The ultimate guide to identity verification

Whether you are opening a bank account, taking out a mortgage, or purchasing crypto, identity verification is now a routine part of our digital lives. For most consumers, this process takes just a few minutes, but behind the scenes, it is anything but simple—especially as fraud and identity theft tactics evolve. 

In this guide, we’ll explain how identity verification works, the technologies and regulations behind it, and how Plaid is helping businesses verify users faster and more securely.

What is identity verification?

Identity verification is the process of confirming someone is who they claim to be. It's a foundational step in online financial transactions, especially for industries like fintech, crypto, and banking, where financial risk and regulatory scrutiny are high. 

At its core, identity verification helps businesses ensure their users are real people who are authorized to perform a specific action, such as opening a bank account, applying for a loan, or sending a payment. For companies, it is also a critical first step in meeting Customer Identification Program (CIP) and Anti-Money Laundering (AML) compliance requirements.

And the stakes are high. In 2024, consumers lost a combined $47 billion to identity fraud and scams, an increase of $4 billion from the prior year. As fraudsters adopt more advanced tactics, including synthetic identities and account takeovers, robust identity verification is more important than ever. 

If you're a fintech startup or a payments provider, identity verification helps protect your users, reduce fraud risk, and meet regulatory obligations without adding unnecessary friction to the onboarding experience.

If you're a consumer, identity verification helps protect you from scammers and fraudsters who might try to impersonate your identity, take over your accounts, or open new ones in your name.

How identity verification has evolved 

Identity verification is a multi-step process that confirms a person’s identity by analyzing a range of digital and physical signals. While the experience is often quick and seamless for consumers, a lot happens behind the scenes to ensure the person on the other end of a screen is who they claim to be.

In traditional manual identity verification, a person is typically required to submit physical or scanned copies of government-issued documents, such as a passport or driver’s license. A human reviewer then inspects these documents to determine if they appear legitimate and match the individual.

Today, consumers’ identities have evolved to encompass more than traditional attributes, like name, address, date of birth, or social security number. Organizations should assume that these data points are at risk of being exposed – or more realistically already exploited through data breaches and the dark web. Digital attributes have become equally as important; what device is used and where a user is logging in from are critical elements to round out a person’s identity. Analyzing these diverse data attributes in addition to traditional identity verification elements allow organizations to not only create a more tailored experience, but uplevel their fight against fraud.

Digital identity verification involves more steps than traditional, manual identity verification, but is actually much faster. Here's how that process generally goes: 

1. Data collection: The process begins when a user enters personal information, often their name, date of birth, phone number, and email, or uploads a government-issued ID.

2. Document verification: If required, the user provides a photo of their ID, which is verified using automated tools and machine learning.

3. Biometric verification: Some systems ask for a selfie or video to confirm that the person’s face matches the ID and that they are physically present. 

4. Device and network checks: Some identity verification services evaluate the user’s device, IP address, browser behavior, and geolocation for signs of suspicious activity.

5. Database or API matching: User-provided data is cross-checked against trusted databases to validate its accuracy. 

6. Fraud Risk scoring: All inputs are analyzed together to calculate a risk of fraud score. 

7. AML screening: If required, users are screened for AML (Anti-Money Laundering) compliance by checking sanctions lists and politically exposed person (PEP) databases.

Digital identity verification brings together these different signals to deliver a more holistic, secure, and scalable approach to identity verification.

→ Want a deeper dive? Read our Digital Identity Verification article. 

Are identity verification, KYC, and CIP the same thing? 

No, they are not the same. While identity verification is a core component of KYC, the terms are not interchangeable. 

KYC, or "Know your customer," is a broader concept that includes guidelines and regulations financial and investment institutions must follow to identify customers, assess risk, and monitor transactions for suspicious activities. KYC does not refer to specific regulations; rather it is a catch-all phrase for regulations surrounding identity verification procedures related to AML and BSA compliance.  The goal is to prevent financial crimes and protect the integrity of the financial ecosystem.

CIP refers to a documented process financial institutions must have to outline how they identify their customers before they open an account. It is a required piece of an AML program that ensures companies take reasonable steps to determine who customers are.

Identity verification is often the first and most visible step in a broader AML process. To comply with AML regulations, businesses must:

• Collect and verify customer identity data (This is CIP)

• Understand the nature of the customer’s activities (Called customer due diligence.)

• Monitor for suspicious behavior on an ongoing basis (This is ongoing due diligence.)

While the two terms aren't interchangeable, it’s impossible to fulfill CIP obligations without identity verification. CIP requirements are part of a larger compliance ecosystem focused on AML (Anti-Money Laundering) and CTF (Counter-Terrorist Financing). Together, these regulations aim to detect and report suspicious activity that could be tied to criminal operations. 

For example, if a user attempts to open multiple accounts with slightly altered personal information, that could be flagged as suspicious activity under AML guidelines. Identity verification helps detect these anomalies before they become a liability.

Several global regulatory bodies set the standards for identity verification and AML compliance, including: 

• FinCEN (US): Requires financial institutions to implement CIP and AML programs as part of the Bank Secrecy Act.

• FCA (UK): The Financial Conduct Authority enforces CIP and AML compliance among regulated entities.

• GDPR (EU): Governs how personal data is collected, stored, and processed, including identity verification data.

• PSD2 (EU): Requires strong customer authentication (SCA), which often includes identity verification steps.

Challenges with traditional ID verification

While identity verification is essential for regulatory compliance and fraud prevention, traditional approaches often fall short–especially in today's quickly evolving digital world. Organizations should not view identity verification as a “check the box” exercise. Here are the most pressing challenges in traditional ID verification. 

Manual review and drop-off rates

Legacy ID verification processes often rely on human review of uploaded documents, which slows down onboarding and introduces user friction. When users are asked to upload a photo and wait for manual approval, many consumers abandon the process, leading to higher drop-off rates and lower conversions.

Risk of fraud and spoofing

Manual checks are easier to fool. Fraudsters may use altered or stolen IDs that slip past human reviewers, especially without robust liveness detection or device intelligence. With GenAI tools, fraudsters can create much more convincing and realistic documents – fueling faster, wider-scaled attacks. In some cases, businesses may not detect identity fraud until well after an account is created, by which point the damage may already be done.

Global limitations 

Expanding into new markets introduces new challenges for traditional ID verification. ID formats vary widely by country, and not all identity documents are supported by legacy systems. Language barriers, limited document coverage, and mobile-unfriendly interfaces also create friction for international users. These limitations can make it difficult to deliver a seamless global onboarding experience.

Overcoming those challenges is a key role of digital identity verification, which uses digital tools to verify identity quickly and securely, and compares data to large verifiable databases that are difficult to fool. 

The role of identity verification in fraud prevention 

As fraud tactics become more sophisticated, identity verification has become one of the most important tools for detecting and stopping bad actors in the financial system. 

A 2025 Identity Fraud Study from Javelin found that consumers lost $15.6 billion to account takeover fraud, up from $12.7 billion in 2023. Plus, overall identity fraud losses jumped to $27.2 billion, a 19% increase from the prior year. In total, 40 million Americans were victims of identity fraud or scams in 2024 and lost a staggering $47 billion. 

In financial industries such as crypto, lending, and digital banking, identity verification plays a critical role in:

• Preventing synthetic identity fraud by cross-checking data points and flagging inconsistencies. 

• Stopping account takeovers through selfie verification, liveness checks, device fingerprinting, and behavioral analytics. 

• Protecting payments and transfers by verifying user identity before funds move. 

• Reducing fraud losses during onboarding by flagging suspicious activity before accounts are created. 

→ Plaid Protect is a powerful real-time fraud detection tool that uses thousands of signals to assess risk from onboarding through transacting. Learn how Protect fights fraud like no one else can. 

How Plaid enables identity verification 

Plaid Identity Verification (IDV) helps businesses onboard users quickly while blocking fraud in real time. It combines flexible verification methods with a built-in risk engine and conversion-friendly design—all accessible through a simple, developer-friendly identity verification API. Here's how Plaid is leading the future of ID verification. 

Multiple ways to verify identity

Plaid offers three verification methods that can be used independently or together:

• Data source verification: Matches user data against trusted databases.

• Document verification: Checks government-issued IDs for authenticity.

• Liveness detection: Uses facial recognition to ensure the person is physically present.

Each method builds on the others, with automated step-ups available based on risk. For example, if a user passes data source verification but has elevated risk, they can automatically be stepped up to document verification and liveness detection so you can ensure they are who they say they are.  

Real-time risk and fraud checks

Plaid’s built-in fraud engine analyzes thousands of data points, including those related to: 

• Device and IP behavior

• Email and phone number reputation

• Typing patterns and behavioral analytics

• Synthetic and stolen identity detection

• Network-level fraud signals

This layered approach helps detect even more sophisticated fraudsters.

Bank-linked verification

Plaid can confirm that a user’s identity matches the information on their linked bank account, adding another layer of trust and helping verify ownership.

Built for conversion

Plaid’s optional features, like Autofill and Remember Me, streamline onboarding for returning users. Combined with Plaid Protect’s Trust Index, which summarizes fraud risk into a single score, businesses can make faster, more accurate decisions with less friction.

Proactive fraud detection

Plaid Protect proactively identifies known fraud rings, suspicious IP ranges, and velocity-based anomalies across the Plaid network. These network-informed insights help businesses stop fraud earlier in the funnel. 

Fast, actionable insights   

Plaid’s Trust Index gives businesses a single, actionable risk score to assess fraud  risk more effectively. Powered by real-time behavioral analytics and proprietary network-level intelligence, the Plaid Trust Index assigns each user a score based on their risk factors, making it easier to automate onboarding or trigger step-up verifications when needed. 

Learn more about Plaid Protect 

Industry-specific use cases for identity verification 

Identity verification plays an important role in many industries, but is most critical in those related to payments and finance. Here's how different sectors use the identity verification process: 

• Fintech: Uses identity verification to verify applicants in real time, helping prevent synthetic identity fraud and impersonation. By confirming identity quickly, fintech companies can prevent fraud and reduce customer friction. 

• Crypto: Verify new users quickly and allow customers to fund their accounts in near real-time. This enables them to comply with strict regulations, without derailing conversions. 

• Banking: Speed up the account opening process by allowing banks to verify users instantly and flag potential fraud. With real-time risk analysis and automated verification, users can open an account in seconds—not days. 

• Payments: Verify a user's identity before money is moved. This prevents bad actors from initiating transfers with stolen credentials and helps platforms meet their regulatory obligations. 

Identity verification FAQs

How does online ID document verification work? 

To verify ID documents online, the user is generally asked to upload a photo of a government-issued ID, such as a driver's license. The system then uses image analysis and security features to confirm the document is valid. Plaid pairs this with a selfie or liveness check to ensure the person submitting the document matches the provided ID. 

How does ID verification work online?

Online ID verification uses a combination of document checks, biometric scans, device intelligence, and data validation to verify a person’s identity in real time.

What documents are used for ID verification?

Common documents include passports, driver’s licenses, Social Security numbers, and national ID cards. Some platforms also accept residence permits or utility bills as proof of address.

What happens if the identity verification process fails?

If a user fails verification, they may be asked to provide additional documents, retake a selfie, or complete a manual review process.

How does Plaid verify your identity? 

Plaid verifies your identity using a combination of data source checks, document verification, and liveness detection to confirm your identity quickly and securely. Depending on the business’s setup, Plaid may:

• Match your name, date of birth, and other details against trusted databases.

• Ask you to upload a photo of a government-issued ID and a selfie to confirm the document is real and that you are present.

• Analyze risk signals like device behavior, IP address, email reputation, and more to detect potential fraud.

Next-gen identity verification starts here

As fraudsters become more sophisticated and regulations continue to evolve, identity verification will remain a critical part of our digital lives. Businesses that invest in fast, secure, and scalable verification solutions today will be better equipped to grow. 

Whether you're a fintech launching a new product, a crypto exchange scaling globally, or a bank modernizing onboarding, strong identity verification isn't just a compliance requirement—it's a competitive advantage.

Learn more about Plaid’s fraud and compliance solutions.