By Dave McGibbon
Consumers are showing a marked preference for digital payments. Once the exclusive domain of online shopping platforms, digital payments have become increasingly essential to virtually every industry. Digital payments can offer a convenient, easy to use, frictionless, low-cost and contactless experience, which has clear benefits for consumers.
These same features offer benefits to businesses as well. According to the IMF, fintech-forward businesses can scale across riskier clients and business segments—such as those in the crypto and NFT spaces—more rapidly than their traditional counterparts, giving them a market advantage. However, this enhanced scalability potentially comes at the cost of increased risk of fraud and other finance-related crimes.
Businesses that address these security concerns early on while keeping an eye on the changing regulatory environment will be able to maximize the virtues of digital payments while insulating against their potential downsides.
Consumers have good reason to be wary of conducting the majority of their transactions online. Fraud conducted through online account takeover (ATO) has grown in proportion to the explosion of digital payments. In 2021, nearly 42 million internet users' accounts were hacked into and used to make fraudulent transactions, resulting in $52 billion in losses (bit.ly/3cGrry8).
The increased digitization of finance has created new opportunities for criminals engaging in large-scale money laundering and terrorist financing, according to the Financial Crimes Enforcement Network (FinCEN). As a result, governments and regulatory bodies have sought to strengthen anti-money laundering (AML) compliance.
The EU’s Sixth Anti-Money Laundering Directive includes strict criteria and harsh penalties for AML non-compliance, expanding the previous definition of criminal liability to include any “legal persons”—including companies and partnerships—involved in the process, regardless of whether they directly benefit from it, and raising the minimum jail sentence from one year to four. In the United States, FinCEN has taken steps to combat fraud by creating stricter rules for third-party actors.
Businesses have many reasons to tackle both of these issues; they are equally key for establishing and maintaining public trust in digital finance. Fortunately, businesses that remain AML-compliant by establishing strong know your customer (KYC) procedures can avoid penalties while optimizing their services to maximize return.
The boom in virtual asset service providers (VASPs) and decentralized finance (DeFi) promises to make online payments more accessible and efficient, providing clear economic benefits. These also create a corresponding need for stronger KYC procedures to ensure that individuals using them truly are who they say they are.
Current security practices lag behind available technologies. Many online platforms still rely on passwords, email confirmation and two-factor authentication. Given that a large percentage of internet users reported using the same password for multiple accounts (bit.ly/3ACuVd4), increased instances of ATO shouldn't come as a surprise. Even some biometric technologies such as fingerprint detection and facial recognition have blind spots, as deep fake technology has proven able to bypass certain facial recognition systems.
Fortunately, recent developments in identity verification technology have made it possible to protect against even the most sophisticated deep fake attacks. Digital identity verification allows users to verify their identity by uploading a government-issued ID and then ensure liveness and face match by taking a video selfie that prompts them to move their face or make different facial expressions while monitoring involuntary movements like blinking and pupil dilation—all of which ensure that the individual to whom the account is registered is present when attempting to access it.
The combination of biometric verification and liveness detection provides the most comprehensive security system available, as it relies entirely on features unique to each specific user. This authentication method is shaping how we think about online payments while also being shaped by it in turn.
Users come to online purchasing hoping to maximize convenience: KYC procedures that involve unintuitive and labor-intensive onboarding and reauthentication processes risk incentivizing customers to fall back on ID certification methods with which they are more familiar.
Establishing public trust requires showing that these more rigorous modes of identity verification are, at the same time, frictionless and easy to set up, as these qualities are crucial for retaining customers.
Businesses hoping to make the most of digital payment face both more widespread financial fraud and a stricter regulatory environment. Staying abreast of these issues and developing effective and adaptable AML and KYC procedures can be a daunting prospect for businesses at any stage, but it’s increasingly clear that doing so is non-negotiable.
Adopting sophisticated cybersecurity procedures comes with a positive side. Businesses that begin investing in the latest online payment technology—as well as the most advanced biometric ID verification technologies—earlier than their competitors have the chance to stand out and scale up by offering their customers unprecedented convenience and security. Taking a proactive rather than reactive approach to AML and KYC doesn't just guard against acute liabilities—it can also be an asset in itself.
Dave McGibbon is the CEO of Passbase, a leader in the identity verification space that makes facial recognition, liveness detection and ID verification accessible through a suite of flexible developer tools. As a cybersecurity expert, McGibbon empowers Passbase’s clients across crypto, fintech, gaming and other industries with technology that assures that their transactions are both secure and efficient. Contact him at linkedin.com/in/dave-mcgibbon.
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