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Internalizing or outsourcing KYC: the dilemma for banks and financial institutions

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Data are playing an increasingly strategic role within banking and financial institutions. As for KYC (Know Your Customer ) data, the importance of customer knowledge data is increasing with regulatory changes.

For many years now, the major issue surrounding KYC has been its digitalisation: the digital transformation of the processes for entering into a relationship has simplified the entire customer experience. Document management has also been optimised from start to finish to enrich and make customer knowledge more reliable.

Year after year, the regulations on compliance are becoming stricter. The question now is whether tointernalise or outsource this entire function and its "essential operational tasks" in order to optimise costs and processes, while complying with the regulatory constraints of banking and financial compliance.

The dilemma for banks and financial institutions today is therefore a major one: do they have a greater interest in internalizing or outsourcing their KYC-related data acquisition and management process?

Internalising KYC, between guarantees and constraints

Top 5 reasons to internalise KYC

Firstly, it should be noted that most banking and financial institutions did not initially consider whether to internalise or outsource their KYC approaches and processes: it was common practice to keep them in-house.

There are five main reasons why many people continue to do this despite the tightening of regulations and controls.

The first reason for keeping the KYC process in-house is to set up an organisation and a KYC that is in tune with the organisation and adapted to its needs: the institution can act as it sees fit and put in place the bare necessities to meet its obligations.

Then, it allows you to maintain full control over the customer journey. As this element is becoming increasingly crucial, it is understandable to want to retain control of it.

Controlling KYC and compliance costs in general is another big argument for insourcing : it is certain that keeping the KYC process in-house allows for better cost control, although outsourcing is not always more expensive than insourcing in the end.

It may also seem essential to control the quality of the data. Given the rapid evolution of the importance and potential of data, their quality must remain optimal in order to make the best decisions.

Finally, let's not forget the IT investments. Necessary investments can be costly and time consuming, but they are also useful and necessary.

Despite these great advantages of KYC internalisation, it is also worth mentioning what darkens the picture of this decision. Indeed, the disadvantages, risks and difficulties are not uncommon in this case.


Disadvantages of keeping KYC in-house

The regulatory environment surrounding financial and banking institutions is becoming increasingly demanding, particularly since the subprime crisis. It can therefore be both expensive and time-consuming not to outsource low value-added tasks related to the KYC process and not to industrialize them as much as possible.


The internalisation approach often consists of insisting on doing everything oneself, at all costs, sometimes even to the detriment of the initial missions of the employees.


An external service provider can complement and accelerate the work of internal compliance teams and allow them to move away from repetitive, low-value tasks (e.g. manual verification of supporting documents).


The provider may also act on procedures that are the responsibility of the financial institution, internalising KYC-related compliance may penalise the performance and efficiency of the whole organisation.


Outsourcing KYC, the choice of more and more banking and financial institutions


There are several ways to explain why a growing number of banking and financial institutions are choosing to outsource their KYC process to trusted compliance providers.


As the LCB-FT requirements that complicate regulatory processes become more stringent, organizations are making this decision.


The advantages that persuade institutions to delegate KYC


The aim of KYC outsourcing is tooptimise their KYC process in compliance with legal requirements while being flexible, fast and seeking to control costs .


Let's start by mentioning the costs: while outsourcing may seem more expensive at first glance, several things should not be forgotten:


  • An error or negligence found as a result of an audit can be costly, very costly
  • For small or medium-sized structures, it is not always useful or justified to dedicate a full-time function to the implementation and control of KYCs: the area of activity, workload and especially the number of staff can make internalisation more expensive than outsourcing


Another great benefit for institutions to delegate their KYC process is that it allows the entire workforce to focus 100% on their core business.


More broadly, outsourcing KYC processing often proves to be an important efficiency and capacity management lever for the organization.


However, it is important not to go too far in delegating these activities. In particular, following a warning or sanction from the regulator, it is prohibited to include the service provider as a stakeholder in defining and executing the financial institution's due diligence procedures (see Article 165 of Chapter 4.2 of the ACPR Guidelines: " Financial institutions shall in particular ensure that due diligence measures outsourced to a service provider are effectively implemented by the latter in accordance with their own procedures ").


Finally, the emergence of new technologies such as blockchain and artificial intelligence offer new perspectives for institutions. With solutions such as Archipels, it becomes possible to achieve an unprecedented level of flexibility capable of reinventing the rules of KYC in depth and over the long term.


Disadvantages of outsourcing KYC


While outsourcing KYC undoubtedly has many advantages, there are some limitations, especially in the long term.


Outsourcing KYC can be costly and add complexity, in addition to having to manage an external service provider with different processes. Nevertheless, it may be more economically viable to outsource KYC for small teams and limited volumes, and conversely to outsource for larger volumes due to scale effects.


Also, some generalist players are efficient on simple cases, but less so on the most complex ones, which can increase the cost of processing the case in question. Indeed, external service providers, because of the technologies they use, only support a certain number of standard document types (about ten). This is essentially where automation is possible and financially interesting.


The management of the data transmitted to partner-providers is also a key issue, both in terms of security and the sovereignty and confidentiality of this data.


Choosing to outsource can also lead to a partial loss of control over risk and skills management.


Outsourcing the KYC process is not something that can be done overnight either: the conditions available to institutions are specific. The ACPR (Autorité de Contrôle Prudentiel et de Résolution) guidelines of 17 December 2018 relating to identification, identity verification and knowledge of the customer explain these conditions.


How do I choose between KYC insourcing or outsourcing?


So, internalize or outsource? There is no such thing as a perfect, universal solution.


This choice for the KYC process should be reflected in a strategic and operational reflection, for example " Make or Buy ". (on all or part of the process).


The institution must then address several key questions common to all outsourcing approaches, taking into account the particularities of the KYC: specific skills, management of controls, cost control, risk management, dynamics on volumes to be processed, access modalities, enrichment of databases and documents, etc.



In summary, only a thorough reflection before any KYC outsourcing project allows to assess all the benefits and risks compared to internalizing the process. There are several solutions available to you for outsourcing the KYC process.



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