Assessing AML Compliance at Neobanks: Issues and Solutions

Considered the digital era’s answer to financial inclusion, neo-banking is rising to prominence, shattering the historical monopoly and hegemony of traditional banking. As populations across the globe are increasingly being connected to the internet, primarily through mobile devices, neobanks (also known as digital banks) help them provide easy access to varied financial services at a lesser cost. Compared to the incumbents, these new-generation banks offer lower costs, better convenience and faster processing time. Further, they can serve as “an economic lifeline” for unbanked and underbanked households in many countries. These digital-only banks can accept many more people who don’t qualify for traditional banking services because of the lack of credit history or stable employment.

However, neo-banks are vulnerable to cybercrime, hacking and financial crimes, probably to a greater extent as compared to their brick-and-mortar counterparts. For criminals, the new-age banks could open up a hassle-free way to open multiple accounts and do transactions at will, internationally. In their bid to increase customer base enable faster service processing, these neobanks are also likely to undermine AML/CFT controls stipulated by watchdogs. For example, UK neobank Revolut admitted in March 2019 it was unable to block suspect transactions on its platform as it had turned off a system designed to stop suspicious money transfers. Revolut decided to do away with the system after it produced 8,000 false-positive alerts, resulting in legal transactions being blocked.

Compliance Woes at Neo-banks

Given below are some of the compliance issues faced by new-generation digital banks.

• Relaxed Know Your Customer (KYC) Measures

The concept of KYC is at the heart of building credibility for financial institutions in the market. Proper KYC processes are essential to ensure the integrity of a customer and his/her conducted transactions. They help avoid businesses with customers involved in crimes such as corruption, bribery, fraud, money laundering and terrorist financing, and those who use a fake or stolen identity. The digital-first or digital-only mode of business, devoid of physical checks and balances, could prove risky for neo-banks as they compete to onboard millions of customers. They may continue to use digital onboarding measures, however, proper risk assessment measures should be in place at neobanks to ensure compliance and security.

• Ineffective Transaction Monitoring

The problem of false positives remains a big concern in the Transaction Monitoring space. Huge volumes of false alerts are a drain on productivity and often leads to erroneous decisions, impacting the customer experience. For example, some neo-bank users saw their accounts frozen over receipt of government funds related to the COVID-19 pandemic. This came after the banks’ transaction monitoring software identified unusual patterns of transactions. Affected customers may not be able to resolve the issue as many of the neo-banks do not have proper customer service teams and systems. Albeit on a small scale, this problem may discourage the general public from switching to neobank services or entrusting them with big sums of money.

• Lack of Dedicated Staff and Money for Compliance

Most neo-banks are in a rapid expansion mode, potentially taking a toll on their resources. Most of them cannot afford to set up compliance teams with hundreds of staff and costly systems like their deep-pocketed traditional counterparts. Neobanks may be complying with the basic regulatory requirements to continue with their operations, however, blind automation to save costs would not work as expected.

What Needs to be Done

The digital disruption in the banking industry should not undermine the importance of AML/CFT compliance. Neobanks still need to give due importance to compliance and allocate adequate resources to shore up defences against financial crime. After enrolling their businesses with regulators, they need to do a thorough assessment of AML/CFT risks in the region. The assessment will give inputs to develop an AML/CFT compliance program. Depending on the business, they need to allocate costs on compliance staff and tech, ensuring a proper balance. Once the compliance program is ready, they need to implement the same and review the program periodically or as per regulatory requirements.

How Tookitaki can help

Neo-banks should have tools that can mitigate AML/CFT risk effectively without compromising on the efficiency of compliance operations and customer experience. Modern technologies such as machine learning and Big Data analytics can be effective tools for financial institutions to help identify and prevent financial crime. Specifically, modern solutions equipped with network analysis, deep learning, anomaly detection, natural language processing can assist compliance staff get superior results. They can eliminate false positives and enable the best use of scarce resources.

Tookitaki’s end-to-end AML operating system, the Anti-Money Laundering Suite (AMLS), powered by AML Federated Knowledge Base is intended to identify hard-to-detect money laundering techniques. AMLS is available as a modular service across the three pillars of AML activity – Transaction Monitoring, AML Screening for names and transactions and Customer Risk Scoring. The AI-powered solution has the following features to aid neo-banks with their AML/CFT compliance.

• AI-powered detection of interactions and network relationships between customers or interested parties to flag suspicious activity
• World’s biggest repository of AML typologies providing real-world AML red flags to keep our underlying machine learning detection model updated with the latest money laundering techniques across the globe.
• Smart alert management to identify alerts that matter and that are non-productive
• Advanced data analytics and dynamic segmentation to detect unusual patterns in transactions
• Risk scoring based on matching with watchlist databases or adverse media
• Visibility on customer linkages and related scores to provide a 360-degree network overview
• Constantly updating risk scoring which learns from incremental data changes

AMLS was designed keeping in mind the ability of AML/CTF compliance systems to integrate with an increasingly digital banking system. Users may it as a standalone system or on top of legacy systems to augment their efficiency.

While traditional banks are better equipped with structured processes and systematic compliance programs, neobanks may be at a losing point without proper processes and technology in place to detect and prevent financial crimes through their platforms. Our solution has been proven to be highly accurate in identifying high-risk customers and transactions. For more details of our AMLS solution and its ability to identify shell companies among other money laundering techniques, please contact us.