Who is FINMA and why does the latest revision matter?
FINMA is Switzerland’s market supervisory authority and is responsible for the financial regulation of the country’s banks, insurance companies, stock exchanges and other financial intermediaries.
Up for revision is FINMA’s Circular 2016/7 “Video and online identification”, which was drafted with the standing motion to be regularly reviewed and updated. The revisions under consideration aim to further simplify digital onboarding procedures for the Swiss banking industry whilst maintaining the same or a higher security standard.
Because FINMA is revising its due diligence requirements for video and online identity verification, this provides a new opportunity to use technologies such as NFC. The proposed revisions to the FINMA Circular, dated November 16th, 2020, have been written to take advantage of recent technological developments in biometric technologies. The revisions are currently in the consultation period until February 1st, 2021 and are expected to enter into force by mid-2021.
FINMA’s “Circular 2016/7 Video and online identification”
The original FINMA “Circular 2016/7 Video and online identification” provided financial intermediaries with 2 possible ways to onboard customers digitally. First, for “Video Identification”, they assigned equal validity to real-time video identification as they did for in-person identification. This especially permitted startup fintech companies to ramp up their offerings by allowing them to conduct Know Your Customer (KYC) due diligence via live video feed. This process, however, is still quite expensive, not available 24/7, and still quite cumbersome, as many do not feel comfortable holding a live video call with an unknown agent, being asked all kinds of personal questions.
Second, for “Online Identification”, the Circular also allowed for a completely machine-based identity verification, with a lot of room for interpretation when it comes to the detailed requirements. But this process would still require customers to perform trial or micro deposits (small money transfers) from an existing bank account to the new account to assist in linking the new customer to their identity. This process is time consuming, often taking several days for the transactions to clear and also required agents or extra processes to send and confirm the transactions. Also, many potential customers may not have a bank account to start with, thus not qualifying for this kind of account opening.
FINMA’s Circular 2016/7 Revisions
The revisions to FINMA’s Circular 2016/7 aim at permitting financial intermediaries to forego this time consuming and costly micro deposit process – provided that they are able to scan and decipher the client’s NFC biometric passport chip. NFC biometric chip validation today provides the highest possible degree of security in mobile identity document verification.
“For this purpose, clients scan their biometric passport chip with a smartphone app and transmit their personal data and photo (but no other biometric data) to the financial intermediary.”
– FINMA Circular 2016/7 “Video and online identification” – partial revision, 16 November 2020
While this is great news for the Swiss banking industry as it allows further automation of the identification process, we believe that it does not go far enough, as it does not reflect the expectations of the industry.
4 reasons why the FINMA revision is better for the Swiss Banking Industry:
1. Verification via microdeposits is time consuming
Financial institutions have been using micro deposits to validate ownership of linked accounts for a long time but the process has a serious flaw. Namely, that it can take up to five business days for the transaction to clear.
In a world where consumers expect online services to be instant, five days is simply too long. People are simply not willing to wait for services, particularly when there is an abundance of substitute services available. Delays of any sort are directly associated with customers abandoning online processes, from shopping cart abandonment to setting up online accounts. The revision will ensure this frustrating and time-consuming part of the onboarding process is finally streamlined using technology.
2. Provides an additional option for online identification
The more, the merrier when it comes to options – adding flexibility to businesses and customers alike. When approved, the revisions will provide an additional option, in that it allows financial intermediaries to forego the micro deposit process, provided that they are equipped to scan and extract info from NFC chips. These days, most countries are using biometric chips in their passports. Swiss citizens certainly are, as they are members of the Schengen area where biometric passports are now a requirement for all newly issued documents. The micro deposit option will still be an option for situations where it might be preferred.
3. Highest security in document verification
Biometric passport NFC chips are considered by most governments to be extremely secure. The realization that paper-based passports could be easily altered or falsified drove a worldwide move to electronic passports (ePassports).
The large number of lost or stolen passports across the globe led to a huge pool of paper-based passports easily purchasable on the darknet by counterfeiters and other malicious actors.
4. Improves scaling
Alongside greater security, another advantage of biometric passports is speed. According to the FINMA Circular, financial intermediaries should be enabled to automate their identification processes in order to improve their scaling while maintaining at least the same security level.
To get an idea of how quickly biometric data can be extracted and processed from a passport, visit a major international airport with ePassport gates. Provided that there are not any other running problems and that you are not a wanted terrorist, entry is usually granted in seconds.
Why the FINMA Revision doesn’t go far enough
While the Revision is a great first step by the Swiss financial regulator and is certainly headed in the right direction in terms of technology, it still falls behind what is desired. A number of financial intermediaries and banking associations working in the Swiss financial industry, who had pushed for a revision of Circular 2016/7 in the first place, were asking for a fully automated process, and are rather disappointed with the current draft of FINMA.
Today’s technology in document verification, liveness detection and face verification, is at least as secure if not more secure than human verification, whether in-person or through live-video verification. There are numerous well-established studies proving this for face verification – it’s clear that human operators cannot perform with the same security, reliability and accuracy as facial-verification software.
Furthermore, documents containing an NFC chip are not yet distributed en masse. While it may be true that most people have an international passport with NFC capabilities, these documents are not primary documents in that people do not carry them around all the time. Thus, NFC support is not yet scalable across the masses.
FINMA will accept public statements until 1 February, 2021 and, based on the responses, will decide whether to revisit the proposal in the Circular or move forward with it.