Identity Verification

The main difference between first- and third-party fraud lies in whose identity is being misrepresented. In first-party fraud, the fraudsters use their true identities but alter details to mislead or deceive for benefit. In third-party fraud, the criminal uses someone else's identity, often without the victim's knowledge, to commit fraud. The impact and detection methods for these types of fraud can also differ significantly. First-party fraud can be more challenging to detect because it involves subtle falsifications by legitimate customers. In contrast, third- party fraud might be easier to spot due to the use of entirely false or stolen credentials.

While both types of fraud pose serious risks to businesses and financial institutions, understanding the nuances between them is crucial for developing more effective countermeasures and better maintaining the integrity of financial systems. That’s because each requires different detection strategies and prevention technologies, such as more sophisticated analytics for first-party fraud, and identity verification and monitoring tools for third-party fraud. 

Identity fraud inflicts significant financial losses on consumers and businesses each year: Annually, identity fraud resulted in $22.8 billion in losses worldwide. For businesses, particularly in the financial sector, these losses aren’t just limited to the immediate financial outlays to cover fraudulent transactions. They also include substantial investments in strengthening security protocols, legal fees and even potential fines for compliance failures. Worse still, repercussions extend beyond immediate financial damage to include: influencing credit scores, consumer trust and long-term business reputations. 

• Customer experience: Many organizations introduce stringent identity verification processes in an effort to better prevent fraud, but this can introduce friction into the customer experience. Customers are required to undergo multiple steps during account creation, login or transactions, which can be time consuming and lead to frustration, especially if the process is perceived as overly complicated. Possibly more damaging is the frustration from false positives — legitimate transactions incorrectly flagged as fraudulent as the result of very high-risk thresholds. False positives risk current business but may also impact future business and a brand’s reputation. 
• Direct financial losses: Companies face direct losses when fraudsters successfully access credit lines, drain accounts or make unauthorized purchases. Direct financial losses due to fraud can be substantial: An average loss of 6.5% of revenue equivalent or USD$359 billion, according to business leaders surveyed by TransUnion.
• Impact on consumers: For individuals, the consequences of identity fraud extend beyond unauthorized financial transactions. Victims may face long-term credit damage, making it difficult to obtain loans, secure housing or even gain employment. The process of restoring one's identity and credit status is not only cumbersome but also emotionally taxing, often leading to significant stress and anxiety. Victims of identity theft often experience a loss of trust in digital transactions, becoming hesitant to engage with online platforms. This reluctance can lead to reduced customer engagement and loyalty, impacting revenue streams of businesses.
• Increased security and compliance costs: In response to fraud incidents, companies typically increase their spending on security technologies and systems. This includes investments in more advanced identity verification tools, secure data storage solutions and enhanced encryption practices. Additionally, as regulatory bodies tighten data protection and privacy laws, compliance costs also rise significantly to meet these new standards.
• Operational disruption: Following a fraud incident, companies often need to divert resources to investigate, update security measures and handle customer concerns. This diversion can lead to operational inefficiencies and increased costs in workforce allocation and technological updates.
• Reputational damage: Beyond the immediate financial and operational impacts, identity fraud can severely damage a company's reputation. A single incident can lead to loss of customer trust — which is difficult and expensive to rebuild. This reputational damage can have long-term effects on customer retention and acquisition, influencing the company's market position and ultimately, its financial health.

Businesses must acknowledge these behavioral shifts and prioritize both preventive measures against fraud and effective strategies for managing fraud incidents to help maintain consumer trust and engagement. These consumer responses also represent an opportunity for businesses: Implementing more effective data security measures, including identity verification processes, can help businesses develop a positive reputation for data security — which in turn helps attract customers disaffected by their experiences or perceptions of other vendors.

The identity verification process involves checking the authenticity of an individual's identifying details against more secure and reliable data sources or documents, often starting with government-issued identification documents like a passport or driver’s license. In addition to document verification, the identity verification process can also encompass biometric methods — such as fingerprint scans, facial recognition or iris scans — that compare biological traits unique to each individual and more difficult to replicate. Identity verification can also use knowledge-based authentication (KBA) which asks questions presumably only the individual would know the answer to, and two-factor authentication (2FA) which requires the presentation of two separate verification factors.

As cyber threats evolve, so too do the methods and technologies for identity verification, with a growing emphasis on digital solutions that provide both security and user convenience. Implementing robust identity verification methods isn’t just about regulatory compliance but also about building trust with customers — ensuring their identities and transactions are secure in the digital age.

Methods of identity verification include:

• Authoritative data: This compares the customer’s collected data against public and private databases to help confirm its accuracy. This includes checking email address and phone numbers, credit data, government records and other relevant registries.
• Biometric verification: Increasingly common in digital transactions, this involves using unique biological traits, such as fingerprint scanning, facial recognition or iris scans, to better verify an individual’s identity.
• Credit file verification: This involves checking a person’s credit file for consistency in their financial history and personal details, including Social Security numbers (SSN).
• Device verification: This is the process of authenticating and validating the devices used by individuals to access online services, thereby better ensuring the device interacting with a system is recognized and trusted. 
• Digital verification: This process uses online data and electronic footprints that better correlate to the individual's claimed identity, such as IP addresses, social media profiles and other online behaviors.
• Document verification: This involves checking the validity of a provided document to help ensure it’s genuine and not altered. Modern systems use technology to help verify security features on documents like ID cards or passports by checking security features, such as watermarks, holograms, barcodes or magnetic stripes.
• Identity graph: This shows how users are connected by common properties, such as names, email addresses, device fingerprints, IP addresses and birthdates. Checking for consistency in a user’s identity graph improves the speed and accuracy of identity verification.
• Knowledge-based authentication: This involves asking personal questions only the actual person should know the answers to. These could include previous addresses, names of relatives or details about financial history.
• Two-factor authentication: This requires users to provide two different types of information for identity verification, such as a password plus a text message code sent to the user’s phone.

A more robust approach incorporating multiple identity verification steps reduces the chances illegitimate users can access services, which better protects both the business and its customers from potential security threats and fraud.

It’s imperative identity verification evolve and modernize constantly — because technologies and tactics employed by fraudsters are changing. At the same time, the surge in online activities, paired with the proliferation of data breaches and phishing attacks, has created many more opportunities for fraudsters to act.

Recognizing and responding to the latest trends in identity fraud is crucial for developing more effective countermeasures. Here are some of the latest trends shaping the field in 2024:

1. Artificial Intelligence-driven fraud: The use of artificial intelligence (AI) by fraudsters has escalated with technologies being used to automate scams, create deepfakes and mimic human behaviors. This trend includes everything from generating realistic synthetic voices to creating fake video content, making scams more convincing and harder to detect. The use of artificial intelligence to create fake identities is a major driver behind the rise in synthetic identity fraud.
2. Bot fraud: Increasingly prevalent trend in the financial sector, bot fraud (also known as bot-driven fraud) automates fraudulent activities like new account creation at scale. Fraudsters also employ bots to test for vulnerabilities in websites and systems.
3. Contactless payment fraud: As the adoption of contactless and mobile payments increases, so does the opportunity for fraud in this space. Cybercriminals exploit weaknesses in near-field communication (NFC) technologies and mobile payment systems, leading to increased payment fraud despite the convenience of these technologies.
4. Fraud-as-a-service (FaaS): The commercialization of fraud has seen a rise in Fraud-as-a-Service platforms where the tools and services needed to commit fraud are sold or rented out. This makes sophisticated fraud schemes accessible to a broader range of criminals — not just those with technical expertise.

These trends and evolving threats highlight the need for businesses to stay vigilant and ensure they employ best-practice identity verification and fraud prevention strategies.

The more highly effective identity verification services deliver on the following factors:

• Increased accuracy and reliability: Helps ensure  verifications are accurate, reducing the risk of false rejections or acceptance of fraudulent identities.
• More compliant processes and outcomes: Better adheres to global and local regulations, including KYC. 
• More optimal user experiences: Incorporates a more user-friendly interface that facilitates easier integration and operation. This is critical to helping ensure your efforts to enhance security don’t create an identity verification user experience that causes customers to abandon the process.
• Enhanced speed and efficiency: Delivers quicker results to maintain a more seamless user experience without compromising security.
• Elevated identity risk signals: Applies factors, such as more advanced data analytics, behavioral biometrics, cross-channel monitoring, geolocation and device context, to better detect and prevent fraudulent activities.

For large corporations and financial services institutions looking to deliver on these factors, here are 12 key features of identity verification solutions:

Together, these features create a more robust framework for identity verification that helps protect against fraud while better ensuring a smoother and more compliant user experience.