Learn the differences between in-house and outsourced KYC, the advantages and disadvantages, and which option will best suit your business.
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.
In most countries, financial institutions or other regulated businesses are obligated to take the following steps:
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.
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:
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%.
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.
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.
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.
Yes, you can. In fact, doing so provides many benefits, as companies can focus their efforts on other tasks.
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.
The problems businesses can face while working with third-party KYC providers may include: