30 Mar 2023

Risk-Based Approach to KYC: How it Can Help Companies to Scale and Remain Compliant

As digital services continue to grow and develop, there is a challenge to balance compliance with the ability to scale. By implementing the Risk-Based Approach (RBA) through automated Know Your Customer (KYC) processes, companies can optimize their compliance resources, mitigate the risk of criminal exploitation, and scale their customer bases. 

This article explores why RBA is necessary, what it involves, and how it can help companies to grow while remaining compliant.

Why RBA is Necessary: Increasing Regulatory Regimes and Compliance

Regulatory regimes globally have increasingly adopted a RBA to compliance, stipulating that financial service providers — whether they are traditional Financial Institutions (FIs) or Virtual Asset Service Providers (VASPs) — adopt this method in their Anti-Money Laundering (AML) and KYC processes. In parallel, FIs and VASPs have been using the RBA to optimize and streamline their customer onboarding systems, while mitigating the risk of exploitation by criminals.

What the RBA Involves: Automated KYC Technology

Traditional forms of KYC compliance have involved human compliance teams running manual checks on prospective customers or service users. This approach has meant that onboarding large amounts of customers has either taken a large amount of time and/or resources. 

However, for smaller companies, investing in permanent compliance teams can be unfeasible. By using automated KYC technology, companies can quickly and effectively vet potential customers in multiple global jurisdictions, ensuring compliance with regulations while preventing services from being exploited by financial criminals.

How the RBA Can Help Companies Scale: Optimizing Compliance Resources and Customer Profiling

The RBA approach allows platforms and companies to make more informed decisions on who they onboard and provides a more robust toolkit for understanding potential customers. Companies can optimize their compliance resources, while also establishing a documented rationale for compliance checks that can be used to justify decisions to regulators. 

Companies that implement the RBA will have clear proof of why certain decisions were made in an onboarding process, which can then be furnished in the event of a regulatory audit. They will also be able to carry out progressive profiling on potential customers during the onboarding process, optimizing the amount of checks applied to each customer.

Diverse Verification Tools: IDV, Digital Identity, and Biometrics

There are various approaches that can be used to verify identities as part of an RBA. Each of these processes presents certain benefits that are relevant to different scenarios. 

For instance, certain low-risk service providers may only need to carry out Identity Verification (IDV) checks in order to provide access to their services. Companies that are providing lower-risk services (or dealing with lower risk customers) can therefore choose to expedite access to their services through streamlined KYC processes — while remaining compliant with regulations. However, for higher-risk services, such as those that involve access to funds or assets, it’s important to have layered verification approaches that apply a combination of IDV, digital identity, and biometric checks in order to minimize the risk of the system being compromised.

The Risk and Efficiency Sweet Spot: Minimizing Friction and Maintaining Compliance

Companies that are able to dynamically apply KYC checks on current and prospective customers through a RBA can minimize the friction of onboarding to only what is necessary — maintaining compliance while offering seamless and faster onboarding for prospects. 

With automated KYC onboarding solutions, companies can find the risk and efficiency sweet spot, enabling them to scale and grow while remaining compliant.

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