UK: Clearer Rules Needed In The UK To Support Customer Authentication By Video, Says Expert

Last Updated: 4 July 2017
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ANALYSIS: New rules are needed in the UK to make it clearer that it is acceptable for banks to verify the identity of new customers using video technology.

While video authentication is not prohibited by existing laws, laws on tackling money laundering, safeguarding data protection and on the supply of payment services do not give banks confidence on how to proceed with it in a compliant way.

Other countries in Europe have taken steps to support video authentication. This has led to technological solutions being implemented by some banks in the market. The onus is on UK policy makers and regulators to follow that lead.

An archaic approach to 'onboading' customers

The process of onboarding new customers at banks and other financial institutions in the UK is unfortunately both outdated and inconvenient. Verification of new customers requires a physical 'face-to-face' with a potential customer, along with their appropriate identity documents, in order to prove identity.

Considering the overwhelming movement of customers to online and mobile banking, it is disappointing that regulatory frictions have prevented the onboarding process from catching up and going digital.

This is particularly true when you consider that some of the more innovative solutions have already been accepted by some international regulators.

Following the international lead

Video authentication technology is already functional in countries such as Germany and the Netherlands, with many European countries having already regulated to allow for it.

Indeed, on 10 April this year, the German regulator BaFin (the Federal Financial Supervisory Authority) published a new circular on the requirements for the use of video identification procedures.

An example of video authentication in practice can be seen at the German online bank Fidor. It uses IDnow's identification solution to onboard customers remotely via video chat. New customers are simply required to: apply for a Fidor account online; install the app as directed, and; whilst on video chat, show themselves while holding their passport. It is not revolutionary technology but it is highly effective.

It is far from the only example: within three weeks of the Austrian Financial Market Authority (FMA) approving video authentication of new customers, it was being introduced in the financial services industry by banks such as Erste Bank, again using IDnow's solution.

What is clear is that European disruptors in the financial services markets are leading the way across the industry. However, the UK and UK retail banks lag behind.

What is the challenge?

In its response to the European Commission's public consultation on fintech, the European Banking Authority (EBA) acknowledged that existing anti-money laundering (AML) legislation has been acting as a roadblock to innovation.

In particular, the EBA highlighted the fourth Anti-Money Laundering Directive, or 4AMLD, as not being sufficiently prescriptive in relation to verification procedures. This means that different EU member states have the freedom to develop their own legislation in relation to AML standards, provided it meets the relatively lenient minimum requirements of 4AMLD.

PSD2 and the emphasis on 'strong customer authentication'

One of the central roadblocks to introducing video authentication in the UK is the lack of clarity in the legislation, both existing and incoming.

The second Payment Services Directive (PSD2), which the UK will have to implement into national law by 13 January 2018, does not explicitly permit or ban the use of video authentication, but it does accept the concept that something inherent to an individual can be used to help verify their identity – this is a big step towards accepting a person's face can serve as a means of authentication of identity.

However, the onerous security and authentication requirements of PSD2 require the financial services industry to push the boundaries of identification technology.

Under PSD2, authentication is characterised as a procedure "which allows a payment service provider to verify the identity of a payment service user or the validity of the use of a specific payment instrument, including the use of the user's personalised security credentials".

However, under certain circumstances it is necessary for payment service providers to undertake strong customer authentication, which relies on multi-factor authentication. This is described as "authentication based on the use of two or more independent elements, the reliability of each element not being compromised by the breach of any other element, and designed in such a way as to protect the confidentiality of the authentication data".

The 'elements' that can be combined to verify identify are categorised as something known only by the payment service user (knowledge); something held only by the payment service user (possession); something inherent to the payment service user (inherence).

In the context of video authentication, it is not a stretch to imagine that an individual's face is something inherent to them. However, this is only one step of the strong customer authentication process – 'knowledge' and/or 'possession' are still outstanding.

If a customer is holding up their passport across video chat, is that sufficient to meeting the possession requirement? Or if they read out their PIN, would that satisfy 'knowledge'? It is unclear.

PSD2 requires that strong customer authentication is undertaken when a customer accesses their online account or initiates a payment. It does not appear to consider onboarding of customers, which may be an oversight or it may have been intentionally omitted. Irrespective of the why, the requirements for video authentication are not found in PSD2.

Video authentication and 'enhanced due diligence'

With PSD2 itself unable to provide sufficient clarity, the Joint Money Laundering Steering Group (JMLSG) is slightly more prescriptive when it comes to remote onboarding of customers. It has recognised the potential for onboarding customers via non-"face-to-face" channels.

One of the core obligations on financial services firms is that they must apply "enhanced due diligence" when the customer is not physically present during the identification process. The JMLSG has also acknowledged that an individual's physical appearance is one of the many aspects of their identity.

All of this suggests that the JMLSG may be laying the groundwork for AML legislation that allows for video authentication. However, it goes on to state that whilst the amount of identity information to ask for is at the discretion of the firm, the customer not being physically present is identified as one of the risk factors that should be considered to protect against impersonation.

There is a sense that the JMLSG understands the potential for video authentication, but is not yet satisfied that it reasonably safeguards the interests of the customer or of the firm.

Data protection is another potential roadblock

Under the incoming General Data Protection Regulation (GDPR), "personal data resulting from specific technical processing relating to the physical ... characteristics of a natural person, which allow or confirm the unique identification of that natural person" is considered to be biometric data. It specifically includes facial images.

An individual's face being seen over video chat to confirm identity would fall within this description.

The relevance of this is that biometric data is considered a special category of data under the GDPR. The processing of this type of data is prohibited unless one of the exceptions listed in Article 9 of the GDPR is met. Failure to satisfy one of those exceptions would mean that the processing of the biometric data is in breach of the GDPR.

In practice, a robust and specific consent to processing of facial images should be sought from customers, ideally on downloading the app to enable the video authentication to take place.

The future of video authentication and facial recognition technologies

The video authentication tools being used by banks at the moment make use of video chat, meaning that they are not an entirely digital or automated authentication processes. There is still a requirement for a human to see another human with their identification documents, in real time, albeit remotely.

A question remains, therefore, about what will happen once facial recognition software is a globally accepted solution.

The Chinese company Face++ has developed sophisticated facial recognition software which, teamed with Alipay, a mobile payment app with over 450 million users worldwide, makes it possible to transfer money using facial recognition alone.

In the context of making payments, there is no reason why facial recognition should not meet the requirements for 'inherence'. However, there is still a question over how the second part of multi-factor authentication, as provided for under PSD2, of either knowledge or possession, can be met.

Would it be sufficient for the app to be on a mobile device registered on the app as belonging to the individual? Would that limit the use of effective facial authentication to a single channel, with customers still being required to enter a pin to withdraw money at ATMs? Moreover, this would not solve the problem of customers having to physically enter their banks as part of customer onboarding.

There is a balance between testing the boundaries of what is possible technologically, and what is reasonable for consumers on a practical level. Innovation requires a healthy appetite for risk, but when it comes to keeping your customers happy, consistency is often king.

More clarity needed

It is evident from the language of the current and incoming legislation that video authentication is intended to feature in payment technology. The inclusion of biometric data in the GDPR, including specifically facial recognition, illustrates that is it being recognised as a technological solution to the identification of individuals.

However, what is needed in order to be able to progress this solution is further clarity from the legislation, particularly with some national regulators steadfastly against video identification, creating an unbalanced international playing field.

Luke Scanlon is an expert in financial technology law at Pinsent Masons, the law firm behind

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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