Instant payments need instant screening
There is a dark side to innovation. As the volume of payments increases, so does the potential for financial crime. Regulation and compliance requirements designed to combat crime pose a challenge that may slow down payment processing and customer onboarding, therefore having a negative impact on the customer experience.
Under the Financial Action Task Force Recommendations, the customer due diligence guidelines state that sanctions screening should be conducted at the point of customer onboarding and regularly thereafter, regardless of whether transactions are involved.
FATF Recommendation 16 also specifies that payment service providers should ensure that any wire transfer they process includes sufficient identifying information about the payer and the beneficiary, so that applicable sanctions screening requirements can be performed. This recommendation provides for lighter requirements, depending on the purpose of the wire transfer (for example, whether it is related to the purchase of goods or services), the amount and its geographical reach.
When it comes to differentiating between domestic and cross-border payments screening, the Wolfsberg Group provides an interesting angle in its Guidance on Sanctions Screening:
"Screening cross-border payments prior to completing the transaction is common practice and known as screening in real time. By contrast, screening domestic payments in real time may be unnecessary for FIs that are subject to the same local regulatory requirements, including the jurisdictions’ local sanctions and KYC requirements when on-boarding clients.”
Wolfsberg goes on to advise that for these FIs, imposing screening at the time of each transaction is unlikely to identify any new or additional risk indicators. However, if it falls under the scope of a different jurisdiction or regulatory mandate, the institution needs to assess what is required and take a risk-based approach.
The first financial crime report produced by the U.K.’s Financial Conduct Authority illustrates the scale of the challenge. The report showed that firms falling under the FCA’s remit managed a total of 549 million retail and wholesale customer relationships in 2017; of these, 1.6 million were classified as high risk for the purposes of compliance with anti-money- laundering regulations (AML), including 120,000 politically exposed persons (PEPs).
In total, more than 2,000 firms received 923,000 internal notifications related to suspected money laundering during the year (363,000 of these were reported to the National Crime Agency after further investigation), and turned away 1.15 million prospective customers and 375,000 existing customers for reasons related to financial crime.
The pressure on banks, other financial institutions and payment service providers to act as effective gatekeepers in the fight against financial crime is intense. Real-time payments considerably complicate that challenge.
The transaction processing window is shrinking rapidly, drastically reducing the time available to detect fraud and suspicious transactions and patterns, and reliably establish the identity and risk profile of individuals and ultimate beneficial owners. The most pressing question the sector faces is, "How can we increase the speed of payments without compromising on financial crime compliance?"
AML and financial crime obligations are becoming increasingly complex, with regulators requiring more comprehensive explanations and greater transparency of the technology used for screening. This complexity will become even more challenging to navigate in a real-time payments environment.
At the same time, payment service providers and financial institutions cannot afford to compromise on customer service. For newer entrants to the market in particular, speed and ease of service is fundamental to their business model, and ideally, many would like to see customer onboarding and payments approved and completed in seconds, or even milliseconds.
The demand for instant screening — a full array of financial crime checks that occur in real time — is growing. The answer is not to screen less; if anything we expect screening requirements to increase in the future, driven not only by regulators who will undoubtedly increase their focus as the use of alternative payment systems such as e-wallets grows, but by the desire of payment providers to manage risk as effectively as possible.
Take, for example, sanctions screening. At the moment, it’s common practice to exclude domestic transactions from sanctions screening — but some payment service providers are already including domestic transactions in their screening processes, on the basis that the line between domestic and cross-border payments is becoming more difficult to define in an online payments environment.
The answer must lie in the same technology that is driving innovation in payments. The infrastructure for financial crime screening must keep pace with the speed of innovation in payments. That means transactions, even low-value transactions, should be screened instantly and on a large scale.
"Traditional" AML compliance operations were designed to operate in a batch mode, holding potentially suspicious transactions in a queue and reviewing them before release. Real-time payments demand a more intelligent risk-management approach.
The compliance mindset, as well as the tools, will also have to change to reflect instant payments.
These advancements are necessary as mobile and digital technology has transformed many elements of modern life, but the impact on payments has been one of the most profound.
Cash is becoming a fossil. According to the World Payments Report, noncash transaction volumes are increasing at more than 10% every year and now exceed 500 billion annually. PayPal processed 2.8 billion transactions in the first quarter of 2019 alone.
Debit card payments are the fastest-growing form of noncash transaction (increasing by 14.7% annually), but this is expected to be eclipsed by credit transfers as the adoption of real-time payments, particularly in Europe and North America, continues. Global e-wallet transactions are increasing at an even faster rate and now account for around 9% of all noncash transactions; almost three-quarters originate from the largest tech companies, including Apple, Alibaba, Tencent and Google.
More than 30 countries now have a real-time system of some description for domestic payments, including Mexico’s SPEI, India’s IMPS and the U.K.’s Faster Payments Scheme. These programs offer access to instant, electronic, interbank transfers through myriad channels. Cross-border instant schemes, on the other hand, are far less common and currently are limited to the SWIFT GPI and European TIPS system.
Critically, these systems are proving especially popular for peer-to-peer payments, which means the bulk are low-value but in high volumes. As even more sophisticated technology (such as artificial intelligence and the Internet of Things) develops, this trend will only accelerate.
The future of payments is heading in a clear direction. Before too long, all payments will be instant (or initiated in bulk and processed instantly), borderless and available 24 hours a day, 365 days a year. Transaction volumes will continue to rise, perhaps as much as 100 times today’s volume as payments become embedded in an increasing array of apps and devices.
For consumers and businesses, faster and more convenient payments are good news. Consumers’ expectations and demands are adapting and increasing with the technology. Great customer service equates to speedy, seamless payments.