Digital identity fraud is a growing threat, with the U.S. economy suffering over $52 billion in fraud-related losses in 2021 alone [1]. Peer-to-Peer (P2P) payment fraud rose by over 100% year-over-year, with account takeovers and P2P payments fraud also recording double-digit growth. As online transactions and remote interactions become increasingly commonplace, the need for robust identity verification solutions has never been greater.
The ID verification market has seen significant growth, with a diverse array of well-funded independent players vying for market share. Over 20 companies including Veriff, Trulioo, Socure, Advance AI, and Prove have raised over $100 million to date, underscoring the intense competition that significant capital has attracted into the space. Companies typically aggregate data from multiple sources, including biometrics, official documents, credit reports, social media, and geolocation, to deliver a comprehensive 360-degree view of potential customers, partners, and employees.
Growing Demand for ID Verification Systems
The growth in demand for ID verification systems can be attributed to several factors. Firstly, the rise of online fraud and identity theft has made it imperative for businesses to adopt stringent measures to safeguard their operations and protect their customers’ sensitive information. Secondly, regulatory requirements, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, have become more stringent, compelling organisations to implement effective identity verification processes to ensure compliance. The COVID-19 pandemic has accelerated the shift towards digital services, remote work, and online transactions, further emphasising the need for reliable and efficient ID verification solutions. As a result, the ID verification systems market is experiencing significant growth, with businesses investing in advanced technologies like biometrics, artificial intelligence, and blockchain to enhance the accuracy and security of their identity verification processes.
Key challenges
The market faces several challenges that hinder its growth and effectiveness. One of the primary issues is the lack of standardisation across different countries and regions, with each nation having its own unique identification documents, making it challenging for businesses to implement universal verification processes. Additionally, the ever-evolving landscape of fraudulent activities, such as deepfakes and synthetic identities, constantly challenges the effectiveness of ID verification systems.
Data privacy and security concerns also pose significant challenges to the market. Businesses must comply with stringent data protection regulations, such as GDPR and CCPA, and ensure robust security measures to protect sensitive user information from breaches and cyber-attacks. Moreover, balancing the need for thorough identity verification with a seamless and user-friendly experience is crucial for encouraging user adoption and reducing abandonment rates.
The cost of implementing and maintaining ID verification systems can also be a significant barrier, particularly for small and medium-sized enterprises. The development, integration, and ongoing maintenance of these systems require substantial financial investments, which may lead to a competitive disadvantage for businesses with limited resources.
Addressing these challenges requires collaboration between governments, businesses, and technology providers to develop innovative solutions that can effectively combat fraud while ensuring user privacy and convenience.
Consolidation and specialisation
The digital identity verification space has seen a proliferation of midsized players, with over 50 companies that have raised between $10 million to $100 million to date. This highly competitive landscape has given rise to two distinct types of players: those focusing on specific verticals and those adopting a broader approach, resembling scaled-down versions of established strategics in the space. For example, companies like SentiLink, Early Warning, and Unit21 have carved out a niche by leveraging AI and multiple data sources to assess the risk of new account applications, provide ID verification, evaluate new account risk, and offer payment verification services to financial institutions.
Beyond financial services, other vertical-focused players have emerged, such as Safely for the short-term rental and travel sectors, with FullContact and SheerID targeting advertising and marketing solutions.
Conversely, some companies, including Sumsub and iProov, and Evident have taken a broader approach more closely resembling incumbents, each providing user verification capabilities across a range of industries, from healthcare to gaming.
The crowded nature of this market has led to increased consolidation efforts with over 50 acquisitions since 2021. The pending acquisition of Sterling by First Advantage for over $2bn is the latest transformative deal that signals the consolidation is far from over. In the coming years, we anticipate players from both within the digital ID verification space and adjacent sectors to pursue strategic M&A in the sector.
Inorganic growth from incumbents expected to continue
The digital identity verification landscape is populated by several well-funded incumbents and a set of companies that have scaled to an attractive size, creating opportunities for rapid consolidation as larger companies seek to expand their capabilities and market share.
A key driver of this M&A activity is the need to navigate complex regulatory environments across different geographies, as acquiring a target with extensive local knowledge can be more effective than pursuing organic expansion. Sterling’s acquisitions of RISQ in 2016 and Blue Umbrella in 2021 exemplify this tactic, deepening the company’s presence in the Asia-Pacific region.
Beyond geographic expansion, buyers are also focused on acquiring companies as a means of expanding their client bases such as First Advantage’s $2 billion-plus acquisition of Sterling and Chekr’s acquisition of Inflection to strengthen its presence amongst SMEs.
Large identity verification providers are also actively acquiring companies with differentiated technologies and functionalities. For example, TrustMatic’s acquisition of Certn in 2023 was driven by the target’s industry-leading capabilities in automating document authentication, face liveness detection, and biometrics, while LexisNexis’ acquisition of BehavioSec aimed to benefit from the latter’s unique advanced behavioural biometrics technology.
Interest from outside the ID verification space
The importance of ID verification to strategics whose core product is not necessarily ID-related is another key driver for M&A in the coming years. In several industries, a proprietary, in-house ID verification scheme can improve user experience by providing added security or extending functionality of the platform. Tinder’s recent announcement of an ID verification scheme is likely to force competitors to follow suit – as moving first with a proprietary solution presents an opportunity to differentiate and win market share.
Amadeus‘ €320 million acquisition of Vision Box in April 2024 is a notable example enabling Amadeus to bring advanced border control solutions in-house and improve its end-to-end airport offerings. Similarly, Mastercard’s $850 million acquisition of Ekata in 2021 allowed the payments giant to bolster its fraud prevention and digital ID programs by leveraging Ekata’s proprietary risk scores and indicators, which help reduce fraudulent activity and improve transaction success rate for merchants on the Mastercard network.
What to expect next…
With over $10bn raised in the space to date, there is an estimated $100bn+ in enterprise value in a sector with a highly fragmented mid-market and over 50 M&A deals in the past 3 years alone. We expect the acquisition trend to continue, however potential targets must consider their strategic differentiators to stand out given the highly competitive environment. Given there was less than *$40bn of aggregate M&A deal value in software under $1bn EV last year, it is difficult to see more than $5bn of value in ID-verification-related M&A over the next couple of years.
Clearly, this presents a dilemma to companies in the space. The market is already awash with attractive targets with consolidation well underway – as incumbents place their bets, there is risk of a limited window in which to initiate an acquisition under favourable conditions. Companies should highlight key differentiators that enhance their value, such as domain expertise, strong customer relationships, geographical dominance, and proprietary technologies. Standing out in this market is difficult, but imperative to optimise outcomes.
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*All financial data from Pitchbook, Capital IQ, and Merger Market
