Future trends in identity verification on marketplaces and the role of PSPs

Marketplaces play a central role in the digital economy, connecting buyers and sellers on a massive scale. However, with this expansion comes greater stringency of regulatory frameworks, particularly concerning identity verification. The fight against fraud, compliance with anti-money laundering, and assurance of transaction security, places a high demand on marketplaces.

In this evolving landscape, payment service providers (PSPs) are pivotal in delivering effective and compliant identity verification solutions.

How are regulatory and technological advancements shaping the future of identity verification on marketplaces? How are PSPs contributing to a more secure and seamless environment? Here’s what you need to know.

Current and future trends in merchant identity verification

An increasingly strict regulatory landscape

Several legislative developments have reinforced the obligation to identify and report sellers:

• AML6 (Sixth Anti-Money Laundering Directive): This directive mandates enhanced seller identification processes and requires marketplaces to report suspicious activities to authorities. It also broadens the scope of crimes classified under money laundering.
• DAC7 (Seventh Directive on Fiscal Transparency): Effective 2023, this regulation requires marketplaces to collect, verify, and report seller transaction data to European tax authorities.
• Digital Services Act (DSA): This regulation enforces new transparency and traceability obligations, compelling marketplaces to verify the identities of professional users and report illicit activities.
• MiCA (Markets in Crypto-Assets Regulation): While primarily focused on crypto assets, this regulation also affects alternative finance marketplaces by imposing strict identity verification and transaction tracking standards.

To prevent circumvention and ensure consistency, Europe is moving towards common identity verification standards, establishing a harmonised approach across member states.

Automation and AI transforming KYC and KYB processes

Technological advancements are revolutionising identity verification through automation in Know Your Customer (KYC) and Know Your Business (KYB) procedures:

• Automated Document Verification: AI-driven systems leverage optical character recognition (OCR) and facial recognition to analyse and validate identification documents within seconds.
• Advanced KYB Verification: PSPs and marketplaces utilise automated systems to verify companies and their Ultimate Beneficial Owners (UBOs) by cross-referencing data from official registries.
• Proactive Fraud Detection: AI-powered systems detect document inconsistencies, image manipulations, and identity theft attempts.
• Enhanced User Experience: Automation reduces seller onboarding times, enabling near-instant identity verification compared to traditional manual checks.

The rise of certified digital identities

Europe is accelerating the development of standardised digital identity solutions, aiming to simplify seller verification while ensuring data control:

• eIDAS 2.0: This reform will introduce a European digital identity wallet, allowing sellers to authenticate themselves through a single, universally recognised solution.
• Self-Sovereign Identity (SSI): SSI solutions enable users to manage their identity credentials independently without relying on centralised authorities.
• Pilot Initiatives: Various countries are testing digital identity wallets, potentially impacting PSPs' KYC/KYB verification processes.

Biometrics: a secure alternative to traditional ID documents

Biometric technology is emerging as a reliable and seamless method for identity verification on marketplaces:

• Facial Recognition and Fingerprints: These technologies enable real-time authentication without requiring users to submit physical documents.
• Compliance with Data Protection Laws: Adherence to the General Data Protection Regulation (GDPR) and the AI Act is crucial to regulating biometric applications and mitigating misuse risks.
• Privacy Considerations: Despite its advantages, biometric adoption raises concerns regarding user consent and the security of sensitive data.

As these innovations and regulations continue to evolve, the standards for identity verification on marketplaces will be redefined. PSPs are at the forefront of this transition, ensuring compliance, security, and frictionless experiences.

The role of PSPs in the evolution of identity verification

Increasing compliance responsibilities

PSPs serve as key enforcers of KYC and AML regulations, ensuring adherence to regulatory requirements:

• Vendor Compliance Assurance: PSPs must collect and verify vendor information before approving payment account creation. This includes identity document validation, KYB corporate structure verification, and UBO authentication.
• Regulatory Cooperation: Given the increasing regulatory stringency (AML6, DAC7, MiCA), PSPs work closely with authorities to ensure transparency and report suspicious transactions.
• Verification Processes Standardisation: By streamlining KYC/KYB procedures, PSPs simplify seller integration across multiple marketplaces while maintaining consistent compliance.

Towards a shared KYC model for marketplaces and PSPs?

Each marketplace conducts separate KYC checks, leading to duplicated efforts and extended onboarding times for multi-platform sellers. A more centralised verification approach could yield several advantages:

• PSPs as Trusted Verification Hubs: By consolidating validated KYC data, PSPs could enable sellers to authenticate only once, reducing the need for repetitive verification across different marketplaces.
• Data Protection Compliance: Any shared KYC model must fully comply with GDPR and related data privacy regulations to protect sensitive user information.
• Challenges and Opportunities: While this approach could enhance efficiency and lower costs for marketplaces, challenges remain regarding interoperability and liability management in cases of fraudulent activity
   

At Lemonway, we specialise in providing marketplace and platform onboarding solutions that adhere to European regulatory standards. Our expertise enables secure payment processing and seamless merchant integration while ensuring compliance with evolving regulations.

Looking to optimise your identity verification process? Contact our experts today!