KYC for Digital Wallets

What it is and how do they work?

It has surely not escaped anyone’s notice that digitization in business has become ubiquitous at this point. Every major retailer has their own app, many of which include digital wallets as well as information about current stock. Apps like PayPal and Venmo have made exchanging money for goods and services simple and instantaneous. Even very small business owners and artists have been able to benefit from the rise of digital wallets. Then, when the pandemic of 2020 hit, countless businesses were forced to reexamine their methods for accepting payments and the use of digital wallets really exploded. But what exactly is a digital wallet? How does it work? And how can a business owner protect themselves from fraud committed with digital wallets?

What is a Digital Wallet?

A digital wallet contains digital versions of credit and debit cards and can make carrying a physical wallet with plastic cards largely unnecessary (hence the name). A digital wallet can be used on a smartphone, smartwatch, or computer and, as mentioned, many retailers have digital wallets built into their apps. For example, Walmart’s mobile app has Walmart Pay which allows the user to pay for their groceries by scanning a QR code at the register. Further examples of well-known digital wallets include Apple Pay and Google Pay. 

Additionally, cryptocurrencies use digital wallets as the primary method for exchange because crypto does not rely on a central banking system and does not often have physical cards to make payments with. Digital wallets serve them well because the information about how many units of crypto a user has and details about the ledger can be stored in the wallet’s software.

Those who live in rural areas or developing countries can also benefit greatly from digital wallets because they do not require the user to be near a bank.

Bank cards are not the only thing that can be stored in a digital wallet. It can also store gift cards, membership cards, coupons, and event tickets.

How Does it Work?

How it works depends on what kind of digital wallet we’re looking at. Apple Pay and Google Pay use Near Field Communication, or NFC, which allows two devices to exchange information when they are in close proximity. The user can hold their smartphone or smartwatch within four inches of a compatible card reader and NFC tags located in both devices share information with one another. Each card is assigned a virtual card number that is given to the merchant or individual to whom the user is making a payment.

Samsung Pay uses Magnetic Secure Transmission, or MST, in addition to NFC technology in order to operate their digital wallet. Like bank cards have magnetic strips that are read by the card reader, MST creates a magnetic signal to interact with the reader.

Lastly, there are wallets that use QR codes such as Walmart Pay, as previously mentioned. The QR code is associated with the purchase and the customer’s smartphone camera can scan it to make a payment. Walmart Pay is also a bit different from the other examples because it is a closed digital wallet; that is, it can only be used at Walmart stores. Starbucks is another vendor that uses a closed wallet system.

Know Your Customer and Digital Wallets

With so much information going unchecked by humans and being only exchanged by computer and smartphone software, how can a merchant know that a user’s digital wallet really belongs to them? How can they know that the information isn’t fabricated or stolen?

Know Your Customer, or KYC, is an important aspect of preventing fraud in any business dealings and those involving digital wallets are no different. In the United States, KYC refers to the systems which a business puts in place in order to protect itself from fraudulent activity. It’s important that a business knows that their customers are who they say they are. It’s also important that businesses are KYC compliant for the sake of avoiding fines issued by the government for noncompliance. 

KYC compliance and fraud prevention require a multilayered approach. Single-factor authentication just doesn’t cut it anymore. The essential steps necessary to prevent fraud on the digital wallet firm’s end are identity verification, identity document scanning, and a liveness check of the customer.

IDScan.net’s Solutions

For identity verification, IDScan.net’s online identity verification technology automatically performs identity verification by checking that the ID is formatted correctly. It also checks that the information in the barcode matches what is displayed on the front of the ID. It then queries the USPS database to confirm that the address on the ID exists. Lastly, it moves to the pictures, calculating a confidence percentage in the facial match between the photo on the ID and a selfie supplied by the customer. The selfie is also run through anti-spoofing and liveness processes to assure it is legitimate and that the person pictured is a real person.

For document scanning, the Department of Motor Vehicles’ Data Verification Service allows an organization that is presented with a license or ID card to verify that the data on the card matches the data held by the jurisdiction that issued the document. The verification report comes back immediately and flags any information listed on the ID that is suspicious or incorrect according to the currently held record. It also determines if that combination of data can be connected to a legitimately issued ID altogether. This is done through a web-service call that the majority of US states are participants of.  

FAQ:

What is a digital wallet?

A digital wallet contains digital versions of credit and debit cards, store gift cards, membership cards, coupons, and event tickets.

How does it work?

There are three major technologies used: Near Field Communication, or NFC, which allows two devices to exchange information when they are in close proximity; Magnetic Secure Transmission which, like bank cards, has a magnetic strip that is read by the card reader and creates a magnetic signal to interact with the reader; and QR code which is associated with the purchase and the customer’s smartphone camera can scan it to make a payment.

How can a merchant know that a user’s digital wallet really belongs to them?

KYC compliance and fraud prevention require a multilayered approach. The essential steps necessary to prevent fraud on the digital wallet firm’s end are identity verification, identity document scanning, and a liveness check of the customer.

Blogs you may like:

How KYC Software is Transforming Banking

KYC Checks in ICO