Digital payment volumes are soaring, new payment providers are proliferating, and the shift to instant payments means more transactions are settled faster than ever. These shifts in payment innovation can deliver enormous benefits to consumers and businesses but equally open new avenues for financial crime (FinCrime). Regulated institutions must ensure their payment screening activities are fit for purpose to prevent money laundering, sanctions, and other FinCrime in real-time and ensure compliance with regulatory mandates.
More payment options, more complexity
Fifteen years ago, consumer electronic payments typically meant paying by debit or credit card, maybe using an online wallet for internet purchases, and, in some markets, authorising a bank transfer. Today, it’s a different story. Demand for digital payments has soared, while cash usage is diminishing to varying degrees in many countries. Meanwhile, high card processing fees, delayed access to funds, chargebacks, and the inability to recoup processing fees for refunds have led merchants to push for an array of new payment options.
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Building on merchant dissatisfaction and consumers’ desire for simpler payment journeys, BigTech and FinTech see payments as fertile ground for innovation. Apple Pay and Google Pay now frequently overlay card transactions, providing a simpler interface for consumers. FinTechs, such as Klarna, are going in deep to address the core issues of faster settlement, lower processing fees, and access to credit. Finally, the rise of embedded finance, the integration of financial services into non-financial platforms, has seen tech-led brands, such as Uber, become payment enablers.
The pace of change is just gearing up. The regulatory framework for open banking is in its infancy in the US, with the 1033 rule announced just last year. With the recent deregulation sentiment in the US, we may also see faster developments regarding FIs sharing customer data (on request) with authorised third parties. Digital currencies are also reshaping the landscape, with stablecoins gaining particular traction as payment platforms such as PayPal and Stripe bring them to the mainstream.
In short, for consumers, the options for making digital payments are expanding, and soon, the world will be an oyster for consumers and merchants alike to send and receive payments. Yet, as the surface becomes smoother, under the covers, the payment workflows and processing ecosystem are becoming more complex.
Faster payments, complex challenges
The rise of instant payment systems, which means transactions are settled instantly rather than over several working days, also adds many dimensions to the payment landscape. As markets worldwide develop real-time rails, financial institutions (FIs) and fintechs must redesign their processing workflows to handle 24/7 operations. This includes real-time API integrations and automated exception handling to prevent delays or failures in high-speed transactions. They are also being pushed to enhance user interfaces and improve payment tracking, dispute resolution, and cross-border interoperability to meet customer expectations for frictionless, secure, and reliable transactions.
The shift to instant settlement delivers many benefits, such as making funds available to recipients in real time. It also unwraps the possibility of making account-based payments a genuine alternative to card payments at checkout, including in-person transactions. However, instant payments also greatly appeal to fraudsters and money launderers. With immediate access to funds and less response time for compliance checks, the opportunity for financial crimes increases, too.
Smarter compliance in a faster, more complex world
FIs and other regulated entities must up their compliance game in this new world of payments. Many older firms operate on a legacy compliance infrastructure written for a simpler era with fewer payment rails and longer transaction settlement timeframes. But there is no leeway now that there is a more complex ecosystem to monitor and less time to do so, especially given the broader context of increasing geopolitical turbulence and the resulting rise in sanctions activity.
Accordingly, regulated institutions need to ensure their payment screening systems and processes, as well as their AML systems, such as customer identification and verification, are up to the challenge of this new reality so they can identify and assess the parties to the payment in real time.
Firstly, they need the flexibility to adjust workflows for different payment rails and the ability to add new ones, each of which will have its own characteristics. They also need the capacity to scale up and down to accommodate the volume spikes and the speed to process these varying volumes.
Secondly, they must ensure that critical sanctions lists are continually updated. Keeping up to speed is crucial to accurately screen transactions against potentially prohibited parties. Failure to do so results in hefty fines and adverse publicity.
Thirdly, they need to be able to configure watchlists for the jurisdiction of interest. Solutions screening payment messages for worldwide sanctions will drown in false positives. A granular configuration that looks at payments from the lens of country corridors and jurisdictional lists will lead to better alert quality and speed for instant payments.
Finally, for instant payments, compliance checks will need to happen at speed, occurring within milliseconds, so they do not harm the real-time payment value proposition. OFAC’s Sanctions Compliance Guidance for Instant Payment Systems highlights how a risk-based approach can help allocate resources effectively and determine priorities.
For those FIs that handle cross-border transactions via SWIFT, using solutions that support the ISO 20022 messaging format and are SWIFT-Alliance certified is key, as it means they can natively process cross-border transactions and block risky payments in real time. Moreover, as new rails, including digital currencies that are ISO20022 compliant, are released in the market, the screening solution should be able to digest all these various formats and handle exceptions in a timely, logical, and compliant manner.
FinCrime prevention in a new payments world
The evolution of the payments landscape brings both unprecedented opportunities for businesses and consumers and new challenges to FinCrime prevention and detection. As new payment message types and instant settlement continue to reshape the industry, FIs’ responsibility to ensure robust compliance measures has never been greater.
Effective payment screening is a critical safeguard against money laundering and sanctions breaches in this increasingly fast-paced and complex ecosystem. To stay ahead, institutions must upgrade their tools and processes to accommodate new payment formats, keep up to date with the latest sanction requirements, and perform compliance checks within milliseconds to meet the demands of a real-time payment world.
Steve Marshall is Director, Advisory Services, FinScan
