo identification from customers for most transactions. The rationale for the legislation was that terrorists involved in the World Trade Center and Pentagon attacks trained in the United States and kept financial accounts here as well.
Their activities went undetected until it was too late. That is a a large part of why banks today ask to verify your ID to open a new account.
Why Banks Verify ID
While the Patriot Act mandated banks to obtain a copy of a customer’s photo identification, it did not include the specific steps banks must follow to confirm identity. The only guidance provided was that every bank should develops its own written policy on the matter. Today, banks cannot open, close, or complete a transaction on an account without some type of customer identification.
Consumer fraud and identity theft has grown significantly in the nearly 20 years since the passage of the Patriot Act. The requirement to present identification when banking helps to protect consumers as well as the interests of the banks and government.
A person who stole a check addressed to someone else, for example, would not be able to pose as the victim and cash the check at any bank without his or her identification matching what the banking system already has on file. Despite these measures and technology advancements, Americans lost a collective $16 billion dollars to identity theft in 2016. This is one of many factors that has pushed the banking industry towards digital identification.
Know Your Customer
In addition to the mandate to verify customer identity, banks must follow regulations set forth by a program called Know Your Customer (KYC) to prevent financial crimes such as money laundering. After obtaining information from customers such as name and social security number, financial services workers must compare the information against a database list of known criminals in the financial services industry.
Following the passage of the Patriot Act, KYC requires customers to be flagged based on risk. For high-risk customers, bankers must take extra steps to verify identity and monitor their financial transactions.
The Financial Services Industry and the Cumbersome Identity Verification Process
Banks and other financial institutions face pressure from both sides. Federal regulations require taking a copy of a customer’s photo identification and verifying his or her social security number, a process that ultimately benefits the customer. However, some people may become annoyed at the request for personal information and how long the verification process takes when completed manually.
Many financial institutions have turned toward digital verification to solve this dilemma. Since the coronavirus pandemic arrived in the United States in early 2020 and forced numerous everyday process online, banks have gotten even more onboard with digital verification. The efficiency and cost savings of digital verification means that individuals and businesses should expect it to become the norm moving forward.
Digital Identification Today and in the Future
According to IT Pro Today, the projected revenue for the digital identification market is $12.8 billion dollars in just the next four years. So, what exactly is digital identification?
Many banks and finance institutions today embrace methods of verifying identity documents through online processes. However, digital identification increasing makes use of biometrics instead. Some specific methods of verifying identity through biometric technology include:
- Behavioral traits
- Eye scanning, particularly the iris of the eye
- Facial recognition
- Fingerprint scanning
- Location data analysis
- Mobile phone tracking
- Vocal patterns
Having one or more methods of digital identification available creates a more seamless customer experience while providing a superior method of authentication to thwart identify theft, consumer fraud, money laundering, and other financial crimes. The goal is to implement digital identification in banking and allows customers to complete all financial transactions electronically.
What is IDaaS?
Like Software as a Service (SaaS) before it, Identity as a Service (IDaaS) finds a primary market in the financial services industry due to its heavy regulations and use of the KYC program. Some banks have already partnered with fintech companies to create user-friendly IDaaS for the purpose of creating new accounts, onboarding new customers, and for customer verification purposes in future transactions. The partnership with fintech has made the job of banks much easier while creating a more convenient and user-friendly experience for customers at the same time.
There is no question the coronavirus pandemic changed how the world does business. Companies that initially sent employees home to work and relied on the Internet to meet customer needs are finding the arrangement favorable even after some coronavirus restrictions have lifted.
With millions of people continuing to work from home and the booming gig economy, the demand for digital IDs will only increase. Financial institutions have little choice but to get onboard or lose customers to the competition.