Best Customer Identification and Identity Verification Methods

Most business transactions necessitate knowing the identity of customers. Although there are situations that do not require knowing a customer, such as in retail, knowing the identity of a customer is a basic requirement for mutual accountability in complex and long-term business contracts. Most importantly, many businesses are required to use a customer identity verification process to remain in compliance with the law. Therefore, it is important for today’s business leaders to have an understanding of the most effective customer identification methods.

Best Customer Identification and Identity Verification Methods

What Is a Customer Identification Program?

The U.S. government and other world governments have implemented a broad range of laws in response to the growth of terrorism and international money laundering. In 2001, the U.S. Congress passed the Patriot Act, a law that requires banks to collect information about their customers and conduct extensive background checks.

One of the most significant requirements under the Patriot Act is the requirement for financial institutions to set up a customer identification program. CIP programs are more broadly referred to as know your customer programs, but the term CIP denotes the specific laws defined under the Patriot Act.

Under CIP requirements, banks must collect sufficient information about their customers to adequately verify their identity. CIPs are why banks collect highly personal information about customers, such as multiple forms of identification and Social Security numbers. Banks also ask customers a series of questions designed to verify that they are who they say they are. If bankers discover any irregularities, they are required to submit an expanded version of a Suspicious Activity Report under the Bank Secrecy Act of 1970.

Although formal CIPs get most of the attention in regulated industries, customer identification is also used in industries that are not required to comply with know your customer laws. Nearly any e-commerce website wants to know the identity of customers to contact them if something goes wrong and to avoid getting scammed. Customer identification is also important when seeking to develop a long-term customer relationship or when asking a customer to sign a legal document.

Importance of Customer Identification

CIPs are of significant importance to financial institutions because they are required to comply in proportion to their size. Smaller banks only have to do minimal checks to confirm a customer’s identity, but larger banks have to use sophisticated customer identity verification methods. In practice, banks are required to use a broad range of digital identity verification tools to confirm that customers are who they say they are and that they should be allowed to open an account.

Compliance with CIP requirements is crucial because banks can face enormous fines for failing to comply. For instance, Wachovia was forced to pay $160 million in 2010 for failing to adequately verify customers who were agents of drug cartels in South America. Wachovia’s mistakes were significant because its failure to implement an effective CIP enabled more than $8 billion in illicit cross-border transactions to take place.

Customer identification is also important for most e-commerce businesses because credit card fraud is widespread. When fraudulent cards are used, businesses usually lose money spent by a customer regardless of whether they delivered the product or service in return. Additionally, when a contract is necessary, businesses cannot hold customers liable when they do not know their identity.

Benefits of Customer Identification

Implementing a proper customer identification process can protect banks from heavy fines that can be incurred for noncompliance. Today, there are sophisticated software tools available that can verify the identity of customers with a high degree of accuracy. Most of these tools are used over the internet to access enormous haystacks of data that can be used for purposes of identity verification.

Additionally, businesses other than banks can use the same identity management tools that have been developed for formal CIPs. Many businesses can benefit from using a customer identification method to confirm that their customers are who they say they are. Identity verification can help with compliance and prevent fraud. Some employers even confirm the identity of new hires when they are first brought on.

Types of Businesses That Need Customer Identification

All financial institutions are legally required to use CIPs to confirm the identity of their customers. However, many other businesses have used CIPs to improve their security. In today’s highly digitalized world, identity verification is especially important when users are given access to highly sensitive information systems.

The reality is that nearly all businesses have a need to use some form of customer identification. In retail or retail-like buying situations, such as in e-commerce or in simple phone-based transactions, customer identification can often be as simple as confirming that the name and address provided by a customer matches their credit card details. Some situations may necessitate simply asking a customer to see their identification without photocopying it. There are also situations where a business needs to develop a relationship with a customer before agreeing to a transaction.

When to Use Customer Identification

Certain types of business transactions require the use of CIPs. Money transfers of more than $10,000 are required to be scrutinized, and CIPs are an important element in scrutinizing any transaction. For very large international transactions, banks will usually go through an extensive customer identification process to verify that the identity of all parties can be confirmed.

There are also many business transactions that make voluntarily using CIPs a favorable option. Before investing a large amount of money in a new business, investors usually want to verify the identity of all major shareholders and officers. Some businesses also need to verify the identity of certain major vendors and customers to avoid making a serious mistake.

Finally, it is often beneficial to verify the identity of users who open accounts on websites. Identity verification is especially important when users will make purchases through a website or are expected to enter into a contractual agreement.

Customer Identification Methods for Online Business

Customer identification is challenging in the online environment because users can easily use a VPN or a simple proxy to hide their identity. Nevertheless, many effective online methods of customer identification have been discovered.

Most online identification strategies use some form of multi-factor authentication to confirm who a person is. MFA involves testing:

  • what a customer knows,
  • what devices a customer owns, or
  • personal attributes of a customer.

The most common form of MFA is the implementation of phone-verified accounts. PVAs ask a user for their phone number at the point of registration before sending a code to the user’s phone. The user then has to enter the code they receive on the registration page to verify their account.

More basic MFA methods ask users for their email address. Users then have to click through from an email they receive to confirm that they are a legitimate user. However, email verification only stops low-level users since email addresses from major providers, such as Gmail and Yahoo, can be inexpensively purchased in bulk quantities.

In situations that require more rigorous identity verification, websites can ask users to upload their identification cards or passports to confirm their identity. Selfies can also be used to verify users. However, the trade-off is that some users feel unsafe when sending highly personal forms of identification through the internet, so businesses lose a segment of potential customers when more complex methods are used. More complex identity verification also significantly slows adoption by reducing the conversion rate on registration pages.

Customer Identification for Offline Business

Offline businesses also need to implement significant customer verification procedures in many cases. Identifying customers is usually easier in the offline environment since businesses can usually verify who a customer is by knowing them personally.

When a customer relationship first begins, businesses can ask in-person clients to submit their identification card or passport. Some businesses ask for two forms of identification. Social security cards and birth certificates should not be accepted as forms of identification since these documents can be easily forged. In cases when customer relationships take place over the phone, the same methods used for online identity verification can be used.

In offline relationships, customer identification is inherently enhanced in several ways. When businesses talk to customers in person or over the phone, it is often easier to hear when customers are being dishonest or shuffling through their notes. Smaller businesses are often able to recognize the voice of a person who has attempted to open accounts under other names in the past. Of course, most offline relationships take place in person or through video chat, so it is possible to see a person’s live face to confirm their identity.

Implementing a Customer Identification Program

Businesses that need to use a CIP should understand the steps necessary for getting started.

The first step is to understand the extent to which you need to verify the identity of your customers. Some CIP tools use exhaustive methods to confirm identities while other tools are designed for mass verification or for smaller businesses.

Next, you should evaluate solutions that are available in the marketplace. Some tools use customer identity verification methods that may not be sufficient for your particular use case. It is also important to consider the sales impact of increasing verification requirements. The reduction in revenue should be weighed against compliance and fraud risks that could manifest as a result of the activity of inauthentic users.

Tools for Customer Identification

The final step for executing a CIP is to implement and use customer identity management software. Most software tools are available on a subscription basis, but some tools require a minimum term of several years. There are hundreds of vendors available, so be sure to read online reviews to confirm that a particular software suite will be effective in your situation. However, once you have put in the work to choose the right software tool, you can continue to validate the identities of your customers for years to come.

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