KYC doesn't have to kill conversion: enter progressive onboarding

The high cost of friction

40% of customers abandon their KYC/KYB onboarding journey after just 10 minutes.

And yet, KYC/KYB requirements are non-negotiable.

So how can you reconcile compliance and customer experience, without sacrificing one for the other?

Enter KYC progressive onboarding – a game-changing approach that's reshaping how companies verify customer identities while maintaining regulatory compliance. This innovative method is not just a trend; it's becoming a necessity for financial institutions, fintechs, and marketplaces alike. Let's dive into why KYC progressive onboarding is the future of customer verification and how it can transform your business.

The pitfalls of traditional KYC processes

Before we explore the benefits of progressive onboarding, it's crucial to understand the challenges posed by traditional KYC processes:

1. Time-consuming and resource-intensive: Traditional KYC often requires extensive documentation upfront, demanding significant time and resources from both customers and financial institutions before getting access to a financial product.
2. High drop-off rates: Did you know that 40% of customers abandon applications that take longer than 10 minutes to complete?

These challenges underscore the need for a more efficient, user-friendly, and risk-based approach to customer verification.

Understanding KYC progressive onboarding

Unlike traditional KYC, which frontloads all document verification requirements once for all,

progressive onboarding is a compliance-friendly customer onboarding approach where users are granted limited or gated access to a financial product after an initial set of KYC information is reviewed and approved.

Customers can explore the platform and view their account setup but face usage restrictions (e.g., payment limits). As they express interest in specific products or services, additional KYC data and documents are requested, enabling a gradual and risk-based expansion of access

Here's how it typically works:

1. Initial registration (basic information): Financial institutions collect the minimum information necessary to create an account or profile, such as the business name, contact details, and essential identification.
2. Activation of a gated account: Upon Compliance verification, the customer’s account is activated and the customer can access limited services quickly (usually an admin space/dashboard), but all payment products, for instance, are disabled.
3. Incremental KYC information gathering (post account creation): Additional data is requested beyond a certain payment volume threshold or 30 days after account activation, whichever comes first.

For example:

• You may request detailed financial information when a transaction exceeds a certain threshold. See AML6D thresholds. For example, one of our European customers, operating as an Electronic Money Institution (”EMI”) allows its end users to cash in up to 15,000 euros within 30 days. The second tier of data and documentation must be collected to unlock outgoing payments or exceed the 15,000 euro threshold. The 15,000 euro threshold is derived from AMLD4 requiring obliged entities to perform customer due diligence on transactions above 15.000 euros. Designed to strengthen the European Union’s efforts to combat money laundering and terrorist financing, the Fourth Anti-Money Laundering Directive (EU) 2015/849), also known as AMLD4, was passed on May 2015, with member states required to adopt it (and transpose into national law) by June 26, 2017.
• When the customer wishes to access premium features, such as doing FX or cross border payments, you might require additional data/documents.

The benefits of progressive onboarding

Implementing a progressive KYC strategy offers numerous advantages for both financial institutions and customers:

1. Enhanced user retention: You reduce drop-offs and boost conversion rates by simplifying the initial steps (but careful the opposite side of the coin means that you might need to offboard customers who will not comply with the additional document requests).
2. Shorter time to decision: With less information to verify, KYB analysts have a lighter burden and slight chances of alerts and can quickly render a first onboarding decision to grant the gated access.
3. Improved customer experience: By reducing initial friction points, progressive onboarding creates a smoother, more user-friendly experience. This approach aligns with modern consumer expectations for quick and easy digital interactions.
4. Enhanced compliance efficiency: The risk-based approach allows compliance teams to focus their efforts where they're most needed. By tailoring verification steps to customer profiles and product types, businesses can allocate resources more effectively.
5. Regulatory compliance: As a financial institution, you know exactly what product(s) the customer wishes to use during that gated activation period, allowing a very granular AML scoring on the product/service pillar of the risk scoring matrix.
6. Cost reduction: Automation and optimized workflows reduce operational costs associated with manual verification processes. Some businesses using progressive KYC solutions have reported automating up to 60% of their account openings.
7. Scalability: Progressive onboarding enables businesses to expand into new markets more easily by adapting to various regulatory requirements without overhauling their entire onboarding system.

Implementing progressive onboarding

To successfully implement a progressive KYC strategy, consider the following steps:

1. Assess eligibility: Launch AML screening tasks synchronously as soon as the user fills in relationships form in the onboarding collection form (called Portals at Ondorse). If there is not hit, the prospective customer is eligible for progressive onboarding and no document is expected. If there is a hit, the prospective customer is not eligible for progressive onboarding, a full KYC is needed upfront and expected documents are automatically adjusted.
2. Multiply checks by adding new data sources: Connect with various verification services and data providers to create a comprehensive view of your customers. This might include company registers to automatically enrich profiles of customers or fraud detection services to precisely assess eligibility.
3. Allow for easy iteration: Create adaptive onboarding flows that can adjust based on the customer's risk profile and the products they're accessing. The workflows should allow easy iteration of the threshold that we cover below (based on product features, payment volumes or time elapsing).
4. Carve out what hurts conversion: Here is the take, you should identify specifically what document or data requests hurts conversion at onboarding and only save such requests the incremental KYC step (the step 2).

Best practices for successful implementation

To maximize the benefits of KYC progressive onboarding, keep these best practices in mind:

1. Set the right threshold for incremental KYC: The threshold can be based on product features, payment volumes or elapsed time:
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   1. Product features: After submitting the first information set, the customer will have limited access to his/her admin space in your financial product, where he/she can view the account setup and explore available products but not process payments. Depending on the additional product he/she wishes to use, your institution will require more data and documents from the customer before he/she can use the desired services.
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   2. Payment volumes: As the client's transaction volume increases above EUR 5.000, request additional documentation, such as the Digitaal Gewaarmerkt Uittreksel, to verify the company's legal status and ownership structure. Under EUR 5.000, a simplified due diligence can be sufficient. Why EUR 5.000? Get in touch with us to get the rationale that has been accepted by regulators.
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   3. Elapsed time: The initial account is only activated for a limited period (e.g., 30 days) after the first KYC information set is approved. During this time, the customer has restricted access to the platform - enough to explore features or initiate limited activity. If the customer wants to continue using the platform beyond this period, or access additional capabilities, your institution will request further KYC data and documents. This time-based gating ensures that inactive or low-risk users aren’t overburdened upfront, while maintaining a compliance-friendly timeline for collecting the full KYC set from active customers.
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2. Implement ongoing monitoring: Don't stop at initial verification. Set up systems for continuous monitoring and periodic re-verification based on risk levels and changing regulations.
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3. Utilize automated Enhanced Due Diligence (”EDD”): For high-risk cases, implement automated EDD processes to collect additional information efficiently.
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4. Maintain clear audit trails: Ensure your system keeps detailed records of all verification steps, decisions, and data sources used. This is crucial for regulatory compliance and internal audits.

How Ondorse supports KYC progressive onboarding

Ondorse is at the forefront of enabling businesses to implement effective progressive KYC strategies. Ondorse offers:

• A flexible workflow builder for creating custom onboarding processes
• Integration with multiple data sources and verification services
• Automated enhanced due diligence capabilities
• AI-powered risk assessment and screening
• Comprehensive audit logs for regulatory compliance

By leveraging such platforms, businesses can significantly reduce onboarding times, improve conversion rates, and enhance overall compliance efficiency.

The future of KYC in a competitive landscape

We believe that KYC progressive onboarding is set to become the norm rather than the exception for PSPs (”Payment Service Providers”) and EMIs. Its ability to balance regulatory compliance with user experience makes it an invaluable tool for businesses looking to thrive in competitive markets.

We see progressive onboarding strategy mostly used and deployed by B2B fintechs (versus B2C fintechs). We think this stems from the complexity of the onboarding process, conversion dynamics, and relationship structure in B2B versus B2C contexts.

By adopting a progressive approach to KYC, companies can:

• Onboard customers faster and more efficiently
• Reduce operational costs
• Improve customer satisfaction
• Scale their operations more easily

The question is no longer whether to implement progressive KYC, but how quickly you can adopt this transformative approach to stay competitive and compliant in the evolving financial landscape.

We’ve built and run programs at large fintechs and have helped several financial institutions strengthen their risk controls. We would be happy to answer any questions you have.

Get in touch with us and we’ll guide you into how you can use Ondorse to implement a progressive onboarding strategy.