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| What is digital identity? |
| Common use cases |
| How to verify digital identities |
Getting an answer to “Who are you?” has rarely been all that simple. Risk and fraud professionals in corporations or government agencies understand identity verification is one of the fundamental guardians of their organization’s sensitive data and financial assets.
In the digital world, it’s even more complicated with digital identity verification. Though it shares many similarities with methods for “standard” identification, digital identity verification has many distinctions. It’s becoming more and more crucial in the highly interconnected digital world. That’s why risk and fraud professionals also need to know how to protect their organizations and the people who connect with them online from digital identity fraud.
What is digital identity?
Digital identity is the combination of attributes and credentials that represent a person or entity in the digital world. It includes information such as usernames, email addresses, biometric data, browsing history, online profiles, and other data points that collectivelykyc establish who someone is online.
Part of the identification process is to start by distinguishing a person’s digital identity from his or her physical identity. Again, the term refers to the unique set of data that defines that person in the physical world, information that includes name, address, and date of birth, as well as a government-issued driver’s license (or other ID) and his or her Social Security number. A digital identity encompasses all the data that represents a person or entity online. In addition to personal identity information, digital identity data includes a person’s online activities, such as search history, purchases, and social media posts.
A person uses his or her digital identity to access online services, products, or other interactions. The business or other entity needs to determine whether the person and the digital identity correspond. The most familiar method of identity verification is, of course, the use of login credentials—combinations of username and password. Still, organizations need other methods for confirming the human being behind the online profile. These might include digital signatures and certificates, which allow a person to sign an online document.
More and more people are “carrying” government-issued digital IDs and certificates, electronic forms of identification intended to provide the bearers secure access to online services. In the U.S., only a few states offer such IDs, though other countries are developing these forms of identification for all their citizens. Many organizations are requesting that online users submit biometric data to be “read” by facial or fingerprint recognition technology. An emerging form of verification that is gaining more and more attention is based on blockchain, a “distributed ledger” technology that incorporates cutting-edge cryptography.
Whatever the method(s) chosen, a strong digital identity process can reduce an organization’s risk of fraud. It also can assure customers and other users interacting online that the organization is doing all it can to keep their identities from being stolen. That risk is costly–and growing. The U.S. Federal Trade Commission logged 842,000 cases of identity theft during the first three quarters of 2024, a rate exceeding that of 2023. An AARP report claims that American adults lost $43 billion to identity fraud in 2023.
In addition, many professionals believe that focusing on digital identity verification can offer more security than physical documentation alone. Since this identification is digital, organizations can activate automated verification processes that can reduce verification costs. By streamlining authentication, automation can simplify user experience when accessing an organization online.
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Common use cases
Industries
The industries that require particularly robust digital identity verification systems are, not surprisingly, those with a financial stake in protecting sensitive data—their own and their customers.
- Financial services. This category includes banks and credit unions, securities firms, insurers, fintech providers, and cryptocurrency exchanges. Financial services businesses are required to comply with federal regulations regarding customer due diligence (CDD), as well as know-your-customer (KYC) and anti-money-laundering (AML) rules.
- Healthcare. Physicians and hospitals need to be sure that the people receiving treatment and medications are actual patients. Insurers must verify the identities of those receiving payments. The Health Insurance Portability and Accountability Act (HIPAA) requires identity verification from anyone requesting an individual’s protected health information (PHI).
- Government. Agencies must make sure that benefits and services are being given to those to whom they’re entitled. While many government agencies have evolved with current types of fraud, it continues to evolve and the need for an identity verification strategy is more important than ever.
- E-commerce and retail. These businesses need to prevent transaction fraud, ensure accurate payment processing, and guard customer data (including bank account and credit card numbers).
The travel and hospitality, telecommunications, and education sectors need to protect online data via identity verification. In addition, online gaming operators are finding it increasingly essential to prove their players’ identities to prevent fraud. And sharing economy platforms (familiar examples include Uber, DoorDash, and TaskRabbit) must be vigilant against identity fraudsters to safeguard both users and service providers.
Common use cases
These are the most common use cases of digital identity verification:
- Secure login and authentication
- High-value financial and retail transactions
- Access to government services
- Cross-border verification
- Healthcare data access
- Employee verification and secure access
- Regulatory compliance and reporting
In addition, certain types of businesses have special use cases:
- Account creation and customer onboarding. Banks and other financial services firms need to verify users’ identities whenever they open accounts to protect against fraudulent transactions and account takeover, among other risks.
- Age verification. This is essential for businesses requiring age-restricted access, such as online gambling.
How to verify digital identities
Digital identity verification is the process of confirming that a person is who they claim to be in digital environments. It involves authenticating the presented digital identity against trusted sources through methods like passwords, biometric authentication, knowledge-based questions, document verification, or multi-factor authentication to establish trust and prevent fraud.
Risks and challenges
Ascertaining a person’s identity has evolved from simple passwords to two-factor verification and on to more sophisticated systems such as biometrics. While digital identity verification has become crucial across many business sectors, establishing a rigorous program for confirming that the people behind these identities are truly who they say they are is a complicated project. An organization’s risk and fraud professionals need to be prepared for several significant challenges:
- Sophisticated identity fraud techniques. Hackers are creating synthetic identities and AI-related fraud like generated deepfake videos and audios to fool employees into allowing access to the organization’s IT infrastructure which can call for a cybersecurity risk management strategy and security upgrades.
- Addressing data privacy regulations. For instance, the European Union’s General Data Protection Regulation (GDPR) is intended to safeguard EU citizens’ personal data. In the U.S., the California Consumer Privacy Act (CCPA) performs a similar role for that state’s residents.
- Balancing security with user experience. Customers dislike jumping through numerous time-consuming verification hoops just to make a single transaction. IT professionals categorize these slowdowns as user friction, and it can cost businesses potential customers.
- Technical limitations and infrastructure requirements. Digital verification systems need to be able to “talk” with each other—and with an organization’s IT network.
- Credential stuffing and other cyberattack techniques. In credential stuffing, hackers use stolen credentials to breach a system which can be costly in many ways. In a brute force attack, attackers use high-speed automation to “guess” access passwords, generating random characters combined with common password patterns. These and other tactics seek to exploit weak spots in an organization’s digital verification protocols.
- Cross-border complexities. Accessing international identity information can be difficult, and the available data can be hard to verify without additional investigation.
Best practices
Organizations can meet these risks and challenges by following current best practices for digital identity verification. These include:
- Multi-layered verification where an effective verification system accesses several information sources
- Risk-based authentication frameworks; this approach assesses the risk of each login to determine how much verification is required.
- Biometric verification is something fraud and risk professionals should familiarize themselves with the data privacy implications of biometric technology.
- Continuous authentication versus point-in-time verification
- Document verification technologies
- Liveness detection to prevent spoofing
- Compliance with regulatory standards
- Secure data storage and management
- Fraud pattern recognition and machine learning implementation
- User education and communication
- Scalable identity verification infrastructure
There’s much, much more in the details of many of these digital identity practices, and clarifies key terminology when it comes to an in-depth identity verification strategy. As our world becomes more digital and identity fraud risks become more murky and complex, risk and fraud professionals need all the clarity they can get.
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