TABLE OF CONTENTS TABLE OF FIGURES

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2 2 TABLE OF CONTENTS Executive Summary...4 Recommendations...5 Digital Account Opening Booms...6 New Account Fraud Thrives in the Digital Age...7 When Digital Account Opening Falls Short...9 Using Documents Scanning to Protect Customers and Enhance Experience...11 Methodology...13 TABLE OF FIGURES Figure 1: Channels Used to Apply for Financial Products Over Past Year, Figure 2: New Account Fraud Metrics...7 Figure 3: Mobile Account Opening Application Initiation vs. Completion...10

3 3 FOREWORD This whitepaper, sponsored by Mitek, explores the challenge of identity verification in the digital account opening process, and how document scanning can improve on KBA driven processes. The whitepaper was independently produced by Javelin Strategy & Research. Javelin maintains complete independence in its data collection, findings, and analysis. OVERVIEW With financial consumers turning to online and mobile channels not only to manage their existing accounts, but also to open new ones, digital account opening (DAO) is thriving, and the pressure is strong on institutions to expand their origination platforms. But meeting seemingly ever-changing regulatory guidelines and protecting customers from digital fraud stand in their way. In particular, the growth of DAO is fueling a rise in new account fraud (NAF) as fraudsters discover that digital account opening solutions offer them the same types of conveniences that they do to legitimate applicants. Making matters worse still for banks, many of the solutions available to safely verify the identity applicants often sacrifice digital customer experience. Knowledge-based authentication (KBA) does not work for customers with thin credit files, such as immigrants or millennials, who may be forced to visit the branch to authenticate but often choose instead to simply abandon the account opening process. That is an enormous problem for institutions as they enhance their digital channels particularly mobile to meet the needs of their digitalfirst customer base.

4 4 EXECUTIVE SUMMARY Digital account opening is flourishing, with digital channels being the most popular way for customers to open credit, savings, and checking accounts in Mobile account opening, despite being offered by only one-third of the largest FIs, is fueling a significant and growing proportion of digital applications. Mobile millennials lead the digital charge, but dynamic KBA is getting in the way. This segment of consumers uses smart devices to open checking accounts at 1.5 times the rate of older generations (27% vs. 19%). Unfortunately, these digitalfirst consumers also have thin credit files that often prevent their identities from being successfully verified as part of a digital account opening flow. DAO is attractive to criminals, too, offering the same remote convenience given to legitimate customers, along with increased anonymity and scalability. This and other factors (e.g., data breaches, use of synthetic identity, stolen credentials) fueled a jump in new account fraud of 63% in Ineffective identity verification tools drive application abandonment. Of the 36% of checking account applications started through mobile browsers or apps in 2016, more than half were completed in other channels many by necessity, not by choice. Many millennials, immigrants, and divorcees had thin or recently changed credit files that precluded successful identity verification in digital channels with dynamic KBA systems. Only a small percentage of such customers complete their applications when driven from digital to another channel to verify their identity. Each FI needs bespoke identity verification processes to meet the needs of its specific customer populations, but all must address the three pillars of successful digital account opening: customer experience, regulatory compliance, and evolving fraud risks. Tools such as static or dynamic KBA, IP geolocation, and device recognition play a vital role in preventing fraud but have a blind spot for certain customers.

5 5 Recommendations Support end-to-end digital account opening to serve the growing ranks of digitalfirst banking customers through their preferred channels. Provider support of online and mobile account opening is growing quickly the percentage of top FIs offering mobile account opening doubled year-over-year to 33% in But so, too, are problems when digital channel identity verification fails, sending applicants offline and generating high abandonment rates and negative customer perceptions. Broaden digital financial inclusion by ditching KBA. Three in four millennials primarily use digital channels to manage their checking accounts, but the majority are unable to complete the account opening process in the same digital channel. By adopting mobile-oriented tools such as biometrics, device recognition, and image capture, FIs can create a successful digital account opening flow for immigrants, divorcees, and young customers whose credit profiles confound existing identity verification processes.

6 6 DIGITAL ACCOUNT OPENING BOOMS Banking customers are increasingly turning to digital channels instead of the branch when looking to open new accounts. In 2016, mobile and online channels were, combined, the most popular method for customers to open credit card, checking, and savings accounts (See Figure 1). The shift has occurred rapidly; for example, in 2014, only 12% of consumers used digital channels to open a checking account a proportion that has since grown to 72%. While consumers still prefer the online channel over mobile for new account opening, this is partially a function of demand far outstripping supply only onethird of the top 30 FIs support end-to-end account opening through mobile devices. 1 And much of today s so-called mobile account opening takes place not through native mobile apps but through an institution s responsive web pages. As mobile account opening services become mainstream, providers may unlock serious pent-up demand by providing better integrated, more intuitive mobile flows. Digital Account Opening Is Most Popular for Credit, Savings, and Checking Figure 1: Channels Used to Apply for Financial Products Over Past Year, 2016 Major credit card Checking account Savings account 51% 48% 47% 45% 38% 32% 27% 21% 14% 9% 22% 11% 8% 14% 7% Source: Javelin Strategy & Research, 2016 Young customers in particular are leading the charge with digital account opening. Despite the lack of widespread mobile account opening among top providers, nearly 3 in 10 millennials in 2016 applied for a checking account through a mobile device 1.5 times the rate of older generations (27% vs. 19%). Unfortunately, millennials and other thin-file customers such as immigrants are especially difficult to positively identify digitally using KBA.

7 7 NEW ACCOUNT FRAUD THRIVES IN THE DIGITAL AGE In the face of mounting pressure to expand support for end-to-end digital account opening, financial institutions must tread carefully when weighing their options. While meeting customer expectations, DAO can also offer increased anonymity, convenience, and scalability to criminals perpetrating new account fraud. NAF is challenging FIs on multiple fronts, not only with the $2,379 stolen per victim, on average, but with the resultant fallout in customer perceptions, as well (See Figure 2). Nearly 1 in 4 NAF victims believes that their primary FI is powerless to prevent fraud on their behalf much higher than consumers overall, at 15%. This type of fraud is growing at a troubling rate the number of NAF victims doubled between 2014 and 2015 to reach 1.5 million Americans. 2 NAF was the fastest-growing fraud type in 2015 and has become the most damaging by loss per incidence. 3 In the U.S., FIs were left footing the bill for $3 billion in NAF losses. New Account Fraud Is Particularly Damaging to FIs Figure 2: New Account Fraud Metrics Average Fraud Losses by Fraud Type $2,379 $1,747 $1,424 $1,065 $980 New Account Fraud Existing Non-Card Fraud Account Takeover Existing Account Fraud Existing Card Fraud 24% of NAF victims believe that their primary FI cannot protect them from fraud loss, far above the rate for all consumers (15%) Source: Javelin Strategy & Research, 2016

8 8 Beyond the aforementioned appeal of digital platforms to fraudsters (convenience, anonymity, automation), a number of additional factors will continue to drive new account fraud through digital channels. Data breaches: Breaches of persistent identifiers, such as Social Security numbers, can continue to drive fraud for years after the initial incident. The NAF rate for consumers who had their SSN compromised was 3.3%, more than five times that of all consumers at 0.6%. 4 The EMV effect: With EMV suppressing fraud at the physical point of sale, fraud rings are shifting focus to NAF. Once fraudulent new accounts have been opened, criminals can mimic perfect behavior to raise credit limits over long time periods. Synthetic identity-driven fraud: The rising use of names, SSNs, and DOBs where the SSN is not clearly tied to a known individual is difficult to detect and costly to FIs. Young consumers with thin credit files, such as minors, are particularly susceptible as they have limited or no information in the major credit bureaus to raise red flags. More than 1 in 4 NAF victims is years old. Stolen digital banking credentials: FIs have reported that fraudsters are circumventing the requirement for personally identifiable information (PII) or existing account information by authenticating using stolen credentials from an existing account when fraudulently applying for new accounts. This growing threat blurs the boundary between account takeover fraud and NAF.

9 9 WHEN DIGITAL ACCOUNT OPENING FALLS SHORT Too often, the customer experience of digital account opening is sacrificed for the sake of strong fraud mitigation and regulatory compliance. Whether to enforce customer identification programs (CIP) or as part of an overall fraud mitigation process, institutions are reporting that up to half of digital applicants are being pushed offline to verify their identities or to submit additional required documentation. 5 If they visit a branch to follow up, these applicants are often asked to begin the application process again for the sake of expediency, to meet branch account quotas, or simply because the institution lacks a means of accessing applications begun in another channel. These issues are leading to high customer abandonment through digital account opening flows. Among all consumers, 36% used a mobile device to begin the checking account opening process, but nearly half of those customers were forced to a different channel to finish the application (See Figure 3). Because millennials used mobile for account opening at higher rates, a greater proportion had to abandon their preferred channel. Many customers whose identities are impossible to verify through KBA, such as young customers or divorcees, are asked to submit documentation through mail or in person a hurdle that results, one bank executive noted, in a minuscule number of completed applications. Despite being highly attracted to digital account opening, millennial customers are least effectively served through digital identity verification flows. Lack of sufficient credit history means that many young customers cannot be positively identified in the mobile channel with dynamic KBA. For example, prospects still living with their parents cannot be asked if they lived at a specific address at a point in their life, as this information often does not exist in their credit file. As a result, nearly half of millennial mobile checking account applicants either abandon or are forced out of the digital channel where they began the process (See Figure 3).

10 10 Mobile Account Opening Falloff Rates Higher for Millennials Figure 3: Mobile Account Opening Application Initiation vs. Completion Millennials 22% 18% 40% Finished application in mobile All consumers 20% 16% 36% Abandoned mobile channel 0% 10% 20% 30% 40% 50% Percent of checking account applicants Source: Javelin Strategy & Research, 2016 FIs must skillfully combine multiple tools to meet regulatory, security, and experiential imperatives. The age-old security-vs.-convenience conundrum is constantly in play for example, high-friction identity verification options such as forcing a customer to the branch may increase security, but at a heightened risk of abandonment. Static KBA Pro: Easy for users to remember Con: Simple for fraudsters to compromise or guess across sites IP geolocation Pro: Low customer friction Con: Can lead to false positives Con: Fails to protect against in-house familiar fraud Device recognition Pro: Low customer friction Con: Often ineffective for young consumers still using a parent s cellphone plan Dynamic KBA Pro: Simple to implement Con: Effective questions run risk of increasing false positives or coming across as intrusive Con: Ineffective for customers with thin, or no, credit file In-person verification Pro: Effective in verifying identity Con: Negates customer experience benefit of digital account opening Con: High cost Personal information verification Pro: Medium friction Con: Less effective in wake of data breaches

11 11 Using Documents Scanning to Protect Customers and Enhance Experience Document scanning solutions can enhance the account opening flow by autofilling portions of the application with customers captured data and verifying the authenticity of a government-issued identity document, while also deterring fraud and meeting compliance mandates. Image captures avoid false positive failures by analyzing the document image to verify its authenticity and meets compliance mandates by collecting required user information. This addresses the convenience vs. risk conundrum with a simple, easy user experience, and sophisticated authenticity meets the requirements for compliance and protection against fraudsters attempting to perpetrate NAF or account takeover fraud. Legislation with bipartisan support has recently been introduced that would permit FIs to deploy image capture verification uniformly across the country. The Making Online Banking Initiation Legal and Easy (MOBILE) Act was introduced to give populations without easy access to bank branches the ability to easily open new accounts. 6 The primary beneficiary, should the act be passed, will undoubtedly be banks digital account opening flows; others who will benefit include payments providers who must meet ever more stringent anti-money laundering (AML) requirements and the millions of digital-first applicants who might otherwise be forced offline. Image capture can be deployed through mobile apps or browsers or even triggered on PC users smartphones via text message meeting the needs of both online and mobile applicants. Some image capture solutions take security a step further by comparing the captured ID image with the applicant s face using the mobile device s camera. This selfie authentication, as it is often called, mimics the branch process in which a bank employee confirms that the applicant matches the photo on the driver s license presented.

12 12 The most important impact of document scanning for banks is likely to be growth in digital account opening among high-value consumers such as millennials. By 2025, millennials will become the highest-earning generation in the U.S. FIs with digital account opening solutions that fail to positively identify young customers, such as dynamic KBA alone, will continue to pay the price as this generation s earning power grows.

13 13 METHODOLOGY Consumer data in this report is based on information collected in random-sample panel surveys of: 10,639 consumers in a May 2016 survey. The margin of sampling error is ±0.95 percentage point for questions answered by all respondents. 5,111 consumers in an October/November 2015 survey. The margin of sampling error is ±1.37 percentage points for questions answered by all respondents. Executive qualitative interviews were also conducted with senior digital banking and fraud and security executives to obtain their perspective on digital account opening. Five interviews were completed with bank executives at large national and regional FIs.

14 14 ENDNOTES Mobile Banking Financial Institution Scorecard: Mobile Becomes the Remote Control for Banking, Javelin, May Mitigating Application Fraud from Synthetic Identities, Javelin, April Identity Fraud: Fraud Hits an Inflection Point, Javelin, February Data Breach Fraud Impact Report, Javelin, June Interview, digital banking executive published Oct. 24, 2016; accessed Oct. 31, 2016.

15 15 ABOUT JAVELIN Javelin Strategy & Research, a Greenwich Associates LLC company, is a researchbased consulting firm that advises its clients to make smarter business decisions in a digital financial world. Our analysts offer unbiased, actionable insights and unearth opportunities that help financial institutions, government entities, payment companies, merchants, and other technology providers sustainably increase profits. Authors: Al Pascual, Senior Vice President, Research Director and Head of Fraud & Security Emmett Higdon, Director of Mobile Daniel Van Dyke, Analyst Publication Date: November 2016 ABOUT MITEK Mitek (MITK) is a global leader in mobile capture and identity verification software solutions. Mitek s ID document verification and facial recognition allows an enterprise to verify a user s identity during a mobile transaction, enabling financial institutions, payments companies and other businesses operating in highly regulated markets to transact business safely while increasing revenue from the mobile channel. Mitek also reduces the friction in the mobile user experience with advanced data prefill. These innovative mobile solutions are embedded into the apps of more than 5,000 organizations and used by tens of millions of consumers for new account opening, insurance quoting, mobile check deposit and more. Learn more at GA Javelin LLC is a Greenwich Associates LLC company. All rights reserved. No portion of these materials may be copied, reproduced, distributed or transmitted, electronically or otherwise, to external parties or publicly without the permission of Greenwich Associates, LLC. GA Javelin may also have rights in certain other marks used in these materials.