KYC vs. KBA: Choosing smarter security for business growth

Uncovering the limitations of KBA

Knowledge Based Authentication (KBA) is an authentication method used to verify an individual’s identity before they can proceed with login, onboarding, or financial transactions. The idea is that only the genuine user would know the answers to specific questions, thus preventing unauthorized access.

KBA methods can be either:

• Static, with fixed questions set by the user, like “What is your favorite color?”
• Dynamic, with real-time questions generated from financial and personal data, making it more unpredictable.

While dynamic KBA adds security, static KBA identity verification poses serious risks, as answers can often be found online. In the modern financial services landscape, relying solely on KBA is inadequate to prevent fraud.

Static KBA identity verification, on the other hand, involves users selecting questions in advance and providing acceptable answers. While it offers simplicity and customization, it poses security risks due to the ready availability of personally identifiable information.

Although these methods aim to keep information secure, they rely heavily on assumptions about data privacy and user recall, which are increasingly unrealistic in today’s data-driven world.

The escalating costs of cybercrime and data breaches

Many businesses have traditionally responded to the KYC challenge by expecting customers to memorize answers to stock security questions, such as their first school or credit card transaction history. This approach, however, is fatally flawed. According to Forbes, as early as 2015, Google found that only 47% of users could remember what they had put down as their favorite food a year earlier, while bad actors could guess the correct answer 20% of the time.

Now, as we share more of our lives online and cybercriminals exploit leaked data, high-risk authentication methods like KBA are becoming even more vulnerable. Consider the 2023 data breach of MediBank, which exposed customer information such as names, addresses, and even insurance card numbers. With an all-time high average cost of a data breach at $4.45 million, businesses cannot afford to rely on outdated security measures.

For example, health insurer MediBank was hacked, with 4 million customers’ personal data stolen, including names, addresses, dates of birth and even insurance card numbers.

The average cost of a data breach reached an all-time high of $4.45 million in 2023 all-time high of $4.45 million in 2023, and now, artificial intelligence (AI) has led to a significant increase in the sophistication of cybercrime. From deepfake technology to AI-powered hacking, cybercriminals are exploiting these advancements to orchestrate unique attacks.

Why financial services must transition to advanced Identity Verification methods

The limitations of KBA are significant, particularly for digital-first businesses like startups and SMBs that prioritize user experience and security. Here’s why:

• Lack of security. KBA is highly vulnerable to cyberattacks. Much of the information used in KBA can be easily found through public databases or even on social media profiles. Hackers, equipped with a minimal amount of research or data from past breaches, can bypass KBA by correctly answering these supposedly secure questions. Static KBA is especially prone to this issue, as widely known personal details like birthdates, addresses, and even preferences are often shared openly.
• Poor user experience. KBA can also frustrate legitimate users. Many people struggle to remember specific answers set long ago, especially when the questions are generic, like “What is your favorite food?” which could have multiple answers over time. Studies have shown that common answers, like “pizza” for favorite food, make KBA even less secure. Furthermore, irrelevant or impersonal questions can confuse users, making onboarding slow and potentially leading to drop-offs.
• Limitations of Static KBA. Static KBA, in particular, has considerable flaws. Not only are static answers more predictable (e.g., many people list common names or foods as favorites), but the rise of social media means that personal information is often accessible to anyone. For example, researchers have found that up to 16% of static security question answers can be easily found in online profiles.

The evolving landscape of digital identity and security threats means that KBA, while once a useful tool, no longer provides the level of protection businesses require. As SMBs and startups increasingly depend on digital-first approaches, moving beyond KBA to more robust methods, such as biometric ID verification and AI-based checks, is essential for providing a secure, seamless user experience.

Difference between KYC and KBA

Know Your Customer (KYC) and Knowledge-Based Authentication (KBA) serve distinct purposes in identity verification and security processes, often operating at different stages of the user journey.

• KYC as an Identity Verification framework
  In contrast, KYC is a broader identity verification framework used during onboarding to establish and verify a user’s identity. It involves collecting and validating personal information, documents (such as IDs, passports, or proof of address), and often biometric data to ensure that the user is genuine and complies with legal and regulatory requirements. KYC is not just about authentication, but about creating a trusted profile for ongoing interactions with the user.
• KBA as an authentication mechanism
  KBA is primarily an authentication method, used to confirm that a user is who they claim to be before granting access to sensitive actions such as account login or transaction approval. It relies on answers to specific questions that only the legitimate user is expected to know, serving as a checkpoint to prevent unauthorized access. This process is focused on validating identity in real-time, typically during account activity. Dynamic KBA enhances this by creating real-time, personalized questions based on non-public information, making it more secure and unpredictable compared to static KBA.

Enabling secure identity verification through KBA involves asking users a series of questions to authenticate their identity, relying on the assumption that only the end-user knows the answers. This ensures secure access and safeguards personal information.

Enhancing security with Veriff’s AI-powered KYC solutions

Veriff offers a KYC solution that streamlines identity verification while ensuring compliance with AML regulations. Unlike KBA, which relies on static security questions, Veriff’s IDV process utilizes biometric verification, AI-powered fraud detection, and multi-layered security to provide secure customer verification.

During the IDV process, Veriff harnesses AI-powered automation to compare identification documents against live videos or selfies provided by the user, ensuring that the person presenting the ID is indeed the rightful owner. This step detects even the most sophisticated forged documents and ensures a higher level of accuracy than KBA, which cannot verify physical presence or intent.

Additionally, Veriff’s use of biometric data, such as facial recognition and liveness detection, adds yet another layer of security. These technologies can confirm that the person is physically present during the verification process and not using a stolen ID or image. Unlike KBA’s reliance on opaque databases and questions that are susceptible to breaches, Veriff’s IDV process adapts to emerging threats and leverages real-time data and machine learning to constantly improve performance.

This comprehensive approach not only reduces the risk of fraud and identity theft but also improves the user experience. By replacing cumbersome security questions with seamless biometric checks, Veriff minimizes friction during onboarding, allowing users to complete the process quickly and efficiently. For SMBs, these advantages mean better protection against bad actors, reduced compliance headaches, and the ability to build trust with their customer base. Explore Veriff Self-Serve plans today to see how KYC powered by intelligent IDV can elevate 

FAQs

1. What is Knowledge-Based Authentication (KBA)?

KBA identity verification process is an authentication method that uses personal questions to verify identity. These questions can either be static (pre-set by users) or dynamic (generated based on real-time data).

2. Why is KBA considered outdated and insecure?

KBA relies on personal information that can often be found or guessed due to data breaches, social media exposure, and freely available details on the dark web. The importance of KBA in securing financial transactions cannot be overstated, as verifying identities is crucial for protecting businesses from fraud. Additionally, many users struggle to remember their answers, making it unreliable for secure authentication. Beyond these issues, KBA also fails to confirm who is in possession of the device being used to access the account. Since KBA relies solely on answering static security questions, there’s no way to verify whether the person accessing the account is the legitimate user or someone who has obtained their personal information. This significant shortcoming makes KBA especially vulnerable to account takeover attacks and reinforces its inadequacy as a modern, secure authentication method.

3. How does cybercrime impact KBA's effectiveness?

With increasing data breaches and advancements in AI-powered cybercrime tools, bad actors can exploit personal data to bypass KBA systems. Static KBA, in particular, is highly vulnerable as it depends on predictable, easily accessible information. Verifying a user's identity is crucial to prevent fraud and unauthorized access.

4. What is KYC and how does it differ from KBA?

KYC (Know Your Customer) is a comprehensive identity verification framework used during onboarding. It verifies user identities with methods like biometric authentication, ID checks, and document verification to ensure legal compliance and security. An online identity verification solution plays a crucial role in KYC by leveraging advanced technologies such as artificial intelligence, biometrics, and machine learning to validate user information quickly and accurately. KBA, in contrast, simply authenticates users with personal questions during real-time activities like login or transactions.

5. Why is KYC better suited for businesses, especially SMBs?

KYC provides advanced security by using robust verification methods, reducing fraud risks, and ensuring compliance with regulations. For SMBs, it also streamlines onboarding, builds customer trust, and creates a smoother user experience compared to the outdated KBA approach.

6. How does KYC enhance customer experience compared to KBA?

KYC avoids the frustrations associated with KBA, such as users forgetting answers or dealing with impersonal questions. Its streamlined and technology-driven processes make onboarding seamless and secure, fostering a positive first interaction with customers. One critical advantage of KYC is its use of biometrics to identify account holders. By employing technologies like facial recognition or fingerprint scans, KYC ensures that the person accessing the account is the rightful user. This not only enhances security, but also eliminates the need for cumbersome and error-prone security questions, delivering a faster and more reliable experience for customers. Biometric verification adds an extra layer of trust, making it far superior to outdated KBA methods.

7. What are the regulatory advantages of KYC over KBA?

KYC aligns with legal and compliance requirements, especially in regulated industries like finance. KBA, on the other hand, is not a regulatory necessity and fails to offer the same level of trust and legal assurance.

8. How does Veriff’s KYC solution help businesses?

Veriff uses AI-powered tools to provide fast and reliable identity verification. Its solutions offer multi-layered security to prevent fraud while enhancing customer experience. For SMBs, Veriff’s self-serve plans simplify compliance management and fraud prevention, enabling sustainable business growth and strong reputation.

8. How does Veriff’s KYC online identity verification solutions help businesses?

While KYC may require a greater upfront investment, its benefits in terms of fraud prevention, compliance, and improved user experience make it a cost-effective solution for businesses in the long run. It reduces risks associated with security breaches, which can be financially devastating.

10. Can KYC help businesses build customer trust?

Yes, implementing KYC signals that a business prioritizes security and compliance. This fosters trust from customers, who feel assured that their data and identity are effectively safeguarded.