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The Rise of Neobanks and Integrating Effective Identity Verification for Digital Security

Author: teresa_myers | 14 Jun 2024

Did you know that the market volume of neobanks worldwide just last year was 4.96 trillion U.S. dollars? And what’s more, that number is projected to grow to a total value of 10.44 trillion U.S. dollars by 2028, with an annual growth rate of 13.15 percent (Statistica, 2024). 

Now here’s the more concerning statistic: cybercrime is thought to cost the global economy losses of around 1 trillion U.S. dollars every single year. Things like deepfake attacks and other forms of identity fraud contribute heavily to this number. In the U.S. alone, losses due to identity fraud amounted to about 43 billion dollars in 2023. And that is just one country.

So how can we prevent this? If we think of neobanks as a high-tech digital fortress with tall and thick walls, the only weak point would be the front gate. Without a solid gatekeeping system that ensures that no one with malicious intent gets in, we can’t ensure the security, safety, and integrity of a digital system.

Thankfully, modern identity verification solutions provide the perfect gatekeeping safety mechanism for modern digital banking.

What are Neobanks?

The image shows side by side difference between a traditional bank, which has long queues of people waiting in line, and a neobank, which can be used sitting in bed at home.

Neobanks are the modernized version of traditional banking platforms. They are financial technology companies that provide both conventional and unconventional banking services via online platforms and mobile apps. The defining feature of these banks is that they have no physical premises for customer services; their services are purely digital.

The primary benefit of neobanks over traditional banking is the relatively seamless digital experience that they offer. Their remote customer onboarding and service provision means that a customer never has to leave the comfort of their home for any of their financial needs. 

As opposed to a physical bank where you would have to stand in line and provide multiple documents, you can manage your account and transactions with a few taps of your smartphone. In addition, there are often unique benefits that these companies provide like financial tracking, limit setting, reminders, and so on that make them attractive over traditional banks.

The Concept of eKYC

Know Your Customer (KYC) is the standard set of procedures carried out by financial institutions for identity verification of customers and clients, usually before any financial relationship is established. eKYC (electronic Know Your Customer) is the modern online KYC procedure used for digital banking applications.

The majority of financial regulators and governments in different parts of the world require financial institutions to comply with certain established KYC and AML (Anti-Money Laundering) regulations in their dealings with their clients to ensure identity fraud prevention, as well as the detection of other suspicious or illicit activities. Failing to comply with these regulations usually leads to legal or financial repercussions for the enterprise.

What this means is that any financial institution needs to ensure that it can accurately scan all banking transactions, and screen all individuals that are a part of its enterprise.

Customer Verification on Digital Platforms

So, now that we know what eKYC is, how does eKYC compliance and customer verification for neobanks happen?

Digital onboarding in a neobank involves many identity verification (IDV) procedures that can happen from remote environments and do not require your physical presence at a branch like traditional bank identity verification.

Discover More: Utilizing AI facial recognition to strengthen self-sovereign identification and provide users with private, controllable, and secure digital identities to improve online privacy and trust.

Some of the major components of an effective customer verification procedure for a neobank are:

Customer verification in a neobank includes three major things: document screening, biometric verification and facial recognition.

Document Screening

The first and most basic step usually involved in a neobank identity verification process is to screen the customer’s documents through a database to verify their authenticity.

For digital ID verification in a neobank, the user is usually requested to provide a high-quality image of their driver’s license or other identification document. This is then read by the system using OCR (optical character recognition), and the extracted data is then compared against some form of government database with individual identity records.

This process helps to ensure that the data that is being provided at the time of onboarding is authentic and not forged or faked. 

A lot of the time, the information is also run through multiple watchlists and other similar records to see if the individual is or has ever been involved in any suspicious or illegal activities. The point of this is to know the level of risk it would take for the bank to engage with the person.

Biometric Verification

Biometric verification is the use of different biometric traits and markers that are unique to each individual as a form of identity verification mechanism. This form of authentication is much more secure, fast, and accurate when compared to conventional methods like PIN codes.

Biometric verification in neobanks is easy nowadays due to the advanced technologies that most mobile devices already have and cloud-based services can provide. You can scan your fingerprint, and face using your camera. Some systems even use your phone’s built-in fingerprint scanner for more accurate scanning. Even voice recognition can be done effectively right from your phone.

These records help not just during the onboard process, but during general banking identity verification in regular transactions as well. You can simply provide a face scan or fingerprint to prove that the transaction is being conducted by you and not an unauthorized person. 

Facial Recognition

While many would consider facial recognition a part of a biometric verification process, many institutions effectively use this as a stand-alone method of biometric authentication, which is why it is relevant to talk about it in detail. Facial recognition for neobanks is a relatively easy process that simply involves the user taking a selfie of their face using their phone in a well-lit environment. 

The submitted facial image is then scanned using advanced artificial intelligence and machine learning technology, which allows the system to identify and extract facial characteristics so that they can be converted into a digital form.

The digital template is cross-matched with the image on your identification document, to make sure that the person making the account is the same person whose credentials are being provided. The face is also sometimes run through an external database for more complete identification.

Why Focus on Identity Verification in Neobanks?

Here are just some of the benefits that a company can get from implementing effective IDV procedures:

1. Enhancing System Security

The most obvious benefit of implementing effective identity verification is enhanced fraud detection in neobanks. Making sure that you have a complete and accurate record of individuals and transactions prevents things like identity theft and impersonation fraud.

2. Gaining Customer Trust

By identity-proofing neobanks and ensuring that proper security protocols are followed and carried out, a company can build the trust and confidence of customers in its products and services.

3. Operational Efficiency

Proper implementation of AI-powered identification procedures enhances operational speed and efficiency through process automation. This can help the company to save both time and operational expenditures. This also makes it possible for neobanks to scale their operations for future growth much faster and easier, without compromising quality or security.

Facia’s IDV Solutions

The great news for neobanks is that Facia provides complete, all-encompassing identity verification solutions that are both versatile and can be tailored to your business. Our facial recognition technology can detect individuals in a single frame, leading to a frictionless customer experience.

In addition, the star of our services is our 3D liveness detection integrated into our facial detection solutions. This advanced artificial intelligence-powered technology can prevent deepfakes and other spoofing attacks that neobanks are often vulnerable to by analyzing whether an input provided to the camera is from a live individual or not.

Our verification solutions save time, and ensure that your customer’s data is stored securely so that their identity is protected. This makes us the perfect solution to empower customers and comply with all KYC and AML regulations.

Frequently Asked Questions

What does identity verification mean in terms of neobanks?

Identity verification for neobanks work through a few different authentication measures including biometric verification and document scanning. In document scanning, the ID documents provided to the system by the user are run through what is usually a government database to confirm their authenticity. Biometric verification involves using things like face scans and fingerprint scans to both discern and verify the user’s identity.

Why is effective identity verification important for digital security in neo banks?

Effective identity verification measures implemented in a neobank’s security system ensures the customer’s are protected from malicious activity like identity fraud and theft. It also establishes credibility and customer trust in the system, as well as streamlining procedures and making them faster and less resource intensive.

How can Neobanks enhance their identity verification processes?

Neobanks can enhance their identity verification systems by leveraging the advancements in modern artificial intelligence and machine learning technology and implementing systems like 3D liveness detection powered facial recognition. AI can also enhance document verification procedures with the ability to detect anomalies and discrepancies in documents and record matching.