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AML/KYC: Obstacle or Opportunity for Banks and FinTechs









Regulatory agencies and financial institutions (FIs) agree on the importance of protecting the banking ecosystem from illicit activity and fraudulent users, but the methodology of fraud prevention varies. Know your customer (KYC) is a crucial battleground for debate in the anti-money laundering (AML) space.

FIs are continuing to adjust their AML and KYC efforts, but compliance fines are mounting as they struggle to manage regulatory requirements across borders. The AML/KYC Tracker by PYMNTS and Trulioo reveals that FIs around the globe were fined more than $10.6 billion for regulatory non-compliance, including AML/KYC non-compliance, just in the fiscal year of 2020.

See also: AML/KYC Tracker

Digital fraud against consumers has also increased by 24% for the period from January to April 2021, compared to the period from September to December 2020. Hence, compliance laws are a definite regulatory requirement for all FIs for banking activity.

Related news: The FBI on Revamping Fraud Prevention Strategies to Protect Against Digital-First Financial Crime

The Move to Digital

Traditionally, KYC was performed in person at the local branch. The banker would gather physical ID, confirm that the personal profile was captured correctly, and submit the collected data for review. The back-office processes would run the applicant’s information against databases to generate an approval or decline response within minutes, and the account opening process would continue accordingly.

With the digital transformation of banking, FinTech has taken the entire process virtual to increase the response time and widen the scope of approvals. Sophisticated API tools are upgrading banking systems by enabling mobile banking for customers using their ID, phone camera and facial recognition software. Back-office processing and elimination of human errors have also been made easier through machine learning tools, while artificial intelligence (AI) has simplified the process of reviewing criminal registries and denying fraudulent users access.

See also: Why Innovative AML, Watchlist Screening Solutions Are Key to Blocking Digital-First Crime

Compliance Challenges

The benefits of digital account opening eased the load on financial services, but the ongoing compliance challenges for banks and regulators remain. There is no standard, uniform offering that satisfies the goals of regulators and the need for FIs to reduce hostility. For multinational institutions, international compliance adds another layer of complexity with cross-border KYC and new guidelines for AML. Building loyalty by making the enrollment and verification process faster and more engaging is another significant challenge for emerging FIs without a track record.

The unique nature of digital banking requires an efficient system to onboard and service clients, while protecting the financial institution from unnecessary risk.

You may also like: How Banks Can Solve Authentication Woes for New Digital Customers

Technology for Rescue

Tech companies and startups worldwide have created solutions that reduce banks’ compliance burden and help them stay up-to-date with the evolving compliance standards.

However, KYC and compliance are not enough. Anti-fraud measures and risk mitigation in the banking system are intertwined with the analysis of customer behaviors and trends. FinTechs are using the power of machine learning to help fight money laundering and fraud. They use algorithms to analyze information, make decisions and learn from those decisions. Over time, machine learning modifies its own code, without human oversight, in order to make better, faster and more accurate decisions.

Such tools allow banks and FIs to compile data on user behavior and then analyze suspicious patterns in transactions. This analysis can also be used to continually update the existing database with criminal profiles and potential bad actors. Some businesses also enable anti-spoofing that covers IP address, phishing, caller ID and facial spoof attacks, including deep fake detection.

The AML/KYC Tracker also uncovers that payment fraud (59.6%), data security (54.6%) and the long period of completion (49.8%) are some of the leading frictions when it comes to cross-border payments. The sophisticated and advanced tools designed by FinTechs provide an easy solution for banks and FIs to combat these pain points.

See also: How Privacy-Enhancing Technologies Can Ease Customers’ AML/KYC Confidentiality Concerns

What’s Next

As the world becomes smaller and more connected, regulatory agencies and FIs need to approach their payment architecture globally. Banks can effectively reduce the risks and benefit from AML FinTech solutions by outsourcing their compliance programs and focusing on user growth and acquisition in-house. The enhanced tools are designed to meet government requirements with minimal friction at a lower cost for compliance.

With the growth of online commerce and cross-border payments, FIs need to leverage the power of FinTech to ensure the compliance and safety of digital transactions while catering to the requirements of the legislative bodies.




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