Top 5 KYC Challenges and How You Can Overcome Them [In-Depth Explanation] - iDenfy (2024)

Lengthy onboarding process, unexpectedly increasing costs from your identity verification vendor, or challenges with data keeping and reporting are just a tiny piece of the puzzle when it comes to ensuring a smooth and compliant Know Your Customer (KYC) process. That’s why many companies in different industries face KYC challenges, wasting precious time and resources on the wrong vendors that can’t customize identity verification flows to specific use cases.

So, above this glimpse into some of these issues, we look into the top five KYC challenges and explore them from a more detailed point of view so you don’t have to make the same mistakes in your KYC onboarding process.

1. Too Many Fraudulent Accounts are Trying to Access Your Network

In the banking sector as well as in the context of other regulated entities, fraud management is very important. It involves implementing controls to prevent criminal activities, such as preventing fraudulent accounts with fake identity documents or users who don’t want to pay for services, which result in a high chargeback rate. And this happens more often than you think. For example, financial institutions deal with a high cost for fraud, with a ratio of $4 in expenses for every $1 lost.

So, it’s only natural that detecting various types of fraud poses different challenges. As illegal schemes become more complex, companies are pushed to enhance their investments in fraud risk management and other RegTech tools. That’s because standard Know Your Customer (KYC) solutions can struggle with more sophisticated fraud.

One of the key examples in this sense is deepfakes or synthetic identities, where criminals merge stolen and real data to create “Frankenstein” personas. That’s why the rapid advancement of AI technology has brought about growing concerns regarding its potential misuse. For example, Google has temporarily paused Gemini’s capability to generate images of people as they work on refining the model.

🟢 Solution: Find a Provider That Tests its Software Against Fraudulent Accounts

Fraud specialists should know how to analyze data to identify patterns and emerging trends, such as various samples of deepfakes or synthetic identities. Companies should apply a similar approach when assessing ID verification and fraud prevention solutions. The technology should not only determine whether the document is genuine or not, but it also should be able to evolve and adapt to new types of emerging fraud tactics.

This typically is achieved for a company if it tests multiple document samples and onboarding data from its internal databases. This approach is powered by both manual and AI models that can detect diverse fraud patterns.

However, training AI exclusively on genuine document samples may not effectively recognize all fraudulent attempts to pass the verification process, for example, especially when there are multiple sophisticated synthetic identity cases used globally every day. By using this diverse technique, companies can find a better balance in training datasets and ultimately enhancing products for their customers.

Other Fraud Risk Controls for Detection and Prevention

Some key fraud risk controls that help companies both identify and minimize various types of fraud include:

• Conducting employee training in fraud risk management
• Establishing robust AML/KYC compliance policies and procedures
• Using data analytics and ongoing monitoring, with a focus on a risk-based approach
• Reporting potential fraudulent activities across all business channels

Related: What is an AML Compliance Program?

2. Your KYC Process Depends on Manual, Labour-Intensive Work

Automated KYC processes eliminate the reliance on time-consuming tasks such as data collection and verification. Especially when handling numerous hundreds of clients daily, the likelihood of typos is high, given the repetitive nature of data entry. That’s why manual KYC procedures can add unnecessary friction, causing delays, increased workloads for compliance officers, and, in more critical cases, inaccurate customer identity information or document misinterpretation.

The key benefits of an automated KYC process include:

• Minimized administrative work for the company’s internal teams
• Minimal to zero waiting time and overall better experience for the customers
• A more secure identity verification process with extra protection against financial crime

Beyond providing inconvenience for customers, in-person identity verification processes can be less secure. Ordinary employees cannot match AI-powered software in the thoroughness of authenticity checks. Tasks like reading data encoded in a passport’s machine readable zone (MRZ) are beyond the capabilities of the naked eye. The implementation of automated KYC addresses this challenge by ensuring the secure verification of customer data, thereby minimizing the potential for prolonged waiting times and human errors.

🟢 Solution: Have High Standards in Mind When Implementing Automated KYC Software

There’s now an emerging issue for companies that outsource third-party identity verification providers that aren’t up-to-speed with the latest advancements in technology or compliance. So, even though they aren’t using paper-based ID verification methods anymore, they aren’t getting the best results either.

As synthetic identities are getting accepted and passed to open new bank accounts under false personas, companies should set their standards for the preferred identity verification software vendors. Although many KYC service providers support a large global document base and can translate and onboard users from different countries, this isn’t the only factor that companies should consider.

Companies should consider the most common types of fraud in their industry when evaluating the effectiveness of their KYC automation solution. That’s because certain industries experience higher fraud rates. Subjecting low-risk customers to unnecessary KYC checks can lead to additional inconvenience for genuine end-users. This may cause frustration due to the imposition of multiple steps during the onboarding process.

Requirements for a Robust KYC Service Provider

When searching for a proper KYC vendor, you should consider a few vital features that will help your business scale and maintain a balance between ensuring security and a good user experience.

Some features that you should consider before adopting a new ID verification solution include:

• Speed. The provider should offer quick verification results, onboarding more customers in less time while safeguarding against fraud.
• Pass rates. It’s the number of authentic customers gaining access to the platform’s service and others who are being denied. For example, in an industry with a known fraud problem, such as a fintech platform, a high pass rate could suggest that the KYC solution is failing to identify malicious actors. However, it’s important to know the customers and specific user population from which the pass rate originates.
• Coverage. The provider should verify local documents in specific regions as well as accept documents from region-specific services, including providing access to local databases. Companies should determine if they need a global KYC solution or if local coverage is enough.
• Integration options. Low-code KYC integration options are on the rise due to obvious reasons — less work and less hassle for the coding teams. Many ID verification vendors usually provide organizations with an API for browser implementation and a software development kit (SDK) for mobile app implementation, including various plugin options.
• Compliance. Regulatory requirements are different across regions and can cause confusion. For this reason, companies should look for an experienced KYC service provider that, in a perfect scenario, has its own in-house compliance expert team and can help with navigation in this field.

Most importantly, all companies looking for a new ID verification solution should examination of each vendor’s features to confirm their alignment with their specific requirements. So, indeed, there’s no one-size-fits-all solution here. Typically, companies often go for a combination of document verification and selfie verification to enhance the accuracy of automated data handling and improve fraud detection capabilities during KYC checks.

Related: How to Choose the Best KYC Compliance Software?

3. You Encounter System Errors and a High False Positive Rate

In identity verification, a false positive happens when a customer passes the KYC check despite not being who they claim to be or, in other words, being a potential fraudster. However, there are cases where a genuine customer encounters an alert despite submitting an authentic ID document for system access. While due diligence is crucial, system errors can pose a reputational risk for your company.

A pass rate indicates the percentage of users successfully verified during a verification attempt. A positive indicator is a high pass rate within a solution known for historically low fraud rates, like a food delivery app. In this case, the majority of users are trustworthy, justifying the system’s high acceptance rate. Despite that, flagging trusted customers as potential bad actors not only raises concerns about accuracy but also translates into profit losses for the company.

When it comes to KYC, the lack of automation, once again, contributes to higher chances of system errors, especially if the company’s customer base is global. That means the company potentially deals with a growing number of foreign customers and wants to scale faster. Every nation has unique regulations, standards, and cultural intricacies.

Some companies, due to limitations in their KYC software, manually verify all sorts of identity documents. This type of verification becomes even more complex when documents need to be translated, and there are other GDPR requirements where employees can’t use public translators due to data privacy reasons. This intricacy adds a layer of challenge to customer onboarding within the KYC process, particularly when minimizing false positives.

🟢 Solution: Benefit from KYC Customization Options and Hands-On Expert Knowledge

Navigating the complexities of having a proper KYC process requires precision, as a single mistake can trigger a chain of regulatory and compliance issues. This is where companies should look for a provider that carries customization options and can offer the most suitable KYC flow for the business use case.

For example, let’s imagine a furniture rental service provider. The primary issue with such services is ensuring that the person placing the order matches the name on the order and billing information. Without a proper KYC process, customers avoid providing a real, verified ID document for billing. So, in cases involving malicious intent, the company can lack records of government IDs on file as well as loss of inventory or funds, including serious issues like non-payment/non-return (NPNR) situations related to their services, in this case, renting furniture.

Additionally, automated KYC solutions typically use AI to verify the majority of users. While software is faster than humans, it can be less accurate at times. So, to minimize a high false positive rate, companies can use a combined approach of both AI software and manual human expert teams to approve legitimate users and exclude fraudulent ones. That’s because an in-house KYC expert team allows companies to benefit from ID verification solutions with extensive experience. This ensures ongoing improvement and addresses any errors when the software’s results are inaccurate.

4. Your KYC Process Results in a Bad User Experience

On a certain level, all KYC processes introduce friction for customers. Of course, it’s up to the company to manage its level. Lengthy forms or the inability to verify documents remotely is a big no. That’s why it’s vital for companies to ensure that their KYC process is both compliant and seamless to avoid customer loss.

For example, asking the customer for their driver’s license through a simple photograph involves more friction than simply requesting personal information. On top of that, verifying the photograph requires additional resources. As we explained earlier, fraudsters can easily use synthetic identities or even use stolen documents that they’ve purchased for cents on the dark web.

Since risk appetites vary, companies have the flexibility to decide when lengthier KYC checks are necessary. Using different fraud prevention tools, such as a risk scoring system, companies can automatically assess the level of risk linked to each customer. If the fraud score is too high, internal compliance officers can prompt more rigorous KYC checks like an additional two-factor authentication (2FA) or a biometric check. So, that means that the level company indicates friction based on its established red flag thresholds.

🟢 Solution: Perform a Risk Assessment to Categorize Your Users

To prevent customer loss during the IDV process, ensure minimal wait times and avoid errors that require a restart. However, in practice, it’s not an easy task. As discussed earlier, introducing extra verification methods can add friction for end users. To avoid unwanted bad user experiences, companies should conduct a risk assessment with a focus on conversion optimization.

What that means is that companies should find the right balance: ensure stricter rules on higher-risk customers. This complements the goal of having a good KYC program, which is enough to deter bad actors but not so stringent that the company can lose genuine customers. For example, if an individual’s IP address differs from their residential address on official documents, you can request a face reauthentication check even later on in the customer cycle.

So the golden rule is to Introduce a higher level of friction by requiring additional verification checks, for example, only when the customer’s transaction is suspicious, rather than applying friction universally to all customers. This approach ensures a better user experience, as customers only need to provide the necessary information tailored to their risk level and specific situation.

Key Factors for a Good Identity Verification Experience

Besides technical details for assessing an identity verification service provider, such as determining if the software actually operates within the promised timeframe or if there is a high chance of downtime, companies should focus on the user experience. This serves as a precautionary measure for customers so they won’t end up with KYC failure errors, such as issues with photo lighting or incomplete documents.

For a user-friendly ID verification process, you should:

• Keep the users informed. Explain the required documents and information before they begin the process. The more document types the identity verification solution accepts, the higher the likelihood that users will find it suitable. If the user’s KYC fails, provide a reason for denial without getting into too much detail since fraudsters can use this information against you.
• Accept all users on different devices. Your identity verification software should offer users what they want: to complete the KYC process on a desktop, use their phone for a selfie, and then, if needed, return to the desktop to enter personal information. For example, at iDenfy, this is done through a seamless experience — a magic IDV link or a QR code that doesn’t result in high dropout rates.
• Guide the users through each step. If it’s a selfie check with liveness detection, inform the user how to tilt their head or how to fit it into the frame to complete the whole biometric verification process without any hassle. Ensure all instructions are available in the languages commonly used in your operational regions.

5. You Still Have Missing Pieces to Fill and Stay KYC-Compliant

KYC regulations differ among jurisdictions, each imposing distinct requirements for businesses, depending on their industry. Naturally, this frequent change creates a challenging environment for businesses operating internationally. Staying ahead of these changes and ensuring continuous KYC compliance can be a daunting task for businesses.

In general, there are three key elements in KYC that create challenges for businesses in order to stay compliant:

• Customer identification and verification. Businesses must collect and verify customer identities using reliable, independent sources, typically government-issued identification documents. This process is often referred to as the mentioned CIP process or Customer Due Diligence (CDD).
• Enhanced due diligence (EDD). These are the customers that belong to the high-risk category, for example, politically exposed persons (PEPs). The EDD process involves gathering additional information and conducting more in-depth risk assessments to understand the customer’s background, source of funds, and the clear purpose of the business relationship.
• Ongoing monitoring. Businesses must regularly screen customer activities and monitor transactions to spot any unusual behavior. This process is vital for uncovering potential money laundering, terrorist financing, or other financial crimes and serves as a key step in maintaining ongoing KYC compliance. So, if any suspicious activity is identified during the ongoing monitoring process, companies are obligated to file Suspicious Activity Reports (SARs).

For instance, in Europe, the EU’s Anti-Money Laundering Directives (AMLDs) serve as the foundation for KYC, outlining potential identity verification schemes. So, no matter your country, for example, if you operate in an industry with specific Customer Identification Program (CIP) requirements, visit the potential provider’s website to understand how their solution guarantees regulatory compliance.

Related:

🟢 Solution: Look for a Complete KYC/AML Software Provider

More industries are becoming regulated entities. For example, in the UK, high-value dealers, such as those dealing in antiques, jewelry, and luxury goods, are subject to KYC requirements. But it’s not just standard KYC checks that are the real challenge for businesses. Banks and industries like cryptocurrency require additional checks, such as address verification and other AML tools, to complete their KYC/AML compliance program. That means they are looking for a multifunctional provider that could offer its expertise through a single, easy-to-use software.

Clearly stating your requirements and asking the right questions in advance will assist in identifying identity verification vendors that align with your regulatory needs. What’s more, most KYC software vendors today offer free demos and are willing to explain all of the specifics based on your use case.

However, if you still need help in addressing any of the KYC challenges we mentioned above, you’ve come to the right place. At iDenfy, we know how to handle any KYC issue through action-based plans and various fraud prevention tools, all within a single platform.

Consult with our team, or scroll through our customer success stories to see our ID verification solutions in action.