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Going Digital while stopping Fraudsters at the door
Joe Joseph Head of Risk and Compliance practice, HCL Financial Services | December 9, 2020
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Account opening is a critical process in a financial institution (FI), where verifying the identity of potential customers is a regulatory KYC mandate. While lapses in this process may result in large fraud related financial losses, it could also be a predicate crime that leads to money laundering and terrorism financing– attracting regulatory scrutiny, huge fines, and reputational loss.

Using a multi-layered approach, the outcomes of 3 key processes - Identity Validation, Document Verification and Biometrics can detect fraudulent requests with a high degree of confidence

The recent trend of online and synthetic identity fraud is stimulated by increasing digital transformation, the spiraling adoption of digital banking, and a huge marketplace for stolen data and personal information. While identity theft is the criminal act of stealing someone’s personal information, identity fraud is the use of this stolen information to assume another person’s identity to commit fraud. As remote customer onboarding expectations are soaring, digital banking is no longer an option but a key differentiator. Challenger ‘digital only’ banks are fuelling these expectations with the use of innovative technological solutions that address these demands at lower operational costs, while staying compliant with regulations.

The aim of modern identity verification solutions is to support the digital transformation of banks by facilitating e-KYC with remote onboarding of customers at speed. The aim is also to prevent the propagation of fraud schemes associated with the new account opening process and enhancing compliance with KYC/AML regulations.

New Account Fraud

Account opening fraud is generally perpetrated in two ways– using the traditional method of impersonation or by using synthetic IDs:

  • Impersonation involves a person pretending to have the identity of another genuine person. This might be through simply using a stolen document of someone that looks similar.
  • Synthetic identities are developed by criminals by combining real personally identifiable information (usually stolen) and fake information to create a new (synthetic) identity, which can be used to open fraudulent accounts and make fraudulent purchases. Unlike impersonation, the criminal is pretending to be someone who does not exist in the real world other than impersonating an existing identity.

New Account Fraud as a Predicate Crime to Money Laundering and Terrorist Financing

Beyond the direct fraud implications, identity fraud schemes pose a significant risk of money-laundering and terrorist financing. Accounts that are not tied to the real identity of the criminal are easily used for money laundering (E.g. to deposit illegally obtained funds)

In such cases, it becomes harder for traditional activity monitoring to identify money laundering schemes. The predicate fraud has been committed and the fraudster is already through the door.

Identity Verification (IDV)– A Regulatory Mandate

While, as consumers of banking services, we primarily look at the customer experience at the onboarding stage, banks are mandated by regulation to do a lot behind the scenes as a part of the Identity Verification (IDV) process to prevent the financial crime ramifications of identity theft. In the traditional face-to-face process, an individual visits a bank’s branch to deliver the valid identity documents. A bank officer verifies the validity of these documents and confirms the photograph corresponding to the person carrying the documents.

The IDV process requires banks to perform multiple tasks such as identity validation, document and individual verification to establish with confidence that there is a real person behind the account opening request and that they are really who they claim to be. Manual IDV processes requires a lot of human effort and time in addition to the risk of human error. These errors could result in onboarding fraudulent customers who will inflict financial and reputational losses on the bank, resulting in regulatory scrutiny and subsequent action.

Customer Experience at Onboarding

While compliance to KYC/AML regulations is of paramount importance, there is an obvious negative customer experience attributed to this current long-drawn process. This negative experience could potentially drive new customers away, impede existing customers from deepening their relationships, or worse still, result in customers severing their relationship with the bank.

So how is the industry tackling this conundrum of competition, growth, accuracy, speed, fraud prevention, compliance, customer satisfaction, future proofing, and operating costs?

Identity Verification Solutions

Advances in technology and the evolution of artificial intelligence (AI) and machine learning (ML) models are spurring innovation forward in many areas in the industry. Its use in the identity verification process has facilitated increased effectiveness and efficiencies in the fight against fraud.

These solutions use AI- and ML-based computer vision, image processing, optical character recognition (OCR), and biometric technologies to deliver several advantages over traditional methods of identity verification during the onboarding due diligence process– addressing the aforementioned issues related to accuracy, speed, fraud prevention, compliance, customer satisfaction, future proofing, and operating costs.

The Human Imperative

While automation, AI, and ML provide massive benefits, banks cannot just implement digital channels and forget to upgrade. Current AI and ML approaches in this context can only work based on what they have seen (trained with) before. As long as there is profit to be made, criminals will find a way to break through these defenses. They are constantly evolving using similar (to the bank’s) if not more advanced technologies to achieve this. Financial institutions should be aware that this is a real threat and keep their guard up.

This requires human experts to step in where technology has not yet been trained to do.mWhen the machine is unable to make a confident decision over a hybrid model used, an expert can step in to make a decision that the machine will learn to make over a period of time.

Conclusion

Digital identity programs are crucial enablers for online banking and meeting e-KYC requirements. As customers increasingly move to digital banking, the future of customer acquisition will be decided online. The current COVID-19 crisis is further accelerating us toward this eventuality. To remain competitive, traditional banks must offer digital banking facilities. They need to invest in innovative solutions using advanced technologies to meet customer identification challenges.

Using a multi-layered approach, the outcomes of three key processes– identity validation, document verification, and biometrics– can detect fraudulent requests with a high degree of confidence. What is equally important is that it reduces the friction associated with legitimate customers and welcome them with renewed and robust assurances of convenience and security.