Customer identity verification 101 | Stripe (2024)

Customer identity verification is the process that allows businesses to confirm that customers are who they claim to be—allowing businesses to guard against fraud and comply with legal requirements.

Typically, this process involves collecting personal details from customers and comparing them against official records or documents. For instance, businesses often require customers to provide identification such as a driver’s license or passport, which they may check against credit reports or public records. More advanced methods of customer identity verification include biometric verification, which may involve using fingerprints or facial recognition.

Customer identity verification focuses on accuracy and speed. The ultimate goal is to verify an individual’s identity without slowing down service. When done well, this process helps businesses build trust with customers.

Customer identity verification is becoming more important as the volume of digital transactions continues to increase. According to Juniper Research projections, the number of such checks will surpass 70 billion in 2024—up from 61 billion in 2023—with growth concentrated in China and Western Europe.

Verifying customer identity means creating a safe space for customers, keeping out fraudulent actors, and ensuring that every customer’s private information stays secure. Here’s what every business should know about customer identity verification.

What’s in this article?

• How customer identity verification works
  
• Types of customer identity verification
  
• Why customer identity verification is important for businesses
  
• Legal and regulatory considerations
  
• Challenges in customer identity verification
  
• Implementing customer identity verification and best practices for businesses
  
• How Stripe supports customer identity verification
  

How customer identity verification works

Customer identity verification involves a series of steps that confirm a person’s identity. The process begins when a customer signs up for a new account or service and the business asks for personal details such as the customer’s name, date of birth, or address. Businesses might also ask customers to provide official identification, such as a government-issued ID.

The business checks the validity of these details, which might be as simple as confirming a customer’s email or phone number with a verification code. For certain higher-stakes transactions that attract more regulatory scrutiny—such as opening a bank account, applying for a loan, or transferring large sums of money—businesses may compare details against various databases to see if they match existing records.

In cases that require tighter security, businesses might also use biometric verification. This entails using technology to analyze a customer’s physical features, such as their fingerprints or facial structure, verifying that they match their ID document.

During the identity verification process, businesses must strike a balance between strong fraud prevention and minimizing any inconvenience to the customer. Verification must be done in a way that allows customers to continue their purchase without unnecessary interruptions.

Types of customer identity verification

There are several methods of customer identity verification, each with its own application depending on the context and requirements of the transaction:

• Document-based verification
  In this common verification method, customers provide identification—such as a passport or driver’s license—which the business checks for authenticity by matching the details on the document with the information provided by the customer.

• Biometric verification
  This method uses unique physical characteristics such as fingerprints, facial recognition, or voice patterns to confirm a customer’s identity. It’s more secure than document-based verification because it involves characteristics that are difficult to replicate or steal.

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• Online and real-time verification
  Businesses use online information and databases to verify identities quickly—without physical documents. They might check a customer’s details against public records, credit databases, or other online sources. Real-time verification is instant, and it often takes place while someone is signing up for a service or conducting a transaction, which makes it convenient for both customers and businesses.

• Knowledge-based authentication
  Sometimes customers are asked personal questions that only they would be able to answer. These questions could be about previous addresses, old accounts, or even a pet’s name.

• Two-factor or multifactor authentication
  This method requires customers to provide two or more verification factors, which could be something they know (such as a password), something they have (such as a security token), or a physical characteristic (such as a fingerprint). This method adds an extra layer of security by combining different verification methods.

Each method has its strengths, and businesses often use a combination to create a secure and trustworthy verification process. The methods a business chooses to use will depend on the level of security it requires, the type of transactions it conducts, and customer preferences around convenience.

Why customer identity verification is important for businesses

Customer identity verification is necessary for ensuring regulatory compliance, preventing fraud, maintaining trust and reputation, boosting security, improving customer experience, and facilitating global operations.

• Compliance with regulations
  Many industries, such as finance and health care, are governed by strict regulatory requirements. Know Your Customer (KYC) standards and Anti-Money Laundering (AML) directives demand that businesses verify the identity of their customers to be in compliance. Failing to do so can result in hefty fines and legal repercussions.

• Fraud prevention
  By verifying the identity of customers, businesses can prevent unauthorized access to accounts and reduce the likelihood of identity theft or financial losses associated with fraud.

• Better security
  Identity verification helps improve the overall security of business operations. It ensures that access to sensitive information and transactions is granted only to verified individuals, helping in turn to protect against data breaches and unauthorized access.

• Improved customer experience
  Proper identity verification means smoother customer onboarding and transactions. It cuts down on the amount of friction that legitimate customers experience, while suspicious activities get flagged and investigated—leading to a better customer experience overall.

• Market expansion and global reach
  For businesses operating globally or looking to expand into new markets, identity verification is key. It helps companies maintain global operations without legal complications and comply with laws across jurisdictions.

Legal and regulatory considerations

The legal and regulatory ramifications of customer verification are extensive. Below are some considerations for businesses to keep in mind:

• Global regulations and standards
  Businesses must navigate an intricate web of global and regional regulations that govern identity verification. These include international Financial Action Task Force (FATF) recommendations, the EU’s Anti-Money Laundering Directives (AMLD), and the USA PATRIOT Act, among others. Each set of regulations mandates certain standards for customer verification, often influenced by the risk levels associated with different types of transactions.

• Know Your Customer (KYC) and Anti-Money Laundering (AML)
  KYC and AML regulations require businesses, particularly those in the financial sector, to verify the identity of their clients. These regulations seek to prevent businesses from unknowingly facilitating money laundering or financing terrorism.

• Data protection and privacy laws
  With the introduction of regulations such as the EU’s General Data Protection Regulation (GDPR), businesses must securely handle customer data collected for verification purposes with consent. Customers have the right to know how their data is used and stored.

• Sector-specific regulations
  Certain industries face additional layers of regulation. The US health care sector, for instance, must comply with the Health Insurance Portability and Accountability Act (HIPAA), which includes provisions on the security of patient information.

• Geographical nuances
  Legal requirements can vary significantly from one country to another, or even between regions within the same country. Businesses must tailor their customer verification processes to comply with different laws.

• Recordkeeping and reporting obligations
  The law often requires businesses to keep detailed records of the verification process they use for each customer, and they may need to file reports with regulatory bodies. Failure to maintain accurate records can result in penalties.

• Ongoing monitoring
  It’s not enough to verify a customer’s identity once. Continuous monitoring is required to maintain compliance, and businesses are expected to update and reverify customer information regularly.

Challenges in customer identity verification

Customer identity verification requires businesses to navigate a web of technological advancements, regulatory landscapes, evolving fraud techniques, data security concerns, and shifting customer expectations. Doing so effectively demands investment in the right technologies—and a keen understanding of the legal and social dimensions of identity verification. Here are some of the challenges businesses face:

• A balance of security with user experience
  One of the most common challenges is finding the right balance between thorough identity checks and a smooth user experience. Overly rigorous verification can deter customers, leading to abandoned transactions and lost revenue. On the other hand, lax procedures around security increase the risk of fraud.

• Technological challenges
  Evolutions in identity verification technology, such as biometrics and artificial intelligence, present new opportunities and new challenges. Integrating these technologies into existing systems can be costly and involved. There’s also the risk that these technologies become obsolete quickly due to the fast pace of innovation.

• Management of sophisticated fraud techniques
  As businesses improve their verification processes, fraudulent actors also evolve their techniques. Phishing, deepfakes, and synthetic identities are becoming more sophisticated. Keeping up with new forms of fraud requires continuous updates to verification processes and technologies, which can be resource-intensive.

• Data security and privacy concerns
  With an increasing amount of personal data being collected for verification purposes, data security and privacy is paramount. Breaches can lead to significant trust issues with customers—and significant fines.

• Accessibility and inclusivity issues
  Verification processes need to be accessible for a wide range of users. For instance, not all customers have access to high-speed internet or the latest smartphones. Additionally, some biometric systems have faced criticism for biases against certain demographic groups. Creating inclusive and accessible verification systems is an ongoing task.

• Evolving customer expectations
  Customers expect processes to be quick and easy, and that includes identity verification. Keeping up with these expectations while maintaining security is a difficult balancing act. Customers are also increasingly aware of data privacy issues, leading to higher expectations around transparency and control over their data.

Implementing customer identity verification and best practices for businesses

Implementing customer identity verification and adhering to best practices can help businesses prevent fraud and remain compliant with relevant regulations, while also protecting a positive customer experience. Here are the steps a business can take to successfully build and maintain a customer identity verification process:

Implementation

• Assess needs and risks
  Start by assessing your business’s specific needs and risks. This includes examining the types of fraud most likely to impact your business, the regulatory requirements for your industry and region, and your customer base’s characteristics.

• Choose the right technology
  Select verification technologies that meet your needs. Options include traditional methods such as passwords and PINs—as well as more advanced solutions such as biometrics, two-factor authentication, and AI-driven identity verification. The technology you use should be secure and user-friendly.

• Integrate with existing systems
  Integrate your verification methods with existing customer management and security systems. This step should be handled with care to facilitate data integrity and smooth operations.

• Comply and protect data
  Comply with relevant regulations such as GDPR, KYC, AML, and others. Implement strong data protection measures to safeguard sensitive customer information.

• Design the user experience
  Design the verification process to be as intuitive as possible. The goal is to verify customer identities without causing major inconveniences or delays.

• Test and optimize
  Before full deployment, test the system thoroughly to identify and fix any issues. After deploying it, continuously monitor and optimize the process based on customer feedback and evolving security needs.

Best practices

• Multifactor authentication (MFA)
  Use MFA wherever possible. This involves combining two or more independent credentials: what the user knows (password), what the user has (security token), and who the user is (biometric verification).

• Regular updates and audits
  Keep your systems updated with the latest security patches. Regularly audit your verification processes to identify potential vulnerabilities.

• Training and awareness
  Educate your staff about the importance of identity verification and how to handle sensitive customer data. Awareness reduces the risk of human error, which is a common cause of security breaches.

• Balance of automation with human oversight
  While automation can play a role in verification, it’s not enough. Human oversight is important for handling exceptions and potential false positives.

• Customer education
  Inform your customers about the importance of identity verification and how it protects them. This can help make them become more accepting and less frustrated with processes.

• Privacy by design
  Incorporate privacy into every stage of the verification process. Be transparent with customers about what data is collected and how it’s used.

• Scalability and flexibility
  Make sure that your verification system can scale with your business and adapt to emerging threats and technologies.

• Diverse verification methods
  Cater to a broad range of customers by providing multiple verification methods. For example, offering nonbiometric verification methods helps customers who might be uncomfortable with or unable to use such methods.

How Stripe supports customer identity verification

Stripe facilitates customer identity verification through Stripe Identity, which leverages technology from the business’s own KYC process and risk operations. This technology includes:

• Global user verification
  Stripe Identity can verify the authenticity of identification from more than 100 countries, which helps address the challenge of variation in government ID standards.

• Optimized verification flow
  The service includes a conversion-optimized flow for capturing IDs, extracting data from documents, and accessing collected images of ID documents and selfies.

• Image quality optimization
  To prevent the rejection of legitimate users due to poor image quality, Stripe Identity guides them in taking photos and automatically selects the most readable image.

• Fraud prevention technology
  Stripe uses machine learning to detect fake IDs and spoofed photos. It can match ID photos with selfies of the document holder and validate social security numbers and addresses against global databases.

• Integrated system for fraud reduction
  Stripe Identity integrates with core business operations such as payments, subscriptions, and payouts—enabling businesses to fight fraud with multilayered verifications. After confirming a user’s identity, it can verify the ownership of linked bank accounts to reduce the risk of account takeover.

By leveraging advanced technology and offering an integrated, user-friendly approach, Stripe provides businesses with a versatile solution for customer identity verification, addressing both security needs and regulatory compliance. To learn more, click here.