May 26, 2023
The primacy of identity verification in the age of fintech and crypto
Identity verification has come a long way since fintech’s early days. So has fraud. Alain Meier, Head of Identity at Plaid, recently sat down with Lex Sokolin, host of the Fintech Blueprint to discuss the current state of identity verification technology and how Plaid’s identity verification platform has quickly become one of the industry’s most trusted solutions.
Driving the conversation:
The evolution of identity verification technology and what’s behind it
What fraud looks like for most fintechs and enterprises today
How businesses can use the latest technology to stay one step ahead
Identity typically refers to authentication or identity verification. [1:50] Authentication ensures that the person connecting their accounts is using personal information and credentials that belong to them. Identity verification is the process of validating that you’re who you claim to be.
Identity verification has become more sophisticated by necessity. [14:10] Cognito’s first identity verification solution required just a single authenticatable data point, a user’s phone number. This was especially popular in the crypto space.
Today, fraud is exponentially more sophisticated and aggressive. Making it easier for fraudsters is the prevalence of personal information on social media. In order for companies to fight back while maintaining a quality user experience, complex anti-fraud measures are needed.
“Over time, fraud became more aggressive and companies had to implement more and more anti-fraud solutions to sufficiently fight that fraud and also keep up with the user experience requirements that people had,” said Meier.
Fraud in fintech takes on many forms. [18:00] Fraudsters are usually motivated by a need to make money or launder money. The most common methods of fraud include:
Identity theft using identities purchased on the black market
Spoofing (faking) liveness detection in order to access accounts
Synthetic identity verification, which involves injecting false or modified identities into the credit bureau system and then nurturing them over time
First-party fraud, which occurs when a consumer transacts in some way and then claims the transaction was fraudulent
Plaid offers a full-stack onboarding solution that includes all the components of identity verification. [23:40] Plaid Identity Verification (IDV) fights fraud by leveraging a range of data points that other providers can’t access. Plaid offers a full-stack onboarding solution when IDV is combined with Plaid’s downstream capabilities for account linking, funding, and payments.
“There’s only so much intel and data that you can get from someone during onboarding. You need to look beyond that,” explained Meier. “By leveraging the data that we’re seeing across that entire user onboarding journey, we can make the ID verification stage better.”
Expect a wave of new verification technologies to fight fraud. [27:45] These include:
Verifiable credentials - A consumer uses a third party to create cryptographic proof of some aspect of their identity, like age. The consumer can present this proof without sharing any other personal details. Verifiable credentials can be used for trust and safety but they can’t be used for identity verification in most industries due to regulations.
Worldcoin - A biometrically unique “proof of personhood" using a hash of a person's irises. It then creates a crypto wallet containing this iris scan.
AI creates new opportunities for fraud. [32:00] For example, a consumer can now authorize a large language model (LLM) to use their biometric data in order to authenticate on their behalf. This could be used, for example, to hold several full-time jobs at the same time.
“You’re able to theoretically authenticate yourself as an LLM on several different platforms. But they think that it’s you,” remarked Meier.
Plaid’s expertise is creating a “network effect”. [35:00] One of Plaid’s core competencies is its vast network of fintechs, banks, credit unions, and consumers. Plaid is continuing to develop innovative verification solutions but to date, has only scratched the surface of its network’s full potential.
“To date, we haven’t really leveraged network effects that much. There’s interesting work that we can do with anti-fraud, on-boarding, and identity,” said Meier.