Managing KYC Dilemmas: In-house vs. Outsourced Solutions

Many companies are legally obligated to identify, verify, and monitor their customers to minimize criminal activity, which includes conducting customer due diligence (CDD).

However, even those companies that don’t fall under AML regulations should still take steps to avoid sanctioned persons or fraudsters. Newer businesses may prefer to conduct customer checks on their own. However, doing this in-house can become a burden once the company starts to scale.

Companies therefore should consider whether it’s more beneficial to build their own verification team from scratch or hire a provider. We at Sumsub prepared this article explaining the pros and cons of both in-house and third-party solutions. 

Why KYC is necessary

Let’s start by explaining why companies need Know Your Customers (KYC) in the first place. 

1. Many business sectors are regulated and therefore required to check the identity of their customers. 
2. Knowing your customers will decrease the chances of being abused by criminals or sanctioned persons.
3. The absence of verification procedures can lead to reputational damage and financial losses. 

In most countries, financial institutions or other regulated businesses are obligated to take the following steps:

• Appoint a Money Laundering Reporting Officer (MLRO)
• Provide staff training
• Conduct risk assessment
• Customer Due Diligence (CDD), including Simplified Due Diligence (SDD) and Enhanced Due Diligence (EDD) procedures in respect of both natural and legal persons (including partners)
• Conduct screening for persons on sanction lists, Politically Exposed Persons (PEPs) lists
• Implement transaction monitoring procedures
• Keep customer records 
• Report suspicious activity

What’s the difference between in-house and outsourced KYC?

In-house Know Your Customer (KYC) is a process that companies establish on their own. 

Outsourced KYC is conducted with the usage of third-party solutions. Yet, it should be noted that even if companies involve third-party KYC solutions for the fulfillment of AML obligations, they still remain responsible for compliance with regulations. 

The pros and cons of in-house KYC 

When a company reaches a certain size, it becomes virtually impossible to conduct all checks in-house, as eventually a dedicated department would be necessary to properly check customers—requiring a huge amount of resources. Therefore, it eventually becomes more viable to outsource to a third-party solution instead, which can collect, analyze and verify provided information and documents.

So when exactly does this tipping point occur? To answer this question, a business should understand:

• The size of its customer base
• Whether it’s regulated 
• Whether it’s planning to expand internationally
• The type of criminal activity it faces

Pros of in-house KYC

• Companies can tailor the solution to their market specifics
• Total control over the process
• Efficient communication

Cons of an in-house compliance solution

• Tedious and time-consuming manual work—a substantial team is needed to manually check users. Sumsub’s survey shows that the average manual check takes more than 10 minutes
• Unsecured communication channels—sometimes employees might ask clients to send personal information by email or other hack-prone channels
• Management costs and challenges—to build an effective team, you need to find the right professionals, train staff, and more. This requires time and money.
• Building your own IT infrastructure—companies need to be prepared to automate their KYC which will require additional financial support.
• Human error—employees make mistakes and can occasionally let fraudsters in. Even worse, employees can even cause deliberate harm to your business if given too much control over the verification process. 
• Data-enrichment—sanctions lists and PEP lists are constantly updated. A small company might find it hard to stay up to date. 
• Advancing fraud—to improve the accuracy of anti-fraud tools, businesses will need to aggregate data from various sources and stay aware of new threats. This is a herculean task for a small, in-house compliance team. 
• Ongoing maintenance—as companies scale in new markets, their compliance teams must adapt accordingly. So, whenever a new market is entered, the compliance team will need specific expertise in working with local languages and documents. 

Sumsub’s survey of crypto businesses found that 76.9% of businesses manually verifying users plan to switch to automated verification.

Find out how YouHodler, a fintech platform, managed to operate globally and in full compliance while reducing manual work and cutting verification expenses by 50%. 

Pros of outsourced KYC 

• Cost reduction—automated KYC verification solutions help companies reduce costs by 40%. Over three years, the compliance efficiency improvement and avoided additional headcount cost is worth about $2.6 million (Sumsub’s statistics)
• Time-effective approach—for instance, at Sumsub, the average verification speed is 50 seconds, while some companies spend 9.8 minutes on average to verify one user
• Big data expertise—AI-powered solutions have the ability to capture, store, and structure vast amounts of data, while algorithms filter and analyze the information, painting a clearer picture of the new customer in far less time. 
• Scalability—if a business enters a new region, a third-party provider can offer legal support to familiarize it with regional regulations, which helps develop the right compliance policy and processes. Plus, the provider’s technical team can integrate a specific verification solution that already contains all the required aspects of verification (e.g., record-keeping and reporting) in a given region
• Customization—it’s possible to build different flows for each client segment with a no-code solution
• Analytics—the business can receive verification data in real time and use this information to improve the customer experience
• Compliance expertise—when operating internationally, an understanding of compliance specifics in different jurisdictions is a must. Sumsub’s compliance team includes legal professionals from different regions with detailed knowledge and strong problem-solving abilities.

Now, it should be mentioned that outsourced KYC, despite all the benefits, isn’t the end-all solution. If poorly implemented, outsourced KYC can have just as many cons as pros.

Cons of outsourced KYC 

• The need to integrate and customize—companies still need to understand how the third-party service works in order to properly build the verification flow and customize it. Sumsub allows businesses to create their own industry-specific rules or use a preset library, code-free. Sumsub also has a user-friendly sandbox and 24/7 customer support
• Third-party involvement—the personal data of customers goes through a third-party provider. This may cause issues in terms of adequate data protection mechanisms.

While it’s true that companies create certain risks by sharing information with third parties, these risks can be minimized. Companies can request information about the audits the vendor has gone through as well as international certifications. Or, they can conduct their own audit of the vendor for additional proof. 

Companies can also minimize the risks by choosing just one provider for KYC, transaction monitoring, and KYB with proper storage of collected data. By hiring just one vendor, companies can minimize the risks and make the integration as smooth as possible. 

Why choose an outsource solution over an in-house one 

When building KYC, businesses should consider their risk appetite along with guidance from regulators. A proper balance between in-house compliance and outsourced solutions can significantly cut costs, while keeping the company fully compliant with laws and protected from fraud. 

KYC is getting outsourced more than ever. This allows companies to save time and resources while focusing more on their core business activity. Earlier, only large and mid-sized companies could benefit from KYC providers. Now, businesses of all sizes are tending to delegate much of their compliance work to outsourced providers while retaining the required in-house specialists. 

Sumsub commissioned Forrester Consulting to conduct a Total Economic Impact™ (TEI) study to examine the potential value of its platform. The TEI concluded that companies that choose Sumsub can experience a 240% ROI. This study is designed to help you evaluate Sumsub’s potential financial impact on your company. To that end, Forrester anonymously interviewed four Sumsub customers, aggregated their experiences and benefits, and combined the results into this report.

FAQ

• Can you outsource Customer Due Diligence?

  Yes, you can. In fact, doing so provides many benefits, as companies can focus their efforts on other tasks.

• What is KYC outsourcing?

  It’s the process of involving third parties in KYC procedures. Companies choose to outsource to minimize the time and resources spent on verification and monitoring.

• What are the risks of outsourcing KYC?

  The problems businesses can face while working with third-party KYC providers may include:

  • The need to integrate and customize
  • Data protection

  Yet, if implemented properly, these issues can be resolved.