SMS verification, which is essentially an SMS OTP, or one-time password code sent to a phone as a security measure, has changed the game in authentication forever. The unique code sent via SMS makes login simple and hassle-free, especially for users returning after a long time or re-verifying their account. In case there’s a breach or a stolen password, SMS verification can require both standard credentials and actual access to your phone.
What’s more, SMS verification can add an extra layer of protection in Know Your Customer (KYC) compliance for high-risk industries, such as banking, where new users need to be properly verified during the account opening process. This means the first step in the user onboarding workflow is SMS verification, followed by the standard ID document check and biometric verification.
Curious how SMS verification actually looks in practice and the steps needed for a fully compliant KYC identity verification check? Keep reading the blog.
What is SMS Verification?
SMS verification, also referred to as SMS-based two-factor authentication (2FA), or SMS one-time password (OTP), is a popular security measure used to remotely verify and authenticate users when they’re accessing their account online, for example, a bank app or an e-commerce marketplace. This process is designed to verify and confirm a user’s identity with an added layer of security because it requires not one but at least a few identifying data points about the user.
How Does SMS Verification Work?
The SMS verification process typically follows these steps from the end-user’s side:
- The user is asked to enter their username and password, as well as provide their phone number.
- They then receive an SMS containing a verification code on their mobile device.
- The user enters the unique code and completes the login process.
If the user enters the wrong code, they will typically need to request a new one to complete the verification process. Some sites can add limits on how many OTPs can be generated within a certain time frame for security reasons. This ensures that bots or bad actors trying to bypass the system aren’t welcomed.
Why is SMS Verification Important?
While this step might seem to be a minor detail, it solves a lot of issues for businesses. For example, most social media platforms or online marketplaces, as well as iGaming sites, don’t allow multiple accounts using the same credentials. Verifying numbers means that you won’t be able to add the same number and link it to numerous profiles.
Ultimately, SMS verification is vital because it creates a:
- More secure user onboarding flow
- Seamless user experience with a familiar verification method (due to the wide adoption of OTPs and 2FA)
- Fully compliant KYC verification process (when paired with other KYC methods)
This reduces the risk of identity theft and fraud in general, and, from the business perspective, increases security and reduces losses, for example, linked to bonus abuse, where free promotional discounts (intended only for new users) or credits are used over and over again as a way to cheat the system.
Related: How Fraudsters Continue to Succeed with Multi-Accounting
3 Examples of KYC Onboarding Solutions You Can Pair With SMS Verification
There are a few identity verification types that can be used to build a strong KYC onboarding process. While stricter KYC measures aren’t mandatory in all sectors, due to increasing fraud risks and money laundering activities, more and more businesses are adopting at least some sort of verification at the initial registration stage.
When SMS verification is used as the initial step, companies often use it with additional ID verification methods for KYC compliance, such as:
1. Government-Issued ID Document Check
This is a classical method in many industries, as it is highly effective and accurate, because:
- Compared to other KYC methods, ID document check is considered a reliable method to onboard customers because such documents are more difficult to forge.
- Most people have government-issued ID documents, such as a passport, on them, making it a convenient way to create a new account and verify their identity at sign-up.
ID checks can also be tailored depending on the industry. For example, a car-sharing app can only accept driver’s licenses from a certain region if needed. In the meantime, an online alcoholic beverage store can ask for ID documentation before checkout and ensure a compliant age verification process online. For example, iDenfy offers a no-code identity verification solution designed for Shopify merchants, enabling them to integrate ID document checks into their e-commerce platforms without the need for complex development or technical integrations.
2. Biometric Verification
Biometric technology in KYC helps ensure the person who’s completing the check in real-time is legitimate by scanning their facial features, often after a document check, to ensure that their face matches the photo on the ID. This helps check if the person who has the physical document is actually the owner of the ID and is alive and present in order to access their account.
While biometric verification can be used alone for cases like age estimation (when you need to confirm that the person is of a certain age based on how old their face looks), it’s often more effective paired with other KYC measures, including SMS verification. In general, this method is considered user-friendly and efficient since the user isn’t required to manually input any of their personal details.
3. Database Verification
Database verification involves cross-checking a user’s personal details, such as name, date of birth, address, or identification number, against authoritative databases, which are often government registries holding personal information, such as Social Security Numbers (SSNs). This KYC option is often used alongside SMS verification to improve customer onboarding.
For example, these databases can include:
- Tax authorities
- Utility service providers (often used for address verification)
- Motor vehicle administrations (for example, AAMVA verification supports checks against state-issued driver’s licenses)
- National, state, and local government records (such as court records for a criminal background check)
- Private institutions like credit bureaus (for assessing the user’s financial health or as part of the bank account verification process)
Database verification can also be used without physical ID card verification, which is why it can sometimes belong to the “non-doc” verification type group. This measure helps deconstruct inconsistencies or mismatches when the user’s user-provided onboarding data doesn’t match a few or a single database used, depending on your chosen KYC workflow. Combined with SMS-based OTP verification, database verification ensures higher accuracy rates, improving onboarding and risk assessment strategies.
Are There Any Known Limitations Linked to SMS Verification Services?
Yes. Like many solutions, SMS verification, especially if used as a standalone verification measure, can be targeted by fraudsters, making it not a foolproof method. Common fraudulent schemes like phishing or SIM swapping can be used to attempt to bypass 2FA with SMS verification. From the user experience perspective, SMS verification can create limitations if no alternative sign-in methods are available.
For example, users traveling without an active SIM or access to their phone might be unable to log in, leading to frustration and potential account access issues. This happens when the user’s IP address shows a “suspicious” login attempt from another country. To solve this problem, service providers like iDenfy offer email verification, which works in the same manner but sends the OTP to the user’s email address.
Why Extra Fraud Prevention Measures are Necessary
If one security layer fails, the other will prevent the bad actor from breaching or taking over another person’s account. For this reason, businesses need to be aware of all emerging fraud tactics, monitor their users, and be prepared to adapt. For example, with SIM swapping, hackers can take control of a user’s phone number and receive incoming texts, including OTPs that can give them access to another account.
That’s why many businesses use other fraud prevention measures on top, even after the initial account setup stage, and monitor red flags, such as suspicious transactions if the platform is monetized or unusual sign-ins from high-risk locations, among other common signs that can trigger mandatory reverification. This means the user will then need to provide extra proof to access the account and SMS verification won’t be enough.
For example, Trust & Safety teams can lock and block an account on an online marketplace if they notice suspicious activity. This helps prevent account takeover attacks and unauthorized charges. If the rightful owner of the account wants to access their account, they can be asked to provide Proof of Address (PoA), which can be a utility bill with their onboarding data on it (full name, date and address). If it matches their profile and registered personal details, they can regain access to their account.
Related: The Best Fraud Prevention Solutions
Can I Customize the SMS Verification Process?
Yes. Often, companies need to tailor their customer onboarding processes based on their internal security standards and risk assessment practices. This means businesses must comply with regulatory requirements when designing their identity verification processes, including KYC, Anti-Money Laundering (AML), and Know Your Business (KYB) obligations, as well as other industry-specific rules. For example, in crypto, users are often required to provide proof of address when opening a wallet.
So, a typical, more restricted identity verification workflow with OTP authentication in such an industry would look like this:
- SMS verification
- ID document upload
- Proof of Address or Proof of Income (if applicable)
- Biometric authentication
Often, not all customers go through the same process, as it depends on their risk profile and the risk they pose. High-risk customers might go through all four steps, while low-risk customers can be asked to complete only the SMS verification or a combination of this measure with a biometric check via eID, or an electronic identity verification workflow. So, all businesses need to customize the identity verification process to avoid unnecessary friction in their KYC workflow, but still use the multi-layered approach to ensure security. This helps improve conversions and instantly prevents bypassing attempts.
Related: Top Five Identity Verification Measures
Who Uses SMS Verification?
Both regulated businesses that need to comply with KYC and AML laws and unregulated sectors use SMS verification as part of their user onboarding and AML fraud prevention frameworks. In high-risk regulated sectors, SMS verification is paired with other security measures, while low-risk industries that don’t have the same strict compliance requirements can implement this measure as the only authentication solution in their user onboarding workflow.
Companies that use SMS verification (next to other KYC measures) include:
- Banks and credit unions
- Payment service providers (PSPs) and fintechs
- Money services businesses (MSBs)
- Insurance and investment firms
- Securities brokers
- Lending institutions
- Virtual asset service providers (VASPs) (like crypto exchanges or wallet service providers)
- Online casinos and iGaming establishments
- Sports betting operators and lottery service providers
- Real estate firms
- Notaries
- Independent legal advisors
- Accountants, auditors, and tax advisors
- Luxury goods dealers and auction houses (for example, art, diamonds, yachts, watches, etc.)
Users who are asked to enter the SMS OTP sent to their mobile device aren’t pushed back by this security measure since it has become a staple in many online services. By requiring a one-time passcode delivered to a verified phone number, various industries can benefit from this measure by reducing the risk of multiple accounts, fraudulent numbers used for crime and unauthorized transactions, account takeovers, fake accounts, replica sellers on marketplaces, accounts created just for phishing and impersonation, spam and bots, etc.
What are the Key Benefits of SMS Verification?
While SMS verification might seem like a minor detail, it improves fraud prevention and ensures that bad actors can’t access and abuse your services for their own benefit. So, by requiring both an ID, for example, and an OTP, the user’s mobile device and their personal details are verified.
Ultimately, the main benefits of SMS verification can be broken down into three aspects:
- Convenience. Users can seamlessly go through the process in seconds, and most of them have gone through SMS verification at some point, as it’s a popular and familiar security measure.
- Security. Compared to basic credential-based authentication, SMS verification with OTPs provides better fraud prevention capabilities. It helps prevent unauthorized transactions and reduces fraud risks without putting more pressure on the user to complete multiple steps or security checks.
- Price. Many fraud prevention measures are relatively expensive; however, SMS verification APIs are cost-effective and often don’t require additional applications or complex integration, which doesn’t slow down internal teams’ business efforts.
Related: Top 3 KYC Automation Benefits for Businesses
Why Should I Choose iDenfy’s SMS Verification?
Our fully automated SMS verification is designed to ensure compliance with KYC and KYB requirements and detect fraud at the very first step of the user onboarding process. From the end-user’s perspective, they are asked to:
- Choose their country
- Enter their phone number
Then, after receiving the four-digit OTP via SMS, enter it and move on to the next ID verification step, depending on your created custom workflow (all three methods, such as document, biometric and database checks, are supported) for both other companies (and their UBOs, for example, during KYB onboarding) and individual clients.
Implementing iDenfy’s solution is a good idea if you want:
To Prevent Fraudulent Accounts at Onboarding
Stop bots, spammers, and individuals providing false information from accessing your services. SMS verification ensures that only verified, real users progress through your onboarding, helping your business meet KYC/KYB and AML compliance requirements.
To Increase Approval Rates for Legitimate Users
By using an automated system for generating unique one-time passcodes (OTPs), SMS verification simplifies the verification process, reducing friction for genuine customers. This improves first-time approval rates while maintaining regulatory standards for identity verification and fraud prevention.
To Enable Layered Fraud Prevention Checks
Beyond SMS verification, you can easily integrate additional fraud prevention measures such as address verification, bank account verification, sanctions screening, adverse media screening, and other KYC/KYB tools. This multi-layered approach strengthens your compliance framework and reduces exposure to financial crime and non-compliance fines. iDenfy also takes care of KYC data and keeps a compliant data log, suitable for SAR submission and audit-ready report generation.
Want to learn more about SMS verification and iDenfy’s RegTech solutions? Book a free call, and we’ll help you choose the right elements for a compliant yet custom user onboarding workflow.
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