Around the world, governments and the private sector are teaming up with a goal of designing digital identity systems to tackle the growing problem of fraud in digital payments.
Recent examples include Business Finland investing €20 million ($22.52 million) in a five-year digital ID initiative led by TietoEVRY, while last year the Australian government accredited digital identity exchange Eftpos for use in online transactions requiring verification. The European Commission has also declared its intention to launch an identity verification toolbox by September 2022 with the aim of creating a digital ID system which can be used by more than 80% of the EU population by 2030.
The need for more sophisticated forms of identity verification around the payment authentication process has been heightened by the rapid rise of the digital economy over the course of the COVID-19 pandemic. With more and more people using e-commerce as well as turning to purely online banks and payment providers, identity fraud has soared.
According to a new report from Tallinn-based identity verification company Veriff, identity fraud accounts for nearly two thirds of all global fraud incidents, having doubled in 2021 compared to the previous year. Current verification procedures, which often rely on confirmation using phone numbers and email addresses, have proven inadequate.
“To combat fraud in today’s digital world, institutions need to embrace intelligent digital identity verification,” said Kurt Weiss, director of financial services at global identity verification company Ekata. “Sophisticated identity verification looks beyond a single element such as a phone number, and evaluates multiple ID elements, how those elements interact and if they are linked to a genuine person.”
Weiss predicts that biometrics and computer vision — a field of artificial intelligence which trains computers to process and interpret digital images — will form an integral part of next-generation identity verification technologies implemented by payments providers as well as card networks. For example, Mastercard is collaborating with research organizations and academic partners to study emerging areas of biometric authentication that can assess a person’s unique eye movement, heartbeat, pulse, or walking pattern. NuData Security, a Mastercard subsidiary, is currently researching the use of behavioral analytics such as typing speed to see whether they can be utilized as one of these biometric traits.
New technologies must ensure that identity verification is as frictionless as possible. Weiss points to the growing number of micromerchants participating in the digital economy who need to be able to offer a seamless payment experience to retain customers.
Many companies are banking on blockchain as a means of conducting real-time identity verification. A collaboration of 10 Spanish banks, including Banco Santander, CaixaBank and Generali, have worked together to develop Dalion, a blockchain-based self-managed digital identity offering for businesses. In South Africa, fintech Direct Transact is working with companies to ensure that they have authentication processes which meet regulatory requirements around identity verification, and it is now working on a solution utilizing digital ledgers.
“I believe in the next 18 months we will see the implementation and roll out of a distributed ledger for identity, for both consumers and businesses globally,” said Mark Heymann, project lead on digital identity at Direct Transact. “This enables real-time identity verification as part of a payments process and will be embedded in all day-to-day transactions in the future.”
The need for these technologies has been emphasized by the boom in decentralized finance over the past twelve months, with the cryptocurrency and NFT markets both experiencing rapid growth. In recent months, NFT buyers have been repeatedly targeted by hackers and scammers, while U.K.-based watchdog Action Fraud found that cryptocurrency fraud reports increased by more than 100% in 2021, for the fourth consecutive year.
Experts predict that in the near future, all cryptocurrency exchanges will be legally required to have more sophisticated identity verification processes as part of onboarding customers and processing transactions. The EU is already pushing for a new law to be introduced in 2024 which will place greater regulatory requirements on crypto-asset service providers.
“Crypto is probably the most susceptible industry for fraud because it combines constant hype and FOMO, which can be used to manipulate victims,” said Uldis Tēraudkalns, CEO of the Riga, Latvia-based banking infrastructure provider Nexpay. “Theft is easy and there is no recourse for a crypto transaction — once you send away crypto to a scammer's wallet or hand over your private keys, the money is likely gone forever. There are many ways in which scammers abuse victims and online platforms, but the key moment when they can be caught is during ID verification.”
