Making someone produce an identity document or turn on their camera for a selfie absolutely tanks your funnel. It's dire.

The effect is strong enough that a service which doesn't require that will outcompete a service which does. Which leads to nobody doing it in competitive industries unless a regulator forces it for everybody.

Companies that must verify will resort to every possible dark pattern to try to get you over this massive "hump" in their funnel; making you do all the other signup before demanding the docs, promising you free stuff or credit on successful completion of signup, etc. There is a lot of alpha in being able to figure out ways to defer it, reduce the impact or make the process simpler.

There is usually a fair bit of ceremony and regulation of how verification data is used and audits around what happens to it are always a possibility. Sensible companies keep idv data segregated from product data.