Identity Verification in Fintech: 4 Tools You Can Use to Stay Compliant

identity verification in fintech

Accurate identity verification in fintech requires technology. Long-used ID methods like knowledge-based authentication just aren’t reliable anymore, and they leave fintech companies open to compliance risk and customer privacy concerns.

Fortunately, a number of digital identity verification tools have entered the market.

These tools utilize AI, machine learning, biometrics and data extraction to quickly and seamlessly verify identity for fintech firms. The result: Better customer experiences, more compliant transactions, and building trust in your platform.

Ultimately, these technologies are difficult to understand. But the process of identity verification in fintech is straightforward. This guide provides an overview of ID verification, best practices in fintech, and compliance laws that ID checking tools can help fintech companies achieve.

How Fintech Identity Verification Works

Identity verification in fintech refers to determining if a customer is who they claim to be. In physical locations, a customer might enter a PIN or you might check a photo ID. However, when processing transactions online, verification is much more difficult and typically requires advanced tools.

Here are some of the common verification methods used in fintech:

  1. Document Verification

This is one of the most common practices in identity verification. It involves the user submitting a form of identification, such as a passport, driver’s license, or government ID card.

The fintech platform then uses technology to verify the authenticity of the document. This process may involve checking the document’s security features, comparing the photo on the document to a selfie taken by the user, or cross-referencing the information on the document with other databases. This is a tenent of enhanced due diligence.

  1. Biometric Verification

This method uses unique biological characteristics to verify a person’s identity. This could include fingerprint scanning, facial recognition, voice recognition, or even retinal scanning.

For example, a user might be asked to take a selfie, which is then compared to the photo on their ID document using facial recognition technology. Biometric verification is becoming increasingly popular due to its high level of security and ease of use.

  1. Knowledge-Based Authentication (KBA)

This method involves asking the user a series of personal questions that only they should know the answer to.

These could be static questions (like the user’s mother’s maiden name) or dynamic questions generated based on information from the user’s credit history or public records. However, this method is becoming less popular due to its vulnerability to social engineering attacks.

  1. Two-Factor Authentication (2FA)

This method involves verifying the user’s identity using two different factors: something they know (like a password), something they have (like a mobile device), or something they are (like a fingerprint). This adds an extra layer of security, as an attacker would need to compromise both factors to impersonate the user.

Ultimately, the process must be user-friendly. Complicated authentication processes commonly leads to identity confirmation failure.

Compliance and Identity Verification in Fintech

Financial institutions are heavily regulated and must meet strict compliance standards. For example, customer privacy, data security, and customer identity regulations have been up in place to protect customers and help banks catch and prevent fraud.

Technologies like digital identity verification software help companies meet these requirements and store data and records securely and safely. Common regulations in fintech include:

Know Your Customer (KYC)

KYC compliance is a standard banking practice that’s used globally. It ensures financial institutions have verified the identity of their clients and have assessed potential risks of illegal intentions.

The goal of KYC is to prevent banks from being used for money laundering. To remain in compliance, fintech companies must:

  • Gather information about the customer’s identity and contact information
  • Understand the nature of the customer’s activities (to anticipate what sorts of transactions the customer might initiate)
  • Assess money laundering risks associated with that customer
Anti-Money Laundering (AML)

AML refers to a set of laws, regulations, and procedures intended to prevent criminals from disguising illegally obtained funds as legitimate income.

AML regulations require financial institutions to conduct due-diligence to detect and prevent illicit activities. These procedures may include monitoring customer transactions and reporting suspicious activities to the relevant authorities.

General Data Protection Regulation (GDPR)

GDPR is a regulation in EU law on data protection. It also addresses the transfer of personal data outside of Europe.

The regulation aims to give control to individuals over their personal data and to simplify the regulatory environment for international business. In other words, fintech companies must ensure that the personal data they collect for identity verification is handled and stored securely, and that they have the user’s consent to process this data.

Payment Card Industry Data Security Standard (PCI DSS)

If a fintech company handles credit card transactions, they must comply with the PCI DSS. This is a set of security standards designed to ensure that all companies that accept, process, store or transmit credit card information maintain a secure environment.

Bank Secrecy Act (BSA)

In the United States, the BSA requires financial institutions to assist U.S. government agencies in detecting and preventing money laundering. This includes keeping records of:

  • Cash purchases of negotiable instruments
  • Cash transactions exceeding $10,000 (daily aggregate amount)
  • Suspicious activity that might signify money laundering, tax evasion, etc.

Best Practices for Identity Verification in Fintech

Developing a compliant, secure, and user-friendly identity verification protocol is no easy task. Often, companies cut corners on security for a smoother user experience.

Today’s tools provide a simplified processes for fintech websites to verifying identity that can deliver both. As you start to develop a system, focus on these best practices:

  • User-Friendliness: Make the identity verification process as simple and intuitive as possible to enhance user experience.
  • Multi-Factor Authentication: Use at least two methods of verification to enhance security. Using document authentication and knowledge-based authentication, for example, instantly improves security.
  • Data Encryption: Ensure all personal data is encrypted during transmission and storage to protect against breaches.
  • Real-Time Verification: Use technologies like AI to verify identities in real-time, improving efficiency. AI-based facial recognition, for example, improves accuracy.
  • Continuous Monitoring: Regularly monitor transactions and user behavior for signs of fraud or suspicious activity. AI and machine learning can help enhance this monitoring to prevent fraud in real-time.
  • Transparency: Clearly communicate to users why their information is needed and how it will be used and stored.
  • Regular Updates: Keep your verification processes up-to-date with the latest technologies and regulatory changes.
  • Third-Party Audits: Regularly have your security measures audited by a third party to ensure compliance and effectiveness.

One tip: Adopt a privacy-first approach. You should collect only the necessary data, inform customers about data usage, and implement strong security protocols.

Identity Verification in Fintech: Case Examples

Most fintech companies use some form of digital identity verification. However, the leaders in the field step outside of the box and choose platforms that can greatly reduce fraud, improve customer experiences, and increase profits.

Here are some examples of how fintech companies use identity verification solutions:


PayPal, one of the world’s leading online payment systems, uses a variety of methods for identity verification. These include two-factor authentication, device identification, and risk-based authentication. By analyzing transaction patterns and user behavior, PayPal can identify suspicious activities and take appropriate action. This multi-layered approach has helped PayPal maintain a high level of security while serving millions of customers worldwide.


TransferWise (now Wise), a money transfer service, uses document verification and biometric data for identity verification. Customers are required to upload a photo of a valid ID and a selfie for facial comparison. This approach has helped TransferWise provide a secure service while maintaining a user-friendly experience.


Revolut, a UK-based fintech company, uses a combination of document verification and biometric data to verify user identities. This approach has helped Revolut maintain a high level of security while providing a seamless user experience.


Currently, it is almost certain that any online business is required by law to perform AML (anti-money laundering) and KYC (know your customer) checks on their customers or users.

Reliable identity verification is a must for this purpose. Additionally, users can manage their age and identity verification processes more securely with the use of a trusted identity verification service.

With the help of end-to-end encryption, customers’ uploaded data is protected by FTx Identity’s age checker software, which also protect retailers from violating the law by selling products with age restrictions to minors.


  • Data Security
  • data verification
  • Identity Verification