tl;dr
BFSI firms often go wrong with Video KYC vendor selection by:
- Ignoring RBI compliance flexibility and local data storage rules
- Skipping deep security assessments (VAPT, CERT-In audits)
- Overlooking full data residency and lifecycle requirements
- Doing shallow tech evaluations that miss scalability and accuracy gaps
- Prioritising cost over long-term total ownership value
The fix: run PoCs under real-world conditions, monitor compliance continuously, train staff, and treat the vendor as a long-term strategic partner.
The BFSI industry has grown by leaps and bounds through tech innovations, particularly through UPI, India stack and Video-based Customer Identification Process (V-CIP) or Video KYC (VKYC). However, despite this digital momentum, many financial institutions are making critical errors when selecting VKYC vendors, potentially exposing themselves to regulatory non-compliance, security breaches, and operational failures.
Approximately 10% of a bank’s workforce is involved in compliance-related activities, yet vendor selection mistakes continue to plague the industry. The consequences of poor VKYC vendor choices can result in regulatory penalties, customer trust erosion, and significant financial losses that often exceed the initial cost savings from cheaper vendor selection.
The Critical Stakes of VKYC Vendor Selection
VKYC has evolved from a nice-to-have feature to an essential component of digital banking infrastructure. The technology enables financial institutions to conduct customer onboarding remotely while maintaining verification integrity equivalent to traditional in-person processes. However, the effectiveness of VKYC implementation heavily depends on vendor selection decisions made during procurement.
The stakes are particularly high currently, as the norms for regulatory compliance shift from non-negotiable and customer acquisition costs continue to rise. Financial institutions that choose vendors correctly typically see customer onboarding times reduced from weeks to minutes, while those that choose poorly often face extended implementation timelines, cost overruns, and regulatory scrutiny.
Top 5 Critical Mistakes in VKYC Vendor Selection
Ignoring RBI Guidelines
Banks and other traditional financial institutions are built upon a legacy of policies and norms, which were otherwise mostly stable until the past decade. The need of the hour has become to adapt your organization’s processes with regulatory changes as and when they arrive.
For less established institutions, this may prove to be a struggle without the right resources at hand. For example, it’s super easy to select the wrong vendor amidst the blitz and glory of new tech features. But none of those matter if the essentials are left compromised.
A lot of financial institutions may choose to go with overseas vendors, but currently, the RBI requires that all V-CIP data and recordings be stored exclusively in India-based systems. When cloud deployment models are used, data ownership must rest solely with the regulated entity, and all data must be transferred to the institution’s exclusively owned servers immediately after V-CIP process completion.
Here, the best thing to do would be to stick to a trusted vendor that is known to move fast and adapt accordingly to regulatory changes.
Inadequate Security Assessment
Security assessment failures represent one of the most dangerous mistakes BFSI firms make during vendor selection. Many institutions treat cybersecurity as a checkbox item rather than conducting comprehensive multi-layered security evaluations that assess vendor capabilities across all threat vectors.
The regulatory framework requires V-CIP infrastructure to undergo vulnerability assessment, penetration testing, and security audits conducted by CERT-In empanelled auditors. Critical gaps identified during testing must be mitigated before implementation rollout, and security testing must be conducted periodically as ongoing requirements.
The guidelines emphasize end-to-end encryption standards, IP address restrictions for Indian connections only, and comprehensive protection against various spoofing and fraud attempts including video replay attacks and digital document manipulation.
The best way to assess customer safety and data security would be through a thorough analysis of current mandates and industry practices. Conduct independent security assessments of the vendor’s solution, including code review for custom integrations, infrastructure assessment for hosted components, and end-to-end security testing of complete VKYC workflows. This assessment should involve both internal security teams and external consultants with specific BFSI experience.
Overlooking Data Residency and Storage Requirements
Data residency requirements extend far beyond simple geographic storage considerations to encompass data sovereignty, processing location, backup storage, disaster recovery sites, and personnel access controls. Many BFSI firms accept vendor assurances about India-based storage without conducting detailed verification of the complete data lifecycle.
RBI data residency requirements are absolute and non-negotiable. All V-CIP data and recordings must be stored in systems located in India, with no exceptions for backup, processing, or temporary storage. These requirements extend to metadata, audit logs, and any derivative data created during the VKYC process.
A great way to tackle this is by ensuring that vendors provide detailed data flow diagrams mapping every step of customer data processing, from initial capture through final storage and eventual deletion. Verify the physical location of all servers, backup systems, and disaster recovery sites. Examine vendor contracts for data processing agreements that specify Indian jurisdiction and ensure compliance with Indian data protection laws.
Insufficient Technology Infrastructure Evaluation
Technology infrastructure evaluation requires understanding both current capabilities and future scalability potential. Many BFSI firms conduct superficial technical assessments focusing on basic functionality rather than comprehensive performance under various operational scenarios.
Modern VKYC solutions must incorporate sophisticated artificial intelligence capabilities for liveness detection and fraud prevention. The technology should detect various spoofing attempts including video replay attacks, 3D mask usage, and digital manipulation of identity documents.
Face matching algorithms need high accuracy rates across diverse demographic groups, accounting for variations in lighting conditions, camera quality, and network stability. The system should maintain consistent performance regardless of customer device capabilities or internet connection quality.
You can evaluate the artificial intelligence capabilities of a vendor through controlled testing scenarios including various fraud attempt methods. Also, when taking a demo, you can request detailed accuracy metrics for face matching, liveness detection, and document verification across different demographic groups and environmental conditions.
Cost-First Decision Making
Cost-focused vendor selection often results in significantly higher long-term expenses than initially anticipated. BFSI institutions frequently compare vendors based on initial licensing or per-transaction costs without considering total cost of ownership over the contract lifecycle.
Hidden costs emerge throughout implementation and operation phases, including system integration expenses, additional security infrastructure requirements, compliance gap remediation costs, training and certification fees, and ongoing maintenance charges. The KYC process often remains highly manual without proper vendor selection, making it expensive and prone to errors.
When picking a VKYC vendor, creating comprehensive cost models that include all direct and indirect costs associated with selection, implementation, and ongoing operations is highly recommended. Direct costs encompass licensing fees, implementation services, training costs, integration expenses, and ongoing support charges.
Indirect costs often prove more significant and include internal resource allocation for vendor management, system integration, user training, compliance monitoring, and ongoing relationship management. Consider opportunity costs of internal resources diverted from other strategic initiatives.
Strategic Vendor Selection Framework
Proof of Concept Development
Conduct extensive proof of concept testing that simulates real-world operating conditions including peak transaction volumes, various customer demographics, different device types and network conditions, and exception handling scenarios. The PoC should test not only basic functionality but also system performance under stress conditions and integration capabilities with existing infrastructure.
Develop specific test scenarios that reflect your institution’s unique customer base, transaction patterns, and operational requirements. Include testing for regulatory compliance scenarios, security threat simulations, and business continuity situations.
Regulatory Compliance Management
Establish regular compliance monitoring procedures that verify continued adherence to RBI guidelines and other regulatory requirements. This should include periodic security assessments, audit trail reviews, and compliance reporting verification.
Develop compliance monitoring dashboards that provide real-time visibility into key compliance metrics including data residency adherence, security incident tracking, audit trail completeness, and regulatory reporting accuracy.
Implementation Success Factors
Tech Advancement Management and Training
Successful VKYC implementation requires comprehensive change management programs that address both technical and cultural adaptations within the organization. Staff members must understand not only how to operate the new technology but also how it fits into broader customer service and compliance frameworks.
Training programs should be role-specific and ongoing, with regular updates as technology evolves and regulatory requirements change. Consider the learning curve associated with new vendor solutions and plan adequate time for staff proficiency development.
Vendor Relationship Management
Establish clear vendor relationship management frameworks that include regular performance reviews, strategic alignment assessments, and continuous improvement initiatives. Define success metrics that go beyond basic service level agreements to include customer satisfaction, regulatory compliance, and business value creation.
Create escalation procedures for addressing vendor performance issues, security concerns, and compliance gaps. Establish regular communication cadences that ensure proactive issue identification and resolution rather than reactive problem management.
Future Considerations and Strategic Planning
Technology Evolution and Adaptation
The VKYC technology landscape continues evolving rapidly with advances in artificial intelligence, biometric authentication, and fraud detection capabilities. Select vendors who demonstrate strong research and development capabilities and strategic vision for technology advancement.
Consider how vendor solutions will adapt to emerging technologies such as behavioral biometrics, advanced AI models, and enhanced security features. Evaluate vendor partnerships with technology providers and their ability to integrate cutting-edge capabilities into existing solutions.
VKYC is as Easy as 1,2,3 with Digitap
Selecting the right VKYC vendor represents a critical strategic decision that impacts customer experience, operational efficiency, regulatory compliance, and long-term business success. The mistakes outlined in this analysis can result in significant financial, operational, and reputational risks that far exceed any short-term cost savings achieved through inadequate vendor selection.
The key to success lies in viewing VKYC vendor selection as a strategic technology partnership rather than a simple procurement decision. This partnership will shape your institution’s digital customer experience capabilities for years to come. Financial institutions must invest adequate time and resources in comprehensive vendor evaluation, focusing on regulatory compliance, security robustness, operational alignment, and long-term strategic value creation.
Digitap’s Onboarding Suite helps banks maintain the highest standards of security, compliance, and customer experience with Video KYC. The investment in proper vendor selection will pay dividends through improved operational efficiency, enhanced customer satisfaction, and reduced regulatory risk over the long term.