KYC (Know Your Customer) in fintech needs to move fast, but it also needs to be smart. Most customers complete the KYC onboarding process from a phone or laptop, and they expect an answer right away. That speed puts pressure on compliance teams.
Teams need to verify people and businesses with automated KYC verification without adding friction to the onboarding process and without missing early signs of fraud or financial crime. A risk-based verification strategy helps fintechs do both, adjusting the level of checks in the KYC verification process based on the real risk behind each customer instead of treating every user the same.
This guide breaks down how fintechs can build a risk-based verification strategy and strengthen KYC integration, including the relevant regulatory frameworks and requirements and how open-source intelligence (OSINT) tools like ShadowDragon Horizon™ help fintechs identify risk early and keep their platforms safe.
What is a Risk-Based Verification Strategy in KYC for Fintech?
A risk-based verification strategy in KYC for fintech looks at every customer through the lens of likelihood and impact. The aim is to apply the right level of verification based on the risk the person or business brings into your system.
Fintech relies on speed. Most onboarding happens online. Customers expect decisions in seconds, so traditional KYC checks used in banks don’t always fit. Fintech teams need KYC that reacts fast without leaving blind spots.
Digital identity signals play a big role. Device history shows how a phone or laptop behaves over time. IP reputation and network paths reveal where a session originates from. Real-time risk scoring weighs all these details to determine the appropriate level of verification. The system adapts to each action rather than treating everyone the same.
A risk-based verification strategy requires continuous monitoring to keep the customer’s profile current after onboarding. Changes such as new activity or behavior shifts surface quickly, and teams need to take action before a small risk becomes a significant problem.
Regulatory Frameworks for KYC in Fintech
Fintech teams work under strict regulatory pressure. The Financial Action Task Force (FATF) recommends matching controls to the level of customer and transaction risk. This concept drives most regional regulations that fintechs follow.
In the U.S., the FinCEN Customer Due Diligence (CDD) Rule sets expectations for knowing who owns and controls a business. The Customer Identification Program (CIP) Rule requires basic identity checks before an account goes live. Beneficial ownership requirements call for fintechs to understand who ultimately owns or benefits from a business’s operations. Together, these rules guide how fintechs verify the individuals behind each account.
In the EU, Anti-Money Laundering Directives AMLD 5 and AMLD 6 expand what firms must check during onboarding. These rules place additional emphasis on high-risk customers. The AMLD also raises expectations for ongoing monitoring activity. These directives push fintechs to build verification workflows that adjust to risk in real time.
In the Asia-Pacific region (APAC), regulators such as MAS (Money Authority of Singapore) and AUSTRAC (Australian Transaction Reports and Analysis Centre) lay out similar expectations. MAS requires careful review of higher-risk profiles and strong ongoing monitoring of cross-border activity. AUSTRAC focuses on accurate identity checks and quick action when suspicious behavior appears.
Fintech teams map these rules to internal risk scoring models as part of ongoing customer due diligence. A higher risk score triggers stronger verification, while a lower score keeps the process simple. The result is a set of verification tiers that reflect the real-world risk behind each customer.
Steps to Build a Risk-Based Verification Strategy
Crafting a risk-based verification strategy for KYC fintech requires a strategic approach and a clear KYC checklist. The following steps will help compliance teams build an effective KYC program that effectively assesses risk.
1. Customer Risk Profiling
Customer risk profiling is the backbone of a risk-based KYC strategy. First, determine how many risk tiers to use. Most fintech firms work with three (low, medium, high). Each tier requires a different level of checks and monitoring.
Low-risk customers might be domestic retail users with simple use cases, such as basic payments or savings. Medium risk customers might include higher limits or more complex products. High-risk profiles include larger-value accounts with higher-risk activities, such as cross-border activity, or customers in sectors that attract more fraud and financial crime.
There are several factors to consider in determining the appropriate risk tier for a customer, including:
- Geography – Where the customer lives, and where they accept and receive funds.
- Product risk – What they’re using your firm for and how exposed the product is.
- Transaction behavior – This includes the size and frequency of transactions, as well as the direction of funds over time.
- Customer type – Customer types can include retail, sole traders, small business, or complex corporate customers.
- Onboarding channel – Onboarding channels can include web, mobile app, partner integration, or API.
These factors don’t all carry the same weight. High-risk geography typically has a more significant impact on risk than the onboarding channel. A new small to mid-sized business (SMB) sending large cross-border payments is different from a local retail customer who only uses a card.
A strong profile blends static indicators with behavioral factors. Static indicators are details that don’t change often, such as a customer’s legal name or date of birth. These indicators can also include business type and registered address.
Behavioral indicators, such as login patterns and device changes, are more likely to change. Behavioral indicators can also include new counterparties and transaction spikes.
Risk-based KYC treats static data as the starting point. Behavioral indicators then impact the score over time. This mix enables fintechs to keep initial onboarding fast while still reacting when the risk picture changes.
ShadowDragon Horizon™ helps strengthen the first pass at establishing a customer’s risk tier by adding context that documents alone don’t provide. It cross-references details such as email addresses and usernames with the customer’s online presence, giving compliance teams a clearer view of who the customer is before assigning a risk tier.
2. Identity Verification and Documentation Controls
Identity verification is where risk-based KYC first shows up in the customer experience. Digital onboarding flows guide customers through each step. The process adjusts based on the risk score established during profiling. Low-risk customers move through a simpler process with light checks, while high-risk users face stronger controls.
Most fintech firms rely on a few core identity verification methods:
- Document verification checks the authenticity of IDs, such as passports or driver’s licenses.
- Liveness checks confirm that the person behind the camera is real by asking the customer to turn their head or blink. This helps to rule out deepfakes or static images attempting to mimic a live person.
- Biometrics, such as fingerprints or iris scans, add another layer when more certainty is needed.
- Databases help verify identity details.
- Politically exposed persons (PEP) and sanctions screenings determine whether the customer appears on watchlists or has ties that raise concern. A politically exposed person is an individual (or family members or close associates of these individuals) who holds a prominent or public-facing role, such as a government official or a high-profile executive. Due to their perceived power or influence, they’re at greater risk of being targeted for bribery or other forms of corruption.
A layered approach is critical. A basic document check may appear clean, for example, but the customer may have close ties to individuals linked to previous fraudulent activities. A customer may pass a liveness check, but their name may appear in a sanctions database. These checks work together to eliminate blind spots and increase confidence in the customer’s risk profile.
Horizon™ Identity works alongside standard ID checks, pulling signals from identifiers, such as usernames and phone numbers, to determine whether all the pieces line up. For example, Horizon Identity can help teams recognize when something looks off, such as an email that doesn’t appear anywhere except on the customer’s onboarding form. This context helps fintechs establish that the person behind the documents is real.
3. Beneficial Ownership and Business Verification (KYB)
Business accounts introduce a different level of risk. B2B fintechs, such as lending or payments technologies, need KYB (Know Your Business) checks to understand who controls the company and how the business operates.
The first step is identifying the ultimate beneficial owners (UBOs). This requires looking past the front-facing directors and investigating the people who hold real control or influence.
Some business structures are simple, while others are layered across multiple jurisdictions or split among multiple individuals.
Adverse media checks show whether the business or its leadership appears in news tied to fraud or corruption. Corporate structure analysis helps compliance teams understand how each entity links together. Cross-border entities add more complexity because different regions follow different disclosure rules.
ShadowDragon Horizon™ gives compliance teams a clearer understanding of who actually controls a company by mapping relationships and identities with public records that point to real ownership. If a business spans multiple jurisdictions or shows unusual links between individuals, Horizon™ can surface those patterns, making it easier to identify true UBOs and uncover risks hidden within complex corporate structures.
4. Transaction Risk Scoring
Transaction risk scoring tracks how a customer behaves once the account is active. Begin by setting a baseline. Look at the typical activity for that type of user, such as:
- The typical size of transfers
- Frequency of transactions
- Where funds move
- What devices they use
This baseline becomes a reference point. From there, watch for shifts. Velocity controls alert compliance teams when money moves faster than usual. Volume flags can detect large or unexpected transfers.
Pattern detection highlights unusual routes or counterparties. A single event may not indicate a problem, but a string of unexpected activities may indicate fraud.
Real-time monitoring is key. It flags activity as it happens, allowing compliance teams to take action before losses occur. Batch monitoring gives teams a wider review window and helps identify slow-moving trends. Using both provides coverage for sudden spikes and long-term patterns.
Horizon™ Monitor supports this stage by tracking open-source activity tied to a customer or business once the account is active. It surfaces signals such as a customer suddenly appearing in new online spaces or in forums tied to fraud. These signals feed into a fintech’s behavioral model, providing additional context when scoring changes in velocity or transaction patterns.
5. Ongoing Monitoring and Continuous KYC
Ongoing monitoring and KYC remediation keep the customer’s risk profile current. Teams watch for shifts in behavior, such as:
- New devices
- Document changes
- Unusual patterns
These signals can help teams identify when a low-risk profile starts to incur more risk.
Trigger events alert teams of issues that need a closer look. Triggers can include:
- A new address
- A sudden increase in limits
- A change in ownership
- A spike in cross-border activity
These alerts call for a human analyst to conduct a review to determine if the customer still fits the original risk tier.
Automated alerts make this possible at scale. Sanctions updates can happen at any time. Adverse media can appear overnight, and device risk can change after a breach or malware event. Continuous KYC surfaces these changes immediately so compliance teams can take prompt action.
Horizon™ Monitor continuously monitors publicly available sources for insights such as:
- Sanctions hits
- New adverse media
- Changes in online behavior
If a customer is named in a local news story or if an associated identifier appears in a data breach dump, Horizon™ Monitor alerts compliance teams right away so they can react before the risk impacts the fintech platform.
6. Enhanced Due Diligence for Higher-Risk Fintech Use Cases
Some customers bring more risk exposure into a system. Enhanced due diligence (EDD) enables compliance teams to understand the level of risk before approving the account.
Cross-border payments are a common example. Money moves through multiple jurisdictions, each with different rules and fraud patterns. Enhanced due diligence is needed to confirm the customer’s identity and the purpose of the transfers.
Cryptocurrency features may also require EDD. Wallet activity and on-chain behavior, as well as counterparties, can signal risk long before documents reflect it. Analysts should examine whether the customer jumps between high-risk exchanges and look for patterns tied to past fraud.
High-velocity and high-value accounts, such as those with large spikes in activity or rapid movement through new devices, require EDD, as well. A sudden increase in limits is another red flag.
These shifts raise the chance of account takeovers or money laundering. Extra verification allows compliance teams to confirm the activity belongs to the right user.
PEP onboarding brings political exposure, and these profiles require a deeper review of the source of funds and potential influence risk. PEPs, or individuals who hold public-facing roles, such as government representatives, or high-profile positions, such as company executives, are often targeted for bribery and are at a higher risk of other forms of financial fraud and corruption due to their perceived proximity to power and influence.
This also applies to family members and close associates of these individuals. EDD in these cases involves investigating relationships and past events that may impact how the account is used.
EDD benefits from deeper open-source intelligence (OSINT). Horizon™ Identity helps confirm who the customer really is, which is especially important for those involved in crypto and cross-border transactions, as well as customers in other high-value scenarios.
Horizon™ Monitor adds ongoing visibility by surfacing risk tied to political exposure or suspicious online behavior. When a customer’s profile is in the high-risk category, these OSINT tools provide the detail compliance teams need to make confident decisions.
Enhancing Your Risk-Based Verification Strategy with ShadowDragon
A strong risk-based verification strategy helps fintechs move fast without losing sight of real exposure. Each layer in the verification process reduces the chance that fraud or undisclosed risk slips through.
A risk-based approach only works when compliance teams have the right signals at the right time. ShadowDragon Horizon™ gives fintech teams the context they need to make decisions with confidence, adding details from public information sources that documents and databases miss. Contact our team for a demo today to explore how ShadowDragon can help your team build a highly effective risk-based verification strategy.
