What is Identity Proofing, and Why Is It Important?

It might be surprising to hear that, despite the measures taken by many institutes, in 2023 alone, there were more than 1 million reports of identity theft received through the FTC's IdentityTheft.gov website. These numbers can be reduced drastically with proper identity proofing and authentication processes.

What is identity proofing? Why is it important? How does it work? And how does it differ from identity authentication? Let's see.

What is Identity Proofing?

Identity proofing involves the process businesses undertake to authenticate someone's asserted identity in online transactions. While traditional approaches like requesting personal identifying information (PII) or knowledge-based queries are less secure due to the potential for others to provide such details, identity proofing solutions, such as document authentication paired with biometric verification like a selfie or video liveness check, offer enhanced certainty.

This procedure typically occurs during onboarding to establish a trustworthy identity. Also, identity proofing ensures that individuals accessing services or systems are indeed who they claim to be, a critical aspect, especially in financial services for new customers during account opening or registration processes.

With the increasing reliance on remote processes spurred by COVID-19, identity proofing serves as a secure method for financial institutions to validate identities in online interactions, effectively safeguarding against fraudulent activities like application and new account fraud.

Why is Identity Proofing Important?

The significance of identity proofing spans from essential compliance requirements like AML and KYC in regulated sectors such as financial services to safeguarding your business against fraudulent activities by establishing trustworthiness among users.

1. Security: ID proofing ensures that only authorized individuals gain access to sensitive information or services, minimizing the risk of unauthorized access and potential breaches.
2. Fraud Prevention: By verifying the identity of users, identity proofing helps prevent fraud, such as identity theft, account takeover, and other malicious activities.
3. Compliance: Many industries, especially financial services, are required by regulations like KYC (Know Your Customer) and AML (Anti Money Laundering) to verify the identities of their customers. Identity proofing helps businesses comply with these regulations and avoid hefty fines and penalties.
4. Trust and Confidence: Establishing trust between businesses and their customers is essential. Identity proofing helps build trust by ensuring that users are who they claim to be, leading to greater confidence in the security of transactions and interactions.
5. Customer Experience: While identity proofing adds an additional layer of security, it should also be seamless and non-intrusive for users. Implementing effective identity-proofing processes can enhance the overall customer experience by balancing security with convenience.

How Does Identity Proofing Work?

Implementing effective ID proofing is essential for both new account opening and authentication situations. In the context of new account openings, financial institutions must verify an applicant's identity before granting them credentials. 

Similarly, in scenarios involving account maintenance, identity proofing acts as an additional layer of authentication for existing customers making changes to their accounts. 

Various methods are available for identity proofing process, including:

1. Document Verification

Document verification compares the details and security features of an individual's official identification documents with known standards to verify authenticity.

2. Biometric Verification

Captures and analyzes unique physical traits, such as fingerprints or facial features, to confirm identity.

3. Liveness Detection

Utilizes advanced algorithms to detect signs of life in facial images or videos, preventing fraudulent attempts such as using static images or masks.

4. Knowledge-Based Authentication (KBA)

Generates personalized security questions based on the individual's credit history or other personal information to confirm identity.

5. One-Time Passcode (OTP) Verification

Sends a temporary code to the individual's registered phone number or email address, which they must enter to complete the verification process.

6. Trusted Identity Networks

Validates an individual's identity using their existing credentials from reputable sources, such as banks or government agencies, to streamline authentication processes.

What's The Difference Between Identity Proofing And Authentication?

Identity proofing and authentication serve the common purpose of verifying a user's identity, but they differ when applied within the user relationship. Identity proofing typically occurs during onboarding or relationship establishment, ensuring the legitimacy of the claimed identity and its rightful owner through methods like biometric verification.

On the other hand, authentication is employed to return users and verify their identity during subsequent interactions. For instance, when accessing a bank account, identity proofing is necessary to comply with KYC regulations, while authentication is triggered during higher-risk activities like transferring large sums of money, ensuring the user's continued legitimacy and ownership of the account.

Identity Proofing Use Cases In The Financial Sector

The identity proofing process is critical in the financial sector. Here are some key use cases and identity proofing examples in the financial industry:

1. Account Opening

One of the identity proofing examples is when a new customer applies to open a bank account or financial product online, identity proofing verifies their identity to comply with KYC (Know Your Customer) regulations. This process ensures that the customer is who they claim to be, mitigating the risk of identity theft and fraudulent activity.

2. Loan Applications

Before approving a loan application, financial institutions must verify the identity of the applicant. Identity proofing helps assess the risk associated with the borrower and ensures that the loan is granted to a legitimate individual.

Read more: Guard Your Business Against Loan Fraud: Types, Impact, and Prevention

3. Payment Processing

Identity proofing is essential for verifying the identity of individuals or businesses involved in payment transactions. This helps prevent unauthorized transactions, money laundering, and other financial crimes.

Read more: Payment Fraud: Types, Risks, Detection, Prevention & Solution

4. Account Maintenance

When customers need to update their account information or perform certain transactions, such as adding a beneficiary or changing contact details, identity proofing is used to authenticate their identity. This ensures that only authorized individuals can access and manage the account.

Read more: Authorized Push Payment Fraud

5. Fraud Prevention

Identity-proofing tools are employed to detect and prevent fraudulent activities, such as account takeover, identity theft, and unauthorized access to financial accounts. By verifying the identity of users during various interactions, financial institutions can enhance security and protect against potential threats.

Read more: Best Fraud Detection Software: 6 Companies Compared in 2024

Protect Your Business With FOCAL

While traditional methods of verifying identity exist, they often demand considerable time and effort, leading to a less-than-ideal user experience. In contrast, virtual identity verification methods utilize official ID documents and incorporate various checks, such as assessing strength, validity, activity tracking, identity fraud detection, and verification, all aimed at ensuring the legitimacy of an individual's identity. 

It's important for organizations to carefully consider their unique needs and operations when deciding where to integrate identity verification solutions. With integrated partnerships with trusted data providers, FOCAL’s identity proofing solution can authenticate individuals by cross-referencing their data with authoritative databases, providing added assurance of their identity (when data matches).

Conclusion

The significance of identity proofing cannot be overstated, especially as we navigate an increasingly digital world. It safeguards businesses and customers against cyber threats. Implementing strong identity-proofing practices not only enhances security but also fosters an environment of trust and authenticity in our online interactions. It's essential for building a safer, more reliable digital world where confidence reigns supreme.