German-based companies have been navigating these complexities ever since the local financial regulatory authority (BaFin) introduced video identification (Video Ident) procedures in 2015.
Video Ident is the most commonly used verification method in Germany. Still, it has proven costly and challenging to scale during unexpected changes in onboarding volume and outside Germany. So, what are the alternatives?
Snapshot of the German landscape
Bafin outlines several identification methods that satisfy national regulations:
In-person verification (Post Ident)
Video identification (Video Ident)
Electronic identity verification (German eID)
Each one of these methods, however, presents significant problems for financial institutions. They either imply high costs, present scalability challenges, or disturb the user experience leading to conversion loss.
Postal Identification (Post Ident)
Post Ident is an in-person identity verification method performed at a local bank branch or post office by a bank or Deutsche Post employee.
The verification process is straightforward: a customer looking to open a bank account (or any account that requires identity verification) receives a Post Ident coupon issued by the financial institution. Then, an employee at the post office or bank cross-checks the information on the coupon against the customer’s identity card and confirms the identity for the financial institution.
The in-person aspect of customer onboarding ensures accurate fraud detection, but it comes at a price. As it requires people to leave their homes, in-person verification is not an optimal user experience for most people. It can, therefore, negatively impact conversion rates compared to a fully digital verification method.
Video Ident requires an uninterrupted live video conversation between the customer and a KYC analyst during the onboarding process.
Analysts must be trained to conduct the video identification process on the back end. In addition, the Video Ident process must be end-to-end encrypted for privacy and security standards. Video KYC is the most common identification method in Germany. But meeting all the requirements, including the manual process of having trained professionals available in real-time to verify each exchange, can be costly for businesses. Additionally, it’s a less scalable option, particularly when facing unexpected changes in onboarding volume or during peak performance times.
Businesses that leverage this solution — and need to take on a large influx of applicants with unpredictable volumes — could run into hurdles.
BaFin has outlined strict requirements for Video Ident:
Employees need to be specifically trained to authenticate through video;
The video has to be of a certain quality;
The authentication must be done through a live connection.
These requirements can be a tall order for growing businesses that need resources to meet each requirement. Moreover, while German customers are used to this identification method, conversion outside of Germany can be up to 50% lower.
The electronic identification (eID) service lets German citizens and non-citizens use their national digital ID to identify themselves by leveraging a mobile app and the Near Field Communication contactless chip reading capabilities on their smartphones.
The digital ID can be unlocked by holding a smartphone with an NFC reader to the NFC chip located in the identity document. The customer then enters a six-digit PIN that the cardholder has set in the mobile app. After entering the correct PIN, the identification data is securely forwarded to the financial institution requesting it.
This verification method is fully digital. While a high conversion rate would be expected due to a smooth user experience, customer conversion for this method can be a hit or miss. For users who remember their PIN code, conversion is high. However, in practice, people rarely have their PIN codes memorized or readily on hand and therefore can’t share their identity through eID. For the latter, conversion can be practically 0%.
Fourthline Germany Solution
Fourthline has built a versatile and scalable alternative solution tailored to the German market. Companies don’t have to choose between compliance, UX, and conversion rates. Instead, with Fourthline, it's possible to:
Adhere to all BaFin requirements,
Improve user experience and increase conversion rates,
Significantly reduce costs compared to Video Ident,
Scale and adapt to large volumes and peak performances.
How it works
Fourthline firstly verifies users through a fully digital KYC flow, including identification and verification (ID&V), biometrics, and proof of address. After completing this flow, the user provides a Qualified Electronic Signature (QES). Finally, a bank account check is done to verify the user is the account holder.
While initially, it may seem like a more complex process, it's seamless for clients and their customers for two reasons.
First, according to BaFin, the third step can happen after the onboarding. Secondly, it requires no action from the user as it is possible to use the first incoming transaction to verify the account holder's name.
Therefore, this approach is particularly adequate for regulated institutions, like online brokers, who receive bank account details when customers upload funds for the first time.
Clients who partner with Fourthline can offer Germany's most robust, cost-effective, and user-friendly KYC flow.