When it comes to KYC, businesses usually maintain their own compliance team while outsourcing AML screening or biometric checks to automated KYC solutions. However, as companies scale, they eventually have to delegate even more of their user verification processes.
But which due diligence procedures should companies retain in-house? And which should be delegated to a service provider? Let’s take a closer look.
In-house KYC is when businesses create and manage their own KYC department for onboarding new customers manually (including document checks, watchlist screening, etc.).
Companies are legally required to establish and maintain policies, controls and procedures to reduce and manage the risks of money laundering and terrorist financing. This includes:
Moreover, an AML-regulated business must appoint an MLRO (Money Laundering Reporting Officer) responsible for the company’s compliance with anti-money laundering regulations.
Outsourced KYC are solutions provided by third-parties for KYC processes.
When it comes to deciding which processes to outsource, the general rule of thumb is to delegate services that are repetitive or labor intensive, and retain those which require access to additional research, sensitive data or contact with regulators. In any case, companies should retain control over outsourced KYC processes. This is especially true for regulated companies which must fulfill reporting requirements.
Businesses need to strike the right balance between in-house and outsourced solutions. How this balance is struck depends on the following factors:
For instance, if a business is non-regulated (e.g. car sharing services, e-commerce, peer-to-peer services and many others), it doesn’t need to conduct AML, PEP and adverse media screening.
Moreover, non-regulated businesses don’t have to follow mandatory verification requirements. However, it’s still important for them to know their customers to prevent money losses and reputational risks.
Every regulated company has to nominate an MLRO and conduct AML training for their employees. However, if a company is small, it likely can’t afford a full-fledged compliance department, leading it to handle KYC requirements in-house. This is especially true for companies with a small number of customers or those which cannot afford a third-party verification provider.
Let’s look at the pros and cons of building and managing in-house compliance teams.
However, building an in-house compliance team is costly and time-consuming—and it only works when the company doesn’t have many KYC checks to perform.
Sumsub’s survey of crypto businesses found that 76.9% of businesses manually verifying users plan to switch to automated verification.
Most companies aim to grow their customer base, release new products and increase revenue. However, at a certain stage, growth can put undue strain on in-house compliance teams. That’s often when third-party KYC providers enter the picture. These solutions take full control over the compliance routing, allowing companies to focus on their core competencies.
Outsourcing automated KYC solutions can bring the following benefits:
Plus, the provider’s technical team can integrate a specific verification solution that already contains all the required aspects of verification (eg, record-keeping and reporting) in a given region.
The problems businesses can face while working with third-party KYC provider may include:
Third-party involvement— the personal data of customers goes through a third-party provider. This may cause data leaks if the provider doesn’t maintain adequate data protection mechanisms. Sumsub is registered with the Information Commissioner’s Office in line with the Data Protection Act 2018 and supports 256-bit TLS encryption on every device.
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 has a user-friendly sandbox and 24/7 customer support to help companies navigate integration.
When building KYC, businesses should consider their risk appetite along with guidance from regulators. A proper balance between in-house team 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 KYC providers while keeping the required in-house specialists.