Envisaged future: Consumers having a digital (convenient and fast) customer experience with their bank, while keeping their money safe. Banks making a profit, while (best) serving their customers and monitoring/safeguarding their payments infrastructure. Regulators preventing financial fraud and crime to safeguard the integrity of the international financial system.
Spring 2021: Identity fraud losses (coupled with poor user experience) climbed to USD 56 billion, with nearly one-third of identity fraud victims disappointed by their financial services providers because they did not resolve their problems satisfactorily. Large banks pay huge penalties on account of serious shortcomings in money laundering prevention, while other financial institutions struggle to cope with financial crime surge due to COVID-19. Regulators across the globe constantly update their laws and requirements (which is not a bad thing for end consumers and for the fight against fincrime) – the Philippines expands scope of AML/CFT laws, FCA confirms focus on stablecoins, etc.
How did we end up in this situation? Financial institutions and banks are the gatekeepers of the financial system and hold a high level of responsibility to prevent fraud and financial crime. They have put strong cybersecurity systems in place and have developed know-your-customer (KYC) and anti-money-laundering (AML) policies, procedures, and systems to know exactly who their customers are (and, sometimes, the customer of their customers). But in some cases, they miss detecting, stopping, and preventing cyberthreats, or fail to monitor their users on an on-going basis and report suspicious transactions. Moreover, changes created by technology, regulators constantly updating their regulatory requests, and the surge of cross-border transactions are rendering the systems they currently have in place ineffective, complex, and costly.
The existing tools
In this fight against fincrime, technology can help; artificial intelligence (AI), machine learning, data analytics, and solutions providers (fintechs, regtechs, technology vendors, etc.) can digest and balance requirements coming from consumers and businesses, financial institutions and regulators, to enable them to keep their money safe, build trust and security, offer amazing UX, reduce costs, ensure a high level of compliance, shut down on fraud/financial crime.
Ok, we know the solution, banks know it too, but have they applied it? If so how, if not, what is stopping them?
Some banks have started adopting emerging technologies and switched to an agile way of conducting their internal operations. Plus, they have become opened to go through a mind shift from operating in silos to team collaboration. Many have dived into digital transformation, with banking execs starting to rethink products and services and new bank structures. To support their journey, they have partnered/acquired fintechs to access sophisticated technologies, developed solutions inhouse, built new systems on top of old ones.
However, for some FIs it has been difficult and costly to get rid of their legacy systems (and culture). Even if they patch or add new features to existing infrastructures, the system is difficult to operate with and understand. Another challenge is the fact that many of these technology providers that they partner with are small and not always able to pass larger institutions’ vendor onboarding scrutiny. Or they don’t always provide explainable AI solutions, as FIs need to understand the techniques and to be able to explain them to their regulators.
Redesigning core system structures comes hand in hand with internal approaches on use of data, how teams collaborate, how info is shared, etc. Fraud detection and prevention and AML/KYC require connecting the dots among people, transactions, payment methods, locations, devices, times to identity anomalies. This process implies working, in real-time, with huge and ever-changing datasets. Many times, data is not available or is not of the right quality; it needs to be integrated into the banks/FIs tools, other times different tools/data are used for different cases.
Different teams working on different topics is another ‘deal breaker’ in the fight against fincrime. Organisational differences among financial crime, fraud, and cybersecurity teams often lead to a separation of their work, results, and effects, even if the lines between economic crime and cybercrime are blurring. There are situations when transaction monitoring teams have access to the same back-office info as the compliance teams, but because they speak a technical language which is difficult to understand by compliance officers, productivity is hindered. Furthermore, patched/ clunky core banking systems that monitor transactions at large banks can also play a negative role here.
But the current cloud-based technology solutions, which are configurable, flexible, dynamic, enable the compliance officer to create and apply their own rules, making it easy to group clients/set their risk scores. These tools have nice colours, making it easy to visualise the result of transaction monitoring, and help explain what is going on. Moreover, the use of AI can enable compliance officers getting data set properly. Overall, they do not need a lot of data to feed their AI tools, as long as it is good and clean data.
Innovative software solutions can significantly advance the digitisation of the regulated environment, by automating risk management processes, facilitating regulatory reporting, preventing fraud, enabling companies to learn about regulatory changes around the world, and support strategic planning. For instance, regtechs help banks reduce costs with compliance, prevent them from supporting illicit finance activities, and keep their reputation clean. Recognising its potential to transform compliance for financial services, in the UK, regtech has become part of British government’s strategy to build a more globally competitive financial sector after the City of London was cut off from Europe by Brexit.
The right partner - tips on getting to the right provider
During a virtual event dedicated to compliance officers at financial institutions and tech vendors, the audience was curious to learn how to select a technological solution that suited their needs and partner with the right tech provider to boost their operational, defence, and compliance strategies.
First, as banks can be reticent to take a step forward, because everyone promotes a quick use/deployment, it is important for them to see how the product behaves, as once they decide to go with a specific solution, it takes a lot of hardware/resources to finalise the partnership. Second, sometimes banks don’t necessarily know what they want, thus consulting with them it is important to win their trust. Some tips and advice shared by the experts stressed the value and importance of true partnerships - banks and technology vendors need to stay constantly in touch and discuss what the bank’s real need is and how the tech vendor can help them solve it. Third, compliance team/tasks should not be seen too much as a compliance centre, but a value-adding component. And finally, as there is a strong network of compliance officers, business comes from referrals.
Embedding a culture of compliance from day one
No matter if financial institutions plan to build their own fincrime platform or reach out to third parties to help them manage risk effectively, financial crime, and compliance, FINTRAIL experts suggest that embedding principles such as regulation, compliance, financial crime from day one is not that difficult or expensive, but it will stand FIs in so much better stead in the long term as they have already built a robust culture and infrastructure.
Like this story? To learn more about fraud prevention, identity management, digital onboarding and KYC, transaction monitoring, financial crime compliance, regtech, and more, download The Payper’s Financial Crime and Fraud Report 2021 - How to Fight Fraud and Master KYC, Onboarding & Digital ID.
About Mirela Ciobanu
Mirela Ciobanu is a Senior Editor at The Paypers and has been actively involved in drafting industry reports, carrying out interviews, and writing about innovation in payments and fintech. She is passionate about finding the latest news on AI, crypto, blockchain, DeFi and she is an active advocate of the need to keep our online data/presence protected. Mirela has a bachelor’s degree in English language and holds a master’s degree in Marketing. She can be reached at [email protected] or via LinkedIn.