In 2024, companies in the US and Canada were hit with a combined total of $61 billion in fines due to a failure to comply with Know Your Customer (KYC) regulations. This number is likely to rise, even with proper processes in place, and here’s why.
KYC is expensive.
If businesses in your sector can be used for money laundering or terrorist financing, you have to follow a vast number of KYC and Anti Money Laundering regulations. Financial services, fintech companies, crypto companies, and gaming are all at high risk of having their systems used for criminal purposes. As a result, KYC requirements are particularly stringent, causing operational costs to skyrocket.
Most businesses in these sectors are stuck in a Catch-22. Either they have to pay for setting up a complex KYC process, or they have to pay the fines when criminals take advantage. Setting up these systems is expensive and labor-intensive, and the rising complexity and cost of KYC compliance are now a major pain point for financial institutions.
In this article, we will take a look at the various costs involved in KYC compliance, as well as how to optimize them for maximum efficiency.
The direct cost of KYC compliance
Setting up a KYC system has some upfront costs, which differ based on your business. If you have set up a system, upgrading it to meet modern standards can sometimes be more expensive than setting up a whole new system from scratch. Even so, some of these compliance costs are unavoidable.
Onboarding costs
The first step in KYC compliance is onboarding. When clients get a new account, they need to get all the necessary documents and perform identity verification, going through laborious KYC processes to meet regulatory expectations.
Manual review of documents
Manually reviewing all the documents submitted by prospective customers is a slow process. It takes time to check everything, and the risk of human error is high. False positives and false negatives are likely, and both can lead to reputational harm.
Verification of identity documents
Proper identity verification involves cross-checking all the documents and details on a customer. Any mistake in the customer data can extend the verification process, costing the business work hours as well as efficiency. Slow customer identity verification speeds can also create extra friction, making the customer experience worse.
Fraud detection and prevention
As regulations have become tighter and compliance has become harder, fraud detection has become a very expensive part of the onboarding process. Criminal organizations are highly motivated to bypass fraud detection and prevention measures, making it important to analyze all the details during this step. Proper risk assessment is difficult, especially when the process is time consuming and complex.
On top of the costs in work hours and efficiency, companies need to perform regular training sessions to make sure that the staff knows the latest regulations and best practices.
Ongoing monitoring costs
KYC is not a one-and-done process. Once the onboarding is done, there is still a chance that criminals or fraudsters can slip through the net. To avoid this, ongoing monitoring needs to be a part of long-term KYC.
Periodic customer due diligence
Depending on the customer’s risk profile, you need to perform Customer Due Diligence (CDD). If the customer seems to be low-risk, CDD can be performed infrequently. However, Enhanced Due Diligence is necessary if the customer is high-risk, a Politically Exposed Person (PEP), an Ultimate Beneficial Owner (UBO) or otherwise connected to any other high-risk people. Performing periodic reviews like this is quite expensive, especially for high-risk customers.
Suspicious activity monitoring
As the name suggests, suspicious activity monitoring is the process of analyzing transactions or banking patterns that can suggest criminal activity. These activities are then reported to higher authorities by identifying and documenting these patterns. Usually performed by frontline staff in financial institutions, this process is prone to human error.
Reporting to regulatory authorities
Once suspicious activity has been identified, it then needs to be reported to regulatory authorities. While some of the patterns are easy to catch, for example, large deposits of cash, or multiple deposits just under the reportable limit, there are many other patterns that are not easy to spot. If there are any weak links in the chain, money laundering organizations, and other criminals can get away with financial crimes.
Penalties and fines for non-compliance
While banks and other organizations suffer costs in work hours as well as setup and training, any failure exposes them to penalties and fines for non-compliance. These penalties are harsh, and not just monetary in nature.
Depending on the kind of crime and business sector, regulatory bodies can impose fines worth millions. But the worst part of these fines and sanctions is the reputational damage and loss of customer trust. Even if you fix the issues with your KYC system, it is very likely that new customers may choose a competitor and your current customers will leave.
The indirect costs of KYC
While setting up and maintaining a robust KYC system has multiple direct costs, there are several indirect costs as well.
Customer acquisition cost
There are many factors that affect onboarding speed. If the prospective customer is from a different country, for example, onboarding takes longer. In general, the longer it takes, the more likely it is that they may just choose to not go through with it. In the case of some business customers, the full onboarding process can take 90-120 days. These speeds directly impact customer conversion rates, as the inefficiency makes customer experiences much worse.
Operational cost
Due to the complexity of KYC regulations, it is difficult to hire and train people in KYC compliance teams. Training costs in particular are high, as every new regulation requires further training for each member.
Opportunity cost
Any inefficiencies in KYC systems have a cascading effect, slowing down the rest of the organization. KYC, being an important compliance process, shouldn’t take an unnecessary amount of time. Also, any delays in the onboarding process make it harder to acquire new customers, which leads to lost revenue.
Strategies to optimize KYC costs
While KYC costs are unavoidable, it is possible to optimize these systems and costs for your organization. In this situation, a strategic approach is necessary. Handling KYC costs is an ongoing challenge, and it is best to reduce manual labor as much as possible.
Automation and digitization of KYC processes
The first step in optimizing the KYC process is automation and digitization. Legacy systems are too old and clunky to keep up with the needs of the modern day. By integrating KYC solutions into your existing systems, you can reduce human error greatly, while also freeing up thousands of work-hours to be used elsewhere.
KYC solutions aren’t just useful for onboarding, either. KYC verification tools come equipped with AI and Machine Learning, which allows them to perform document verification with much fewer mistakes. These compliance tools are extremely useful when financial institutions need to verify customer identity.
Streamlining of KYC processes
KYC software solutions also reduce redundant checks and data collection, streamlining the entire process. They also make it easier to implement a risk-based approach to KYC by being able to analyze customer profiles much faster, and from a wide variety of databases. These solutions are also used in transaction monitoring systems, and many financial institutions use them to combat financial fraud.
Since these systems are designed to handle sensitive data belonging to your customer base, they come equipped with powerful data security.
Outsourcing KYC to specialized service providers
As such, your best bet is to outsource your KYC needs to specialized service providers. While it is necessary to comply with KYC regulations, putting together an in-house team of specialists is quite expensive, both in terms of staffing and infrastructure costs. By outsourcing, you can leverage economies of scale to get a better deal on KYC software solutions, while also giving you access to a large pool of experts as and when needed. Financial institutions, in particular, can use these systems for full regulatory compliance, verify customer identities, perform continuous monitoring, catch tax evasion, and so much more.
Conclusion
As financial crime increases, it is vital that you integrate KYC solutions into your system. This way, you not only stop money laundering organizations and other financial criminals, but you also protect yourselves and your customers. While there are costs involved in setting up a KYC system as well, the ROI in customer experience and retention is multifold.
By taking advantage of the modern KYC solutions in the market, you can use automation and AI/ML to streamline your KYC process. These KYC solutions can greatly help in increasing efficiency, and help you proactively optimize your KYC costs.
Strong KYC systems are important, and every time they catch a financial criminal, they will help you avoid millions in fines.
Click here to see how HyperVerge can help you handle Digital Identity Verification.
FAQs
How can I calculate the cost of KYC for my business?
You can calculate the Direct Cost of KYC by taking into account ID Verification Costs, Staffing/Training Costs, and Technology/Tools. Indirect costs are harder to quantify and require you to analyze how much operational inefficiencies and customer abandonment cost you.
What are the most effective ways to reduce KYC costs?
The most effective ways to reduce KYC costs are automating KYC processes using KYC software solutions, or, ideally, outsourcing the KYC process to specialized service providers.
What are the penalties for non-compliance with KYC regulations?
The penalties for non-compliance with KYC regulations include fines, sanctions, and loss of reputation.
How can I improve customer onboarding while maintaining strong KYC compliance?
You can improve customer onboarding while maintaining strong KYC compliance by automating the onboarding process by adding AI tools to the journey for checkpoints such as document review and ID verification processes.
