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Who Can Solve a Problem Like Digital ID Fraud?

On Our Radar: Deals we are paying attention to for their impact on industry.


There are hundreds of fintech offerings that are aiming to solve different challenges, from how consumers save money to how employers reimburse workers. But this latest wave of fintech revolution is also trying to solve how sensitive information can be shared and stored given the potential threat of being stolen -- a massive global issue.


In the United States, companies lost an estimated $16.8 billion due to identity fraud in 2017, and the Identity Theft Resource Center reported a 44.7% increase in the number of data breaches from the year prior.


All around the world, all these private fintech efforts can only get so far without government’s backing.


International experience shows the government has to be involved in any sustainable resolution to the problem, according to Jeremy Grant, coordinator of the Better Identity Coalition.


“Only the government confers legal identity, and government is thus the most authoritative source for identity verification,” he told Karma Network. “Every private sector solution in the marketplace is focused on trying to get to the ‘ground truth’ that the government can provide.”


This does not stop fintech startups from finding a solution to a widespread problem.


“It’s an anomaly when a major breach happens and inadequate identity solutions didn’t play a role,” Grant noted.


The coalition’s members include Bank of America, JPMorgan Chase, Mastercard, Symantec, US Bank, Visa and Wells Fargo.


These financial heavy hitters came together last year to pool resources and solve the identity verification crisis. The reality is that the identity verification methods of yesterday – mainly people providing paper documents to bank tellers and DMV employees – don’t work now that people are opening accounts and transferring funds through their phones.


Complicating matters is the introduction of synthetic ID fraud, a type of scam that is difficult to detect because there is no one individual being defrauded who might report it. Instead, scammers cobble together new identities from disparate forms of identification and companies often mistakenly issue credit to these nonexistent people.


Dealing with this problem requires a complete rehaul of identity verification for the digital age. A host of early entrants have tried to address this market, including Truepic Vision, a business-to-business offering that allows banks and insurers to confirm the authenticity of images, and Payfone, which helps businesses verify customers and raised $24 million in funding this week in a round led by TransUnion. Participants in the round included Synchrony, MassMutual Ventures and Wellington Management LLP.


Payfone authenticated over 20 billion transactions for Fortune 500 companies last year, including top institutions in finance, healthcare, insurance, tech and retail.


The big financial institutions’ reluctance to move fast on technology adoption, in addition to a lack of a unified standard for protecting and verifying consumer IDs in the digital age, are the main obstacles to digital ID fraud prevention in the United States.


“Insurance companies and banks are not known to be the fastest-moving companies out there,” Truepic’s COO Craig Stack told Karma Network earlier this year. There is a lot of momentum, but it doesn’t happen overnight.”


In the European Union, there is a standard for digital identity, eIDAS, that connects its member states and countries like Canada and Australia have introduced government-backed digital identification.


Here in the United States, where efforts to create a national ID have been met with resistance by privacy advocates, identity verification is largely left up to the states and proving identity is often a manual process that requires bringing multiple forms of identification into an office for human verification.


‘An Inflection Point’

“Part of the reason the U.S. is lagging is that for years, the private sector was able to provide adequate identity solutions,” Grant told Karma. “But we’ve hit an inflection point over the last few years in terms of the kinds of attacks we’re seeing, along with a corresponding rise in identity fraud.”


The coalition released a report in June recommending that the US government stop using social security numbers as an authenticator but avoid replacing it, which could cost billions.


Instead, they urge policymakers to find a better authenticator and develop next-generation identity proofing and verification systems. Biometric identification, such as fingerprints and eye scanners, are an example of other identifiers.


At the same time that the coalition is advocating government intervention, its members are also working to improve digital identification.


Mastercard has proposed a digital verification token that consumers would manage on their devices and use to prove identity to vendors. It would reduce the amount of personal information being traded and exposed, and it would give consumers control over their identity, quelling privacy concerns around national IDs.


Until there is a standardized, nationwide technology or government’s participation in addressing this global challenge, it will be up to the bright minds of the fintech industry and the big banks to take the lead in testing and introducing a lasting solution.


Ambreen Ali is a freelance writer and editor based in the New York City area who specializes in business and technology. She has 15 years of reporting experience, including covering Capitol Hill and reporting from South Asia.

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