Digital identity verification has long been measured primarily by one standard: how effectively it stops fraud. But new data suggests many organizations may be focusing on the wrong side of the ledger.
A PYMNTS Intelligence report in collaboration with Trulioo, “Built or Bought: How KYC/KYB Ownership Shapes Risk, Cost and Growth,” finds identity programs have a significant financial impact beyond fraud losses. That impact stems from legitimate customers who never complete onboarding, are incorrectly flagged as suspicious or abandon applications after encountering excessive verification hurdles.
That dynamic raises a broader question for financial institutions, FinTechs and digital platforms: How much growth is being sacrificed in pursuit of risk reduction?
The report’s findings suggest that every identity ownership model carries costs. The challenge is understanding which costs are most damaging to long-term business performance.
When Fraud Controls Become Conversion Barriers
One of the stark findings in the report is that internally managed identity programs consistently generate the highest levels of friction.
Among firms managing know your customer (KYC) and know your business (KYB) entirely in-house, 43% report excessive false positives, meaning legitimate customers are incorrectly identified as potential bad actors. Meanwhile, 56% report rising transaction decline rates and 62% say excessive verification checks are creating customer friction.
Every additional document request, manual review or erroneous rejection creates an opportunity for a prospective customer to abandon the process. Unlike fraud losses, which are typically measured and reported, these missed opportunities frequently remain invisible.
The data indicate that internal teams experience many of the friction points most closely associated with lost revenue and reduced customer trust. Legitimate users who are incorrectly blocked may simply take their business elsewhere.
The result is a cost structure that extends well beyond compliance budgets.
The Onboarding Bottleneck
The data becomes even more compelling when examining onboarding performance directly.
Fifty-three percent of firms using internal teams report onboarding delays, compared to just 31% of firms relying on external providers. Similarly, 61% of internally managed programs report high onboarding abandonment rates, versus 41% among externally managed models.
Those gaps suggest that identity friction can influence growth outcomes at scale.
Customer acquisition teams may spend heavily to attract prospects, only to see a meaningful share of them disappear during verification. In highly competitive markets such as banking, payments, lending and digital commerce, that attrition can become an expensive drag on growth.
External providers bring their own tradeoffs, including limitations that may constrain geographic expansion and entry into new markets. Eighty-one percent of firms relying entirely on third-party verification providers say their identity systems prevent them from entering new markets.
The issue is recognizing that every model imposes costs somewhere.
Many firms continue to evaluate identity programs primarily through operational measures such as review costs, audit performance and fraud detection rates.
Yet the report suggests that conversion metrics may deserve equal attention.
Internal teams spend an average of $26 per KYC review and $51 per KYB review, more than double the cost reported by external providers. Despite those higher expenditures, they also report the highest rates of false positives, onboarding delays and fraud-related losses.
The true cost of verification is not simply what a firm spends to review an applicant. It is also the revenue lost when legitimate customers abandon the process, when applications remain stuck in manual review queues and when overly aggressive controls create unnecessary barriers to entry.
The findings suggest that organizations should evaluate identity strategies through a wider lens. Fraud prevention remains essential, but customer conversion, onboarding speed and false-positive rates deserve equal scrutiny. The firms that strike the right balance may discover that reducing friction produces a larger financial return than eliminating another incremental layer of risk.
