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The Importance of Identity Verification for Neobanks and Digital Banks

In our digitally evolving world, where products and services are increasingly tailored to meet the demands of tech-savvy consumers, neobanks and digital banks have emerged as pioneers in redefining the banking experience. While they are extremely convenient because they allow people to sign up for and manage their bank accounts from virtually anywhere, it has also increased the likelihood of fraudulent activity, money laundering, and identity theft.   

Identity verification is an essential component of the financial industry. With the convenience of accessing accounts from anywhere at any time comes the responsibility of ensuring the security of sensitive financial information. The process of verifying the identities of individuals opening accounts plays an important role in maintaining security and preventing crimes such as fraud and identity theft. Moreover, robust identity verification measures are essential for ensuring compliance with legal regulations governing financial transactions. In this blog, we will talk about the importance for online banks to possess a robust ID verification system. 

Identity Verification in Finance and Banking 

Identity verification ensures that the clients with whom banks, financial institutions, and other industries do business are who they say they are by checking multiple sources of information to confirm and verify the user’s personal information. Identity verification aids in the maintenance of federal and international compliance programs, adding a layer of security that protects banks and financial institutions from being accidentally involved in money laundering. Additionally, it prevents fraud and its monetary loss as a consequence. 

Neobanks vs Digital Banks vs Traditional Banks 

Neobank is a financial technology company. They typically don’t own a banking license unlike digital banks. Neobanks have no physical locations, they operate digitally. Everything is done online, including opening a bank account. With no physical branches to maintain, neobanks can offer competitive fees, higher interest rates on savings accounts, and lower minimum requirements. However, they do have a more limited number of services being offered compared to traditional banks. 

Digital banks, also referred to as online banks, offer a convenient alternative to traditional banking. Digital banks are systematically backed by conventional banks, offering more services while still operating remotely. That being said, digital banks own a banking license.  

In contrast, traditional banks offer a sense of familiarity and trust through their physical branches, where customers can receive personalized assistance and face-to-face interactions with bank staff. This human touch is especially valued by older generations and individuals who prefer the reassurance of in-person banking services. 

Traditional banks also provide a wide range of financial products and services, including mortgages, loans, and investment opportunities, often with the added convenience of ATM access and safe deposit boxes at branch locations.  

However, maintaining physical branches comes with significant overhead costs, which may result in higher fees and lower interest rates for customers.

With all the differences, both neobanks and digital banks rely on a digital-first approach. While both offer greater accessibility for customers, it also brings about the challenge of an increased risk of identity fraud due to the limited physical verification. Cybercriminals use vulnerabilities to gain access to sensitive information, allowing them to impersonate people, open fraudulent accounts, and carry out unauthorized transactions. Therefore, they must continuously invest in robust security measures. 

The Necessity of Identity Verification 

Ensuring Compliance 

In an increasingly regulated environment, compliance with legal regulations governing financial transactions is non-negotiable. Failure to implement robust identity verification measures can result in severe consequences, including fines and reputational damage. By investing in quality identity verification solutions, banks can not only protect themselves from legal liabilities but also safeguard the interests of their customers.  

Read about remote identity verification for banks  

Mitigating Fraud Risks & Building Trust  

Due to their fully automated systems, neobanks are more vulnerable to identity theft. Fraudsters can remotely set up neo banking accounts using forged credentials, which frequently go undetected. The fraud rate in neobanks is approximately 0.30%, twice the rate of credit card companies which is known to be at 0.15% and triple the amount of debit cards, according to Unit21. Some common fraud types are identity theft, account opening fraud, and account takeover fraud. Neobanks are vulnerable to this because accounts can be opened from any device, rather than in person.  

Desire to Enhancing User Experience & Seamless Onboarding 

The Neobanking and digital banking market has a competitive nature – all wanting to deliver fast and easy service to customers. And if they set up an overbearing fraud detection and prevention solution, it could jeopardize the seamless user experience it intends to provide. 

It could be a tricky task to find the ideal balance between security and user experience.  Choosing a vendor that prioritizes both security and performance, and leveraging technologies such as biometric authentication or AI-driven verification tools can accelerate the onboarding process and minimize friction for customers. Furthermore, it is a good practice to also have manual verification in the process as the combination of automated and human-powered verification increases the accuracy of a check. 

Financial institutions can determine the level of risk associated with onboarding customers based on where they are operating, in addition to a variety of other factors. That risk level can then influence which technologies and data sources the bank chooses to use. 

Remote Identity Verification 

With the shift towards digital banking, remote identity verification has become essential. This method allows banks to confirm an individual’s identity without the need for physical presence. Remote identity verification solutions leverage cutting-edge technologies such as facial recognition and document scanning to verify the identities of customers remotely. 

AuthentiScan is an automated end-to-end identity verification solution: our trusted ID document verification technology combined with cutting-edge biometric identity proofing. The optical character recognition (OCR) technology converts images of ID document data into machine-encoded text for easy data entry into your business systems. Within seconds, users can receive the verification result which includes a detailed audit trail, which enhances compliance and reporting. 

If your company has manual ID checks in the process, the DocumentChecker database contains the world’s most comprehensive, uptodate, and accurate reference information for ID documents and banknotes. This allows you to check the document information, 70,000+ security features, as well as get notified of newly issued documents or counterfeit banknotes in circulation. The built-in MRZ checker provides assistance with manual checking. 

These solutions support you with performing sufficient document verification and accordingly improve your know-your-customer (KYC) and customer due diligence (CDD) processes, perform anti money laundering (AML) checks, and protect your business from fraud. Additionally, Keesing Technologies is GPDR and ISO 27001 compliant, which reflects its secure data handling.

Try AuthentiScan & DocumentChecker for free  

Click here to get a free demo for AuthentiScan or here for free trial account for DocumentChecker!  

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