KYC Profitability

Customer due diligence requirements under anti-money laundering legislation are now a given for accountancy firms. Yet in many firms, extensive KYC work is carried out without clear pricing or commercial logic. This may include anything from manual checks to training and implementation of KYC within the firm. The question is whether the firm is actually capturing these costs – or whether profitability in certain engagements is being quietly eroded.

What is the firm actually doing for customer due diligence – and are you charging for it?

Structured KYC work consists of several recurring steps: collecting customer information, verifying identity and beneficial ownership, conducting a risk assessment, deciding whether to accept, reject or retain a customer, and carrying out ongoing monitoring and, where necessary, reporting suspicions. All of this takes time and requires the right expertise.

In practice, KYC work often falls between the cracks financially:

• It is not recorded as a separate engagement or activity.
• The time spent is merged with general customer management or administration.
• There are no clear guidelines on how much time is acceptable per customer type.
• The work is performed by senior staff without this being reflected in the price.

The result is that the firm carries a significant, but largely invisible, compliance cost, while the price charged to the customer risks being set as though that cost did not exist.

Customer due diligence as a hidden cost in the firm’s finances

To understand how KYC affects profitability, the firm needs to treat customer due diligence as a separate cost item, not merely as a legal obligation. Typical cost drivers include:

• Onboarding new customers with incomplete documentation.
• Complex ownership structures requiring additional investigation.
• Recurring updates to customer information and risk assessments.
• Internal discussions and decision meetings regarding higher-risk customers.
• Handling suspicious transactions and considering whether to report to the Financial Intelligence Unit.

Unless the firm quantifies this work, it becomes difficult to assess which engagements are genuinely profitable. Two customers with the same fee may have entirely different cost profiles once KYC work is taken into account.

Low-risk and high-risk customers – different profitability profiles

Anti-money laundering legislation is based on an AML risk based approach. This means that the firm must allocate more resources to customers and engagements where the risk of money laundering or terrorist financing is higher, and fewer resources where the risk is low.

From a profitability perspective, this means in practice that:

• Low-risk customers require less KYC work over time.
• High-risk customers may require recurring enhanced checks and reassessments.
• Certain customer segments may consume their own margin through high KYC costs.
• The firm may need to decline engagements where the risk and cost are not proportionate to the fee level.

If pricing is not differentiated by risk, low-risk customers often help finance high-risk customers. That may be commercially justified in some cases, but it should then be a conscious decision by the partner group – not an accidental effect of unclear models.

Business models for pricing customer due diligence work

There are several ways to integrate KYC into the firm’s business model without creating unnecessary friction with the customer. Examples include:

• Cost included in the base price: KYC work is factored into the hourly rate or fixed price for standard engagements. This requires the firm to have a relatively consistent risk profile across its customer portfolio.
• Separate KYC or compliance fee: A fixed fee per customer, for example annually, intended to cover customer due diligence, risk assessment and ongoing updates.
• Risk-differentiated pricing: A higher fee or specific surcharge for customers in a higher risk category, based on a structured risk classification.
• One-off onboarding fee: A start-up fee when a new customer is accepted, covering initial customer due diligence and risk assessment.

The appropriate model depends on the firm’s size, customer structure and service offering. The key point is that the model should be well considered, applied consistently and anchored in management.

How to communicate KYC work to customers

A common concern is that customers will react negatively if the firm charges for KYC work. Often, the issue is how the work is presented. When customer due diligence is framed as a fundamental requirement for the firm to take responsibility for its engagement and protect both the customer and the firm, understanding is usually greater. A clear explanation at the beginning of the relationship is often considerably easier than justifying hidden costs or supplements retrospectively.

Practical steps for partners and firm management

For partners and finance managers, KYC is primarily a strategic issue: how do you ensure that compliance does not undermine profitability? A structured approach may include:

• Mapping current KYC processes and who does what.
• Measuring actual time spent per customer type or risk category.
• Analysing which customer segments become less profitable when KYC costs are included.
• Deciding on a pricing model and how it should be communicated internally and externally.
• Ongoing monitoring of key metrics, such as KYC time per revenue unit or per risk class.

When KYC work becomes an integrated part of the firm’s business model, with clear pricing, embedded processes and deliberate risk decisions, the risk of unpleasant surprises in both profitability and supervision is reduced. At Morling Consulting, our AML lawyers support firms in combining compliance with commercial value across Europe. Read more about how we work as advisers on anti-money laundering legislation and KYC matters.