In 2021 alone, over $50 billion was lost to identity fraud across North America, impacting more than 50 million victims. And yet the true costs incurred, extend far beyond this figure.

Reports show that every $1 of fraud ends up costing financial institutions as much as $4. Banks can be hit with fines for failing to comply with KYC and AML regulations, may be liable for reimbursing customers and face operational costs related to monitoring and dispute management. This is all before the price of reputational damage and a loss of customer trust has been taken into account.

Wider economic trends are contributing to a growth in fraud. Across North America inflation continues to rise, with figures demonstrating that consumers at the end of 2022, needed an extra 15 cents to match the buying power of every dollar spent in March 2020. Such adverse conditions create a profitable opportunity for fraudsters and scammers to exploit.

Outdated fraud measures

Legacy solutions for fraud prevention and identity management cannot keep pace with this evolving landscape. 85% of US banks still rely on user-name password as the primary way to authenticate customers, a method which is expensive and inefficient to maintain. A reported 78% of users reset their password at least once every 3 months, with each instance costing banks at least $70.

Meanwhile, innovation across the financial services sector and the wider digital economy is driving a future of real-time, almost invisible payments and transactions. Financial providers are left with less time to intercept potentially fraudulent transactions, creating greater pressure to securely identify customers during onboarding and authentication.

But onboarding new customers without an established digital identity system puts pressure on financial institutions. The account opening process can cost as little as $10 per customer, or as much as $150 per customer, when the costs of outdated manual processes, human oversight and extended delays are all taken into account.

Delays are not only inefficient for financial institutions but can be detrimental to customer retention. Customers now expect to be able to onboard seamlessly in a digital environment, log in to their accounts via smartphone or laptop and use cards online with ease and security.

Financial institutions unable to facilitate these expectations, while protecting customer security at all costs, may struggle to retain their customer base. Many are now calling for the establishment of a digital identity ecosystem to support the continued growth of a digital economy.

A fragmented identity ecosystem

The North American identity ecosystem as a whole, is complex and fragmented. Financial institutions are subject to identity rules and regulations which vary between the different federal, state, provincial, and local entities within the region. So far, efforts to introduce a government-backed digital identity have not been successful, in either Canada, Mexico or the United States. 

While a range of digital identity initiatives based on public-private partnerships are making an impact, many digital services still rely on physical documents such as passports, drivers’ licences or ID cards as a root of trust. Knowledge-based methods such as social security or national ID numbers are also still widely used, despite their known vulnerability and extensive misuse. 

Strengthening digital identity is critical to reduce fraud, enhance regulatory compliance and maintain customer trust. Financial services institutions of all shapes and sizes are looking to invest in new technologies to transform their customer facing identity processes – including customer onboarding (KYC), authentication and transaction monitoring. The North America digital identity market is expected to grow by 18.1% annually.

Growing emphasis is being placed on digital identity at a regulatory level. Legislation on open banking, privacy and data protection, and digital inclusion, as well as the tightening of controls around KYC, AML and CFT will impact financial institutions. The ‘Improving digital identity act’ 2021 will also have a significant impact, together with standards developed by certification bodies like NIST, FIDO and W3C.

Financial institutions will need to be prepared for the evolution of the wider digital identity landscape and look to invest in solutions and capabilities which future proof their operations for this coming shift.

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Future Identity Finance North America takes place on May 16th, in New York. Register your interest in attending, sponsoring, partnering or speaking at the event now.