By James O’Toole
Credit unions have the potential to set a new standard for financial services. These institutions are often at the vanguard of progress, going toe-to-toe with traditional banks, by leveraging their member-centric approach, competitive rates, and member participation and ownership.
Over the past decade credit unions have boldly modernized, siphoning members from their competitors—through personalized financial management tools, contactless payment options, virtual assistants, automated loan approval systems and more.
However, the essential building blocks around anti-fraud, know-your-customer and anti-money laundering best practices have lagged behind. This boils down to identity verification, which is currently weak, inefficient and insecure. Traditional identity verification practices can take several forms—yet each method has flaws which expose both the organization and its customers/members to fraud.
Most traditional organizations rely on the physical verification of personal documents, such driver's licenses, passports, or other government-issued IDs. The problem with this method is that it’s prone to both human error and delays. Membership cards are equally inefficient, as they can be lost, stolen, or faked, imposing additional costs and logistical challenges to organizations.
Subjective Interpretation
Signature verification is another example of an outdated practice, often relying on the judgment of staff members, leading to subjective interpretations and potential inconsistencies in the verification process. Some organizations still require in-person visits, which can be problematic for rural or disabled members, while being generally inconvenient and adding to operational costs.
Fraud Threatens Industry’s Success
Then there’s the problem of fraud. Fraud rates in credit unions jumped by more than 70% in 2022—part of a larger trend plaguing financial institutions, which experienced a 53% year over year increase in fraudulent activity in Q4 2022.
Data breaches reached record levels in both 2021 and 2022, with more than 1,800 instances recorded per year. In the past two and a half years, 300-million individuals have been victims of data breaches—siphoning funds from hard-working earners while eroding consumer trust.
This spike in fraudulent activity is the result of two trends working concurrently: worsening macroeconomic conditions coupled with advances in the technology accessible to criminals. Interestingly, states that imposed restrictions on biometric verification were twice as likely to experience identity fraud.
Looking at this from the other end of the telescope, this could mean that advanced, biometric-based identity verification methods could potentially halve instances of fraud, given the regulatory freedom to be implemented. Modernized verification practices are the antidote to the credit union industry’s mounting fraud problem.
A Future-Proofed Toolkit
Luckily, credit unions looking to overhaul their identity verification infrastructure have a plethora of options to choose from. Biometric authentication refers to using fingerprint recognition, facial recognition, or iris scanning to authenticate members' identities.
Biometric data is unique to individuals, making it a secure and convenient method of verification. Even if a credit union is located in a state which limits the use of biometric authentication, there are other methods that can be used to replace outdated identity verification practices, such as optical character recognition (OCR) technology.
OCR algorithms analyze the document's text and convert it into machine-readable data. This enables quick and accurate verification of information against member records and databases.
Credit unions are also leveraging data analytics to analyze member data, transaction patterns, and behavior to detect anomalies or potential fraudulent activities. Traditional credit union methods can take a gradual approach to modernizing identity verification practices—using Knowledge Based Authentication (KBA) and Two-Factor Authentication (2FA) as stepping stones before investing in machine learning technology.
CUs Don’t Have to Choose
Persistent economic unknowns, inflation, and instability in Eastern Europe mean many credit unions are looking to trim the fat from the operation budget—modernizing identity verification practices creates operational efficiencies that add to the bottom line.
Manual identity verification processes are costly due to the need for physical document storage, extensive manual labor, and potential errors requiring remediation efforts.
By transitioning to digital identity verification processes, credit unions can reduce administrative costs, improve operational efficiency, and minimize the risk of financial losses associated with fraud or regulatory non-compliance. Automating an organization’s identity verification department frees up employees to focus on value creation and frees up capital to dedicate to growth.
A Savvy Move
Modernizing identity verification practices doesn’t just enhance security—it’s savvy from a regulatory compliance perspective. Credit unions are under constant scrutiny from two branches of U.S. legislation: Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
KYC regulations require financial institutions, including credit unions, to establish and maintain comprehensive procedures for verifying the identity of their members and understanding their financial activities. By obtaining accurate member information in a timely fashion, credit unions can ease compliance with KYC regulations.
Machine learning is especially handy in compliance with AML regulations—identifying suspicious activities, monitoring transaction patterns, and generating alerts for potential instances of money laundering and terrorist financing.
Besides KYC and AML regulations, modern identity verification methods expedite and shave labor costs from regulatory reporting. Advanced identity verification software can collect, safely store, and organize data so that it can be easily unearthed in the event of an audit. By providing a comprehensive record of the verification steps and activities performed, credit unions can avoid fines by regulators while signaling to members that they are a transparent institution.
A Benefit for Both
Eliminating outdated identity verification practices has the added benefit of enhancing the customer experience. Increased security means increased consumer trust. In addition, phasing out the in-person verification of documents means members can verify their identity remotely and complete account opening or service requests from the comfort of their own homes or on the go, saving them time and effort.
Manual onboarding entails the tiring and stressful process of entering important information by hand, where a single typo can have negative ramifications for both user and credit union. Automating this process can improve member retention through increased security and ease of use.
Increased Personalization
Modernizing identity verification also means increasing personalization, as accurate collection of data allows for the creation of a customizable user experience. Increased customization breaks from the cold, bureaucratic UX of traditional credit unions and provides financial services in a user-friendly, accessible, and welcoming fashion.
Credit unions that can use this period of post-pandemic instability to move toward modern identity verification practices will be rewarded once macroeconomic conditions turn around. By modernizing how credit unions collect and transfer personal information, organizations can please employees, regulators, and members alike.
James O’Toole is the co-founder and chief business officer of ID-Pal, an SaaS solution that enables the real-time verification trusted by organisations worldwide. Prior to founding ID-Pal, James was a management consultant for Accenture where he worked on a number of high-profile client engagements ranging from strategy development to operational excellence within the Financial Services industry.