Accurate KYC Cost Calculation

After running eKYC for dozens of businesses and conducting hundreds of thousands of user identifications.

We can safely say that more often than not business leaders have a distorted idea about the true costs of their user identification processes.

In this article, you can learn about the common mistakes business leaders make when it comes to calculating their user identification costs.

We are of course, in no way suggesting that you as a business leader are unable to keep up with the accounting of your business costs.

However, we generally see that costs that are either directly or indirectly related to user identification and onboarding are attributed to other functions/processes.

As such they are regularly not accounted for when a business tries to make an informed decision on how to handle its KYC needs.

In this article then, we aim to discuss 2 points:

Why many mislead themselves when attributing costs to their identification processes
How you can avoid falling into the same trap and make an informed decision

So let’s start with why it is easy to mislead yourself when it comes to KYC cost attribution.

Perspective can often help us see our situations more clearly just by providing a relative point to measure against.

However, the bad news is that you can turn this anchor on its head and create a false sense of clarity.

By narrowing your perspective or in other words, measuring your situation based on a relative point that does not provide you with the full picture » you are effectively misleading yourself into a false reality.

When you are calculating the costs of different onboarding/identity verification solutions, and are trying to make an educated comparison, what you consider to be part of that calculation can significantly distort your image.

Focusing solely on the most obvious, direct cost of verifying 1 customer without also looking at what happens before and after the verification process »

will inevitably lead you to misjudge your operations, and to decisions that will hinder your business growth.

Finding out how much you spend on each verification is only worth something if you:

know what it will cost you to get to a point where you can run verifications

and

can accurately measure what happens to each verified customer once they go through your sequence

Without accounting for:

1. the necessary steps to even be able to run the sequence,

and

2. the accuracy rate and potential outcomes of the sequence,

you are merely looking at a fraction of the entire process.

Direct cost/verification calculation on its own is a vanity metric.

Sure, it is excellent if you manage to keep that ratio low.

Yet if you are also keeping your:

completion/conversion rate,

customer satisfaction

and CLTV

low…while you are increasing your CAC, you are not doing yourself any favours.

Now theoretically this is not a complex process and I am certain you know why it makes sense to go beyond looking at the most visible cost elements.

However, when it comes to putting this into practice, it is easy to lose sight of the less obvious elements and base your decision on vanity metrics.

So, to demonstrate how one may mislead themselves…

let’s say you save 1 dollar on each customer verification by choosing a solution that promises an extremely low cost/verification number.

That is the good news.

The question is, how and why is that number so low? Where are you saving money during the process?

No one will willingly lose money on a process, thus for you to be able to save, you have to innovate either technologically or in the business process.

You can try to do so in 2 ways.

Choose a 3rd party provider with the aforementioned innovations…

Or handle everything by yourself – meaning you have to spend your own capital and human resources on development and operation maintenance.

You can also choose to run everything manually in which case you are at best risking to significantly lower your completion rates (as a direct result of a much slower, subpar experience) and inevitably your average lifetime values.

I write “at best” because based on our experiences (+market circumstances and common sense), manual verification processes are not scalable.

You might be able to keep your speed up in the beginning, but unless your goal is to serve a small business with a couple hundred verifications a month…

as per the above, you’ll definitely see your identification processes deteriorate and become much slower, less efficient and less successful.

So coming back to our example above, of saving 1 dollar per verification »

The same time: you are losing the money

spent on acquiring that customer (CAC) » since you now have a harder time converting one, thus your ratio will be worse

PLUS

the opportunity cost » i.e. money the ones dropping out due to the subpar process would have generated for you by using your service… let’s estimate a very low amount, and say 100 dollars.

That is the bad news.

It certainly does not feel like the good is outweighing the bad to me.

Naturally, it is a challenge to quantify every expense related to a certain business function.

It is also obvious that there are costs that go way beyond the simple wage/no. of identified users metric.

Just to name a few:

the cost of dev ops setting up a highly complex multiple variant process
the cost of trying to patch up in-house systems with the ever-changing security and compliance requirements
the cost of training an in-house team
the opportunity cost of slower onboarding
the opportunity cost of lost customer loyalty
the opportunity cost of false positives & missing flags on a fraudulent user
the opportunity cost of a subpar user experience

and the list goes on.

So then, how can you make an educated decision?

Let’s look at 3 crucial aspects of how the right KYC solution is affecting your growth

1. Speeding up the process

As much as a DIY solution may be handy when you can fix a household appliance…

there are some cases where working with a professional will save you more money and trouble in the long run.

For example, we see a lot of businesses setting up in-house KYC mechanisms. On paper, they can of course identify users.

But when we look at the speed at which they are able to do it, we wonder how it is justified.

Working with either:

– a designated yet tiny onboarding team
– a large team of sales agents who are doing onboarding in their spare time
– a provider with a subpar process for your customers

will undoubtedly result in your users having to wait for days to go through an often painful onboarding experience.

A change from identification in days or a matter of seconds can mean the difference between a lost or won customer.

2. Increasing your conversion rates

When customers have to go through dragged-out manual processes, even if they have initially decided to give a try to a service provider because of the service itself…

After the Nth manual identification step, they tend to give up.

We have seen multiple cases where in order to identify the customer, a provider had to reverify their ID in separate stages of the process »

sometimes in a digital form and sometimes even with an added in-person step.

If that would not be enough, an operation as such is also highly vulnerable to tiny changes (like a different ID card used), which causes further friction and annoyance to the customer.

When you can digitally identify a user once, and at max confirm their identity in seconds when needed »

your users can avoid unnecessary friction, have a pleasant verification experience and thus convert at higher numbers.

3. Decreasing resources used & drop-off rates

We never encounter businesses that are indifferent to their budget or ones that love to talk about their unlimited resources.

Most will try to find the most economical solution among the trustworthy ones when it comes to both solving a “nuisance” and choosing a 3rd party service.

But to be fair, when all solutions look the same, one can hardly find a better route than treating the service as a commodity, and thus choosing the cheapest of the options..

The question is, however, are they really finding the most economical way?

When it comes to user identification your decision should be based on 2 aspects…is the solution

Secure for you and your customers, with a proven track record
Familiar, painless and frictionless for your users, so their experience with your service is not tainted

When looking strictly at cost/identification, in the sense of how much you are paying for each identification » you can easily mislead yourself into thinking that the cheapest phone operator is the right way to go.

However, when you calculate the dropoff rates and the resources used for each:

– correction,
– further reach out,
– in-person identification etc.

you’ll quickly find that you are wasting way more than you’re gaining.