The KYC Onboarding Crisis: Why Engineering Must Build In-House Solutions
The Costly Mistakes of KYC Engineering
If you've worked in fintech, banking, or any regulated industry, you've seen it firsthand—KYC onboarding is a nightmare. Over-reliance on third-party vendors, failed integrations, compliance bottlenecks, and fraud slipping through the cracks. And yet, organizations continue throwing money at external services without a solid engineering strategy for long-term sustainability.
This article is a call to action for engineering and product teams to rethink KYC onboarding, focus on in-house solutions, and build a resilient, scalable KYC process that works. We’ll examine:
Failures in past and current KYC implementations
The right way to integrate AML (Anti-Money Laundering)
Final Thoughts
Let’s stop treating KYC as a check-the-box compliance exercise. It’s time to do it right.
1. The Engineering and Product Failures in KYC Onboarding
The Product Perspective: Friction vs. Compliance
KYC is often caught in a tug-of-war between compliance and user experience. Product teams push for a seamless onboarding process to reduce drop-offs, but in doing so, they sometimes weaken the security and fraud prevention layers. On the other hand, compliance demands thorough identity verification, increasing the number of steps, documents, and friction for the user. The lack of a well-thought-out balance often results in either:
A slow, painful onboarding experience that discourages genuine customers.
A lax verification process that lets fraudsters in, creating regulatory headaches later.
The Engineering Perspective: Over-Reliance on Third-Party Vendors
Many companies outsource KYC verification to external vendors without fully evaluating the long-term implications. While third-party services like Onfido and Sumsub provide out-of-the-box solutions, they introduce critical dependencies that engineering teams struggle to manage:
Vendor Lock-in: The Cost of Dependence
At first, integrating a third-party KYC provider seems like a fast and efficient solution, but this convenience comes at a price. Vendor lock-in occurs when a business becomes so reliant on a provider that switching becomes technically painful and prohibitively expensive. API structures, data formats, and storage methods vary across vendors, making migration difficult. Additionally, contractual agreements may have high termination fees or restrictive data export policies, limiting flexibility.
Solution: Engineering teams should build an abstraction layer over third-party KYC services, allowing for provider interchangeability with minimal disruptions.
Outages and Rate Limits: The Hidden Downtime Risk
Third-party services often come with their own uptime challenges. A single-point failure in the provider’s infrastructure—whether due to scheduled maintenance, rate-limiting, or unexpected downtime—can halt user onboarding entirely. Some businesses have lost thousands of dollars in revenue due to an API outage preventing identity verification.
For example, a fintech startup relying on a single provider experienced a complete onboarding freeze for 48 hours when the provider’s API failed. This resulted in frustrated users, high churn rates, and an emergency engineering scramble to find workarounds.
Solution: Organizations must implement failover strategies, including backup providers and internal verification methods to prevent onboarding paralysis.
Compliance Gaps: The Unseen Legal Risks
A third-party KYC provider that is compliant in one jurisdiction may not meet regulatory requirements in another. Businesses operating in multiple regions must ensure that their providers adhere to local laws like GDPR, CCPA, and PSD2. Failure to do so can result in legal action, fines, or even forced shutdowns.
Another major issue arises when vendors update their compliance policies without notice. Companies that rely on a single provider may find themselves unknowingly violating newly introduced regulations because they assumed compliance was handled externally.
Solution: Instead of blindly trusting third-party compliance, engineering teams should build internal monitoring systems that verify KYC vendor adherence to evolving regulations and conduct periodic audits.
💡 Lesson: KYC isn’t just about integrating an API; it’s about building a robust, adaptable system that ensures business continuity, compliance, and scalability.
2. Engineering’s Role: Build, Don’t Just Integrate
Why You Need to Build In-House KYC Tooling
✔️ Redundancy: If a third-party service fails, you need an internal fallback.
✔️ Cost Control: Vendor pricing scales with your user base—your costs explode over time.
✔️ Data Ownership: Keep user data private and comply with local data regulations (GDPR, CCPA).
✔️ Flexibility: You control how verification is handled, making it adaptable to different jurisdictions.
The Core Components of a KYC System
A robust KYC system consists of:
ID & Document Verification (OCR, Liveness detection)
AML Screening (Sanctions lists, PEP checks)
Fraud Detection (Behavioral risk analysis, anomaly detection)
Data Storage & Audit Logging (Regulatory compliance)
3. The Right Way to Integrate AML (Anti-Money Laundering)
AML is a critical component of KYC that often gets overlooked or implemented reactively. A well-integrated AML process ensures that organizations can detect and prevent financial crimes before they escalate. The right approach to AML integration includes:
Automated Screening Against Sanctions and Watchlists
Implement real-time checks against OFAC, UN, EU, and other global sanctions lists.
Use APIs like Dow Jones Risk & Compliance or ComplyAdvantage to automate risk screening.
PEP (Politically Exposed Persons) Identification
Identify high-risk individuals who hold prominent public positions.
Cross-check PEP data with transaction monitoring to flag unusual activities.
Behavioural and Transactional Monitoring
Analyze user behavior to detect anomalies (e.g., sudden large transactions, frequent account switching).
Set up risk-based rules to trigger enhanced due diligence (EDD) for suspicious accounts.
Machine Learning for Fraud Detection
Train models to identify patterns of fraudulent transactions.
Use AI to adapt to evolving threats without excessive false positives.
Regulatory Reporting and SARs (Suspicious Activity Reports)
Ensure a system is in place for automated generation of SARs for compliance teams.
Establish clear escalation workflows for fraud investigations.
💡 Engineering Takeaway: AML should not be an afterthought—it should be a real-time, continuously evolving process that works alongside KYC.
Final Thoughts: Engineering and Product Must Align
Am I saying that third-party tools should be discarded and never used? Absolutely not. Third-party tools have evolved to incorporate best practices and offer excellent solutions. However, they are designed for broad use cases and built to serve the masses. They should be utilized and even endorsed by engineering teams, but not blindly relied upon.
My call is for Compliance, Product, and Engineering teams to collaboratively find ways to reduce the friction in their KYC onboarding processes while incorporating redundancies. As the name suggests, Know Your Customer means truly understanding your users, not just outsourcing that responsibility to third-party providers. Organizations have a duty to know their customers in a way that aligns with their specific risk profile, compliance needs, and business model—without always being at the mercy of external vendors.
The future of KYC onboarding belongs to companies that take control of their processes. Let’s build it right.