March 28, 2023

The evolution of identify verification and the future of fintech

Identity verification is accelerating the future of fintech by turning the tide against fraud, improving KYC compliance, and unlocking new fintech use cases. Here, Alain Meier, Head of Identity at Plaid, speaks with Jason Mikula of Fintech Business Weekly about the evolution of identity verification since Plaid's acquisition of Cognito in January, 2022.

Driving the conversation:

  • Why identify verification technology is critical for KYC

  • How IDV is used to prevent crypto fraud

  • Emerging identity tech, like mobile driver’s licenses

  • Reasons for the slow adoption of decentralized identities

Listen now!

Key takeaways:

  • Cognito’s identification technology was initially developed for crypto remittances  [6:38] Plaid acquired Cognito in January, 2022 to enhance their identity verification product offerings. By May, Plaid had integrated Cognito's technology and released Identity Verification (IDV) and Monitor.

  • Fintechs are adding IDV for KYC compliance [7:27] Fintechs are rapidly adopting and integrating Plaid Identify Verification (IDV) into their account linking process and Know Your Customer (KYC) compliance procedures. In Q4, 2022, one in three new Plaid customers bought IDV.

To learn more about Know Your Customer (KYC), read our article “What is KYC?” 

Rapid bank adoption
  • KYC solutions are easier to implement with IDV [9:45] Fintechs spend less time integrating IDV because it’s a no or low code solution. Compliance and fraud teams manage success criteria directly, without the risk of cross-team miscommunication or poor documentation.

“We’re seeing that a lot of larger fintechs who previously didn’t have the capacity to experiment with new KYC and anti-fraud methods are now much more willing to do so because of that reduced barrier to entry,“ says Meier.

  • IDV is integral to onboarding and account funding [13:00] Plaid customers chain together several Plaid products to confirm identity, reduce ongoing risk, and fund an account.  IDV makes sure the user is who they say they are. Auth connects the user’s bank account. Identity matches the account ownership details with data provided during identity verification. Once the account is funded, Signal predicts the ACH return risk.  

Reducing fraud and identity theft
  • IDV is used most to prevent crypto fraud [19:45] Crypto is the largest industry covered by IDV because the crypto space has the biggest financial incentives for fraud. Crypto’s underlying technology, blockchain, is an immutable ledger, meaning its transactions can’t be altered. If funds are fraudulently transferred, they are gone forever. 

“If you can solve fraud in crypto, then you can solve fraud in basically any industry. The absolute biggest financial incentives for a lot of fraudsters are in the crypto space," explains Meier.

  • Consumers will allow more friction in return for more security [26:00] Typically consumers want less friction when they engage with their digital tools. But a recent survey found that 70% of users feel more secure using apps that ask them to verify their identity. 

Emerging identity tech
  • Mobile driver's licenses could shift control of identity data [30:30] Mobile driver's licenses may shift verification systems away from private firms (like Google) and towards government-based verification systems. They could also give consumers more control of their identity information. Longer term, this could reduce the power credit bureaus have over consumer identity data. Risks include surveillance and more difficulties for undocumented immigrants. 

“Just like Apple Pay made it ridiculously easy to check out, this [the mobile driver’s license] is going to make it ridiculously easy to verify your identity,” notes Meier.

Decentralized identities
  • The US isn’t ready to adopt decentralized identities [37:55] Meier is a huge supporter of decentralized identity, also referred to as self-sovereign identity. It allows a consumer to control their identity using a password and private key on their device. Unfortunately, decentralized identity doesn’t adhere to KYC guidelines which require each financial services provider to conduct their own identity verification. So it’s not legally permissible. 

“The value of a digital credential is severely diminished because there is no legally permissible way for you to use it again,” remarks Meier.

IDV technology is rapidly evolving to meet the growing needs of consumers and financial services providers. In just a few years, it has proven that it can help combat fraud, eliminate friction points for underserved communities, streamline the user experiences, and more. While there are many predictions about the future of fintech, one thing is sure: identity verification will be the key to unlocking it.

Go deeper: Learn more about Plaid Identity Verification