Founders, investors on opportunities & challenges ahead for identity verification industry

With the proliferation of online accounts comes more opportunities for fraudsters to commit nefarious acts. So it makes sense that identity verification and fraud detection startups, which typically use AI and other technologies to ensure that users are who they claim to be, are truly having their moment.

So far this year, identity verification and fraud detection startups have pulled in nearly $835 million in venture funding across 24 rounds—37.5% of which were made in seed-stage startups, as calculated from a Crunchbase data pull conducted in late April. To add some more fuel to the sector on fire, the digital identity market is projected to rise from under $15 billion in 2019 to more than $30 billion by 2023, according to research by One World Identity.

For instance, identity verification startup Socure raised a $100 million Series D at a $1.3 billion valuation; Jumio closed a $150 million investment; and identity infrastructure company Persona has raised a $50 million Series B.

I spoke with several businesses and startups in the space about why the sector is seeing so much demand and the challenges that lie ahead.

Move fast and identify accurately

Banks have reported scams on stimulus payments and the FTC has said over 327,000 complaints came to its office in 10 months, a white paper by One World Identity and Trulioo shows. Phishing scams saw an uptick and e-commerce fraud rose 14% in the holiday season compared to 2019, and rose 59% compared to 2018, according to Transunion data.

It’s a host of numbers that tells us how imperative it is to verify identities securely and accurately. And in the wake of COVID-19, demand for identity verifications has also exploded because of remote work, Socure Founder and CEO Johnny Ayers said in an interview. Socure was founded in 2012.

But there’s a delicate balancing act when it comes to providing these verification services while also reducing friction for the consumer using the service. Consumers don’t want to experience delays when signing up for an app that requires their verification.

A white paper found that 77% of financial services or online gaming consumers say that if there are too many steps to confirm an individual’s identity to gain access to the system, then the user won’t fully engage with the system.

Amit Jhawar, who is a partner at Accel, the firm that led Socure’s latest funding round, echoed this sentiment to FinLedger. But in tension lies opportunity, especially for those identity verification startups who are best able to balance accurate identification and frictionless customer onboarding.

“If you can provide [businesses] with the best identity verification… that actually becomes a competitive advantage if you have tremendous tools and capabilities,” Ayers said. “But it also becomes a disadvantage if you don’t. This is what we see driving the demand for Socure.”

Mastercard is no stranger to seeing the competitive advantage in investing in identity verification companies. Recently, the payments giant announced it intends to acquire identity verification company Ekata for $850 million. Mastercard SVP, Digital Identity Products Dennis Gamiello told FinLedger that preserving consumer’s privacy in a secure and seamless way is a “critical foundational element to establishing that trust.”

“We think governments and our partners see this need that identity is foundational to establishing trust in these digital interactions,” Gamiello said. “If you think about digital first being the way forward, this current digital first environment sticking, then identity and trust is going to be critical to that. There’s a necessity and there’s a pull and demand for these capabilities. And I think that’s driving the ongoing investment.”

Challenges: Government and partnerships

But the digital identity verification space isn’t all growth and deal-making.

Ayers noted, in the long-term, some of the concerns he has for the industry revolve around Congress and regulation, especially pertaining to the “Improving Digital Identity Act of 2020” and National Institute of Standards and Technology [NIST]. The Improving Digital Identity Act of 2020 was introduced last year to address identity fraud — in 2019 identity fraud losses approached $17 billion, according to JD Supra.

The act aims to create a task force to protect individual privacy, direct the NIST to create new standards to guide government agencies and establish a grant program to provide funding for states to update systems that provide identity credentials, according to JD Supra. Ayers had more questions about the Act and NIST than answers, but if enforced the act would encourage governments to update identity privacy infrastructures.

Kaarel Kotkas, founder and CEO of Veriff, told FinLedger that some of the challenges he anticipates pertain to finding the right partners and keeping up with new types of documents in the fast changing marketplace.

On the flip side, Kotkas does think that the COVID-19 pandemic amplified trends that were going to occur anyway, and that includes the increasing importance of ID verification companies.

“Will the future be fully remote after the pandemic? The answer is no, but it will definitely be more flexible. And this is why the verification space [will see more] demand.”

Meanwhile, Gamiello said the outlook of the sector is difficult to predict.

“We can expect a lot of this digital first momentum to stick,” Gamiello said. “As a result, digital identity and verification capabilities remain critically important. As the trajectory of digital interactions grows, you can expect the usage of services like this to continue on the same trajectory.”

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