Identity verification and open banking: How secure access is powering the financial revolution

What is open banking?

Open banking is a way to give regulated companies secure, limited access to your bank account information, with your permission, so they can provide helpful services—for example, budgeting advice, or recommendations for other financial products that you are eligible for.

Open banking primarily focuses on enabling secure data sharing and granting third-party access to customer accounts, aiming to enhance customer experience, launch new digital services, and increase revenue. 

Role of Identity Verification in open banking

In an open banking environment, identity verification (IDV) plays a crucial role in ensuring the security and trustworthiness of transactions and data sharing. Since open banking involves sharing sensitive financial information, strong identity verification processes help prevent unauthorized access, fraud, and identity theft, creating a safer financial landscape for consumers and businesses alike.

• Secure access and authentication: IDV verifies the identity of users when they access open banking services, ensuring that only legitimate users gain access to their accounts and data. Techniques such as biometrics, two-factor authentication (2FA), and document verification can add layers of security.
  
• Fraud prevention: Open banking’s interconnectedness can expose users to greater fraud risks. IDV solutions that leverage AI and machine learning can detect anomalies and flag potential fraud based on behavior patterns and device usage, protecting both banks and customers.

• Compliance with regulatory standards: Financial institutions and third-party providers must comply with stringent regulations, such as PSD2 (the Revised Payment Services Directive) in European Union, which mandates strong customer authentication. IDV solutions help organizations meet these regulatory requirements, avoiding penalties and enhancing customer trust.

• Enhancing customer experience: With robust IDV measures, customers can access multiple financial services through one secure portal. Automated and fast ID verification processes reduce friction, allowing customers to swiftly access and use new financial services.

Technologies used in Identity Verification for open banking

• Biometric authentication - Fingerprint and facial recognition provide fast and secure identity verification methods, ensuring high security without complex passwords.
• AI and Machine Learning - AI helps detect unusual behavior patterns, which can signal potential fraud.
• Blockchain - This technology can create decentralized, tamper-proof records of verified identities, making it easier to confirm user identity across multiple services.

Benefits of integrating open banking with ID Verification

• Increased security and reduced fraud - With reliable IDV, open banking services are safer, reducing the risk of data breaches and unauthorized transactions.
  
• Better compliance management - Financial institutions can comply with strict regulatory frameworks, improving trust and reducing risk.
  
• Improved customer trust and convenience - Customers are more likely to adopt open banking if they know their data is secure, creating a more user-friendly, transparent financial ecosystem.

Who regulates open banking?

Open banking regulation varies worldwide, with different bodies overseeing its implementation based on regional rules:

• United States: While currently lacking comprehensive federal regulation, the Consumer Financial Protection Bureau (CFPB) has proposed rules for open banking, with some states working on their legislation.
• Europe: The European Banking Authority (EBA) develops technical standards, while national competent authorities (NCAs) enforce PSD2 regulations.
• United Kingdom: The Competition and Markets Authority (CMA) initiated Open Banking to drive innovation, and the Financial Conduct Authority co-chairs the Joint Regulatory Oversight Committee (JROC) to oversee Open Banking in the UK, ensuring consumer protection, market integrity, and fostering innovation and competition within the financial sector.
• Australia: Open Banking is regulated under the Consumer Data Right (CDR) framework, with oversight primarily provided by the Australian Competition and Consumer Commission (ACCC). The ACCC ensures compliance, security, and consumer protections for data sharing in the Open Banking system.

New regulation in open banking

The Consumer Financial Protection Bureau (CFPB) is implementing a final rule to enforce the personal financial data rights outlined in the Consumer Financial Protection Act of 2010 (CFPA). This rule mandates that banks, credit unions, and other financial service providers must provide consumers' data upon request to the consumers and authorized third parties, ensuring security and reliability. It also sets responsibilities for third parties accessing this data, with key privacy protections, and encourages fair, open, and inclusive industry standards.

 These rules aim to make it easier for consumers to switch service providers, and should encourage safer data transfer, according to fintech groups. However, banks raised concerns about potential threats to data security and legal overreach. The new rules also provide robust privacy protections, allowing consumers to restrict unrelated uses of their data. Additionally, the regulations could enable consumers to get loans on better terms and facilitate payments directly from their banks. Organizations will have until 2026 or 2030, depending on their size, to comply with the regulations.

How can Veriff help? 

As open banking expands, ensuring secure and reliable identity verification becomes critical for safeguarding sensitive financial information. 

Veriff provides advanced identity verification solutions tailored to meet the unique needs of open banking ecosystems. 

By verifying customer identities quickly and accurately, Veriff helps banks and fintechs comply with regulatory requirements, reduce fraud risk, and establish trust with customers. This secure and seamless verification process supports a smoother customer experience and aligns with the strict data protection standards in open banking.

Biometric Authentication

Biometric Authentication offers a secure, automated solution for various stages of the user journey, including account access, resets, high-risk activities, age-gated products or services access, and account recovery. Biometric Authentication ensures that legitimate users can easily and confidently access what they need while deterring unauthorized individuals and mitigating the risk of further harm to genuine users and businesses. This balance of enhanced security and seamless user experience makes Biometric Authentication a necessary tool for businesses.

AI-Powered Identity Verification

Veriff uses advanced artificial intelligence (AI) and machine learning (ML) technologies to verify the identity of users in real-time. By analyzing biometric data, government-issued IDs, and behavioral patterns, Veriff can quickly and accurately detect fraudulent attempts to create fake accounts or perform unauthorized transactions. This helps prevent fraud at the point of onboarding and ensures that businesses are dealing with legitimate customers.