The economics of false positives

Every KYC system has a threshold knob. Crank it down, you catch more fraud and reject more legitimate customers. Crank it up, you onboard more customers and absorb more fraud. The question is: where do you set it?

The usual answer — wherever AUC is maximised — is wrong for almost every business. The right answer depends on customer lifetime value, fraud loss-given-fraud, and the marginal cost of friction.