The KYC Buyers’ Guide Series: #1 The Evolution of Modern KYC

In today's digital landscape, businesses face increasing challenges in their customer onboarding and verification processes. Between regulation, rising identity fraud (thanks to AI) and users expecting a fast, frictionless process, selecting the right Know Your Customer (KYC) verification tools has never been more critical.

This series will help you navigate the complex world of identity verification solutions and make informed decisions for your business.

Understanding Modern KYC Requirements

KYC processes have evolved significantly in recent years. Traditional methods involving manual document checks and physical ID verification are no longer the only - or necessarily the best - methods to rely on in our digital-first world.

The Shifting Landscape of Identity Verification

Traditional KYC verification methods, such as uploads of photos or documents, are increasingly under the spotlight as innovations in technology and user expectations come into play. The impact of this means customers have perceptions, and therefore expectations, of how long something should take. To that point, research shows:

• The average customer onboarding time is 35 minutes. 
• That is 2.8 times longer than users want. 
• The risk of customer dropoff can increase up to 38% due to lengthy processes. 

Another factor that is having a significant impact on traditional verification is artificial intelligence (AI) and its use in fraudulent activities. With physical documents - and in some countries, phone checks - still prevailing, fraudsters are investing time in technology to create deepfakes, clone voices, and generate synthetic identities, while maintaining their phishing and social engineering attacks. Two of the ‘hottest’ techniques are:

1. Deepfakes, where AI generates realistic images of documents, and voice cloning is popular for account takeovers. 44% of fraud now involves deepfakes.
2. Synthetic identities - AI-generated documents of fictional people - rose 195%, globally, according to recent data.

Regulatory requirements are also a constant influencing factor, including:

• Updates to Anti-Money Laundering (AML) regulations, including the initiation of the Anti-Money-Laundering Authority (AMLA).
• The Payment Services Directive (recently, PSD3).
• The Digital Operational Resilience Act (DORA).
• Markets in Crypto-Assets (MiCA).
• Most notably for identity, the European Union’s electronic IDentification, Authentication and Trust Services (eIDAS 2.0) framework. This regulation, which came into force in 2024, mandates the acceptance of government-issued electronic identification (eID) methods by businesses with operations in Europe, starting in 2026.

These regulatory shifts, alongside growing security concerns and technological innovations, are pushing businesses toward solutions that can adapt to changes while maintaining a smooth customer experience.

Finally, when it comes to current solutions, the disparity in regulatory practices and implementation, along with normal market competition, means that businesses end up partnering and integrating with multiple vendors. While it fulfills functions and regulatory requirements, it ends up creating a fragmented ecosystem, and overheads for technical and compliance teams to maintain the solutions and overall infrastructure.

Recap of Key Challenges in Modern Identity Verification

Businesses that require KYC processes face several critical challenges:

• Ensuring the user experience is as seamless as possible
• Adapting to evolving fraud techniques
• Managing compliance across different jurisdictions
• Integrating verification systems with existing infrastructure
• Controlling operational costs while maintaining effectiveness

The Evolution of ID Verification Technologies

Identity verification has progressed from manual document checks to sophisticated digital solutions that leverage government databases and advanced biometrics.

From Manual to Digital: The Verification Journey

Traditional KYC processes rely heavily on manual or in-person verification methods, such as:

• Optical Character Recognition (OCR).
• Phone-checks.
• Basic document uploads.

These methods can cause significant manual overhead for businesses, be error-prone, and create substantial friction in customer onboarding. As digital transformation accelerates, businesses have increasingly invested in automation to verify identities remotely.

Even for popular traditional methods like OCR, data shows that 1 in 20 identity verification failures are now due to deepfakes. However, just as fraudsters have been investing in AI, so too have OCR vendors. Through the use of AI tools, vendors are shifting from static checks to:

• Real-time behavioral biometrics.
• Anomaly detection.
• Device analytics.

These innovations signal a profound change: effective KYC now requires AI-driven, multi-layered defense systems rather than simple image or document validation.

However, the latest evolution in this space is the adoption of electronic IDs (eIDs) and digital identity wallets, which are mandated in eIDAS 2.0. eIDs provide significantly higher security levels while streamlining the verification process. The technology behind eIDs involves advanced cryptographic methods, such as blockchain-backed auditability and multi-party computation (MPC), which verify identities without exposing personal data. Pilot programs are already testing secure, privacy-centric wallets with offline dashboards, attribute attestation, and e-signature capabilities. This represents a monumental shift in KYC, allowing businesses to rely on:

• Tamper-proof, government-verified credentials
• Streamlined onboarding
• Strengthened compliance
• Reduced fraud
• Preserved user privacy

These innovations are defining the next generation of identity verification for KYC.

The Rise of eID Solutions

Electronic identification systems offer several advantages over traditional verification methods:

• Higher security through cryptographic protection
• Reduced vulnerability to forgery or manipulation
• Faster verification processes
• Enhanced privacy protection
• Improved user experience with fewer steps

Conclusion and coming up next…

As this article shows, there are significant push and pull forces affecting regulated businesses today. From user expectations, to regulation, to security concerns, to technological innovations - this is the context in which businesses and vendors have to operate. In our next instalment, we’ll be building on this, and discuss critical factors for evaluating KYC verification solutions.

If you have any questions or would like to find out more about eIDs and what Authologic does, we’d love to hear from you.

Reference links:

1. FullCircl
2. Fincialit.net
3. Veriff