Online shopping is fast becoming the norm, with nearly three billion people making online purchases in 2023, according to Juniper Research data. This shows the massive strength of the global ecommerce adoption, which opened up a range of new fraud threats to consumers and merchants.
These threats are varied in nature, including transaction fraud, account takeover (ATO) fraud, and other kinds of fraud. Fraud can happen starting from the onboarding process, with the creation of a fraudulent account, the use of stolen payment credentials, and fraudulent returns. Merchants and ecommerce platforms are now using identity verification solutions to mitigate the risk of fraud.
Identity verification is the process through which an individual is validated as being who they claim to be, and the correctness of their attributes. This means identity verification includes age verification, address verification, and verifying ownership of a payment credential.
Verification is generally completed by the user’s bank or payment provider. These institutions are required to carry out verification checks, whereas the merchants often are not. Banks must meet stringent know-your-customer (KYC) and anti-money laundering (AML) requirements, meaning that if the payment is authorised by the bank, there is a high likelihood of the user being legitimate. However, this presents two primary issues. First, if the bank’s checks do not catch fraud, the merchant won’t either. Second, this does not protect the merchant from legitimate accounts committing fraud against them, such as in the case of chargeback fraud.
In heavily regulated industries such as gambling, merchants are already required to conduct their own identity verification checks. In these cases, a trusted identity is created at the onboarding stage, with age and address checks being done at this point. When a customer tries to use the service, they are checked against this trusted identity. Many ecommerce websites, such as Amazon, have moved into the grocery sector, and supermarkets have also significantly grown their online presence. These services will offer consumers access to age-restricted products, such as alcohol and kitchen knives. To sell these items, the merchant must perform age verification checks. Merchants must digitalise their age verification methods by requiring the user to present an ID, and then take a selfie to confirm the identity on the ID.
If IDs have NFC (Near Field Communication) chips, the information can be extracted using an NFC-enabled smartphone. If this is not available, a photo of the ID can be read using OCR (Optical Character Recognition). With digital IDs being rolled out over the coming years, the process of checking a user’s identity will eventually become entirely digital, boosting customer convenience, as the IDwill be stored on the device used to make the purchase.
These ID verification methods are harder to bypass than simply requiring ID at delivery. Delivery drivers are not trained to spot fake IDs, and time pressure for deliveries will likely result in IDs being less carefully checked. Digital methods can use artificial intelligence (AI) to check documents for security features, preventing minors from using fraudulent IDs, or another adult’s ID.
The challenge with implementing strong identity checks is striking a balance between offering a low-friction service and preventing fraud. Increased friction will reduce completed sales, costing the merchant.
However, fraud also presents costs to the merchant, meaning merchants are looking to strike the balance that sees them lose the least money across both challenges. This balance is not stationary; identity verification technology is evolving, increasingly utilising mobile devices’ biometric capabilities to offer seamless user verification. Types of fraud are also changing, with some categories, such as refund fraud, seeing growth. As shown in Figure 1, these trends will lead to an increase in the number of identity verification checks being carried out for ecommerce.
Source: Juniper Research
A key technology for facilitating these checks is biometric verification, especially facial recognition. Facial biometrics use the pattern of a user’s face to compare it to a trusted template of their face, thus verifying their identity. These templates are made up of the unique mathematical and dynamic patterns of the user’s face and can be 2D or 3D. While 2D facial recognition can be spoofed by HD photographs, and 3D facial recognition by high-quality masks, when used in combination with liveness detection, it becomes almost impossible to trick. The evolution of deepfakes poses a potential threat, particularly as the technology improves but, currently, liveness detection catches the majority of deepfakes. Identity verification is vital in protecting users from account takeover and merchants from various forms of fraud. Ecommerce platforms must look to utilise biometric verification in combination with eID documents to provide a trusted ecommerce environment.
This editorial piece was first published in The Paypers' Fraud Prevention in Ecommerce Report 2024-2025, the ultimate source of knowledge that taps into the ever-evolving fraud realm and helps ecommerce specialists protect their businesses with the latest fraud prevention strategies.
A Senior Research Analyst at Juniper Research, Michael primarily conducts research on digital identity and payments markets. His recent reports include digital identity, digital wallets, and digital identity verification.
Juniper Research specialises in providing best-in-class market research across mobile, online, and disruptive technologies. We offer in-depth reports, forecasts, annual subscriptions, and consultancy. Our global clients include banks, payment providers, and many others. To find out how we can help you, contact info@juniperresearch.com or visit www.juniperresearch.com.
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