How Fintechs Scale Sustainably with AML

Fenergo hosted an online session around the challenges fintechs face when complying with anti-financial crime obligations whilst scaling as a business.

Our expert panel was made up of: 

• Deepan Nambiar – Compliance Solutions Specialist at Fenergo
• Scott Newby – Head of Compliance & MLRO at Shieldpay
• Leigh-Anne Moore – Regulatory Compliance Consultant
• Faisal Islam – Director of Compliance and RegTech at Paradyne Fintech

Anti-Money Laundering Compliance for Fintechs

Revenue generation and compliance with anti-money laundering (AML) regulations are two goals that are often viewed as being in opposition to each other. Today’s uncertain global economic climate, paired with the investment challenges and rising costs fintechs face, make it all the more crucial for these organizations to streamline core compliance processes like know your customer (KYC) reviews and transaction monitoring.

In a poll of fintechs attending the live webinar, we asked what their compliance departments’ biggest concerns were. Rising financial crime, a lack of investment, and customer onboarding all ranked as equally problematic (24%) for compliance teams. Rising operational costs and time-to-revenue delays were the top concerns for fewer of the attendees (19% and 9% respectively).

Leigh-Anne highlighted that the lack of sophistication in a lot of AML systems create a higher volume of false positives for financial institutions (FIs) to deal with. Specifically, she called out that incomplete data and delays in updating client data centrally can really cause issues with identifying criminal activity and discounting legitimate activity.

Why KYC and Transaction Monitoring Checks are Crucial for Client Lifecycle Management

KYC and transaction monitoring are two of the core AML compliance AML regulations that all registered FIs must comply with.

The panel highlighted that financial institutions (FIs) of all sizes, not just fintechs, face challenges around disparate compliance processes and siloed client data, especially when trying to conduct KYC reviews and ongoing risk monitoring. 

We asked the attendees of our webinar how strongly they trust the accuracy of their KYC data when cross-referencing it against transaction data to achieve the most up to date customer risk profile. Half said they somewhat trust the accuracy of their KYC data, whereas the other half admitted they had low to no trust in its accuracy. None indicated that they had strong trust in their KYC data.

Unifying KYC and Transaction Monitoring Systems to Overcome Data Silos

When compliance processes and systems are siloed between various departments, so does client data. Without a single source of truth, carrying out transaction monitoring or conducting KYC reviews becomes complicated for teams and can mean that this data has to be collated manually, by reaching out to the client every time, or teams end up making decisions without all the information they need. 

Poor client experience or regulatory breaches resulting from poor quality data are risks that fintechs can ill-afford, given the slim margins these organizations operate with. Fintechs therefore cannot afford to cut corners when it comes to KYC and transaction monitoring systems. 

As mentioned by Scott, integration and synchronization need to be prioritized when building a fintech’s compliance programme from the ground up. Fintechs benefit from far less red tape than large, multinational firms, and should simplify their compliance workflows while still small and therefore agile enough to do so easily.

How RegTech Helps Fintechs to Scale Sustainably and Compliantly

As fintechs grow in revenue and client numbers, their transaction volumes and number of KYC profiles also goes up. Without a strategy to scale sustainably, fintechs struggle to remain compliant and ultimately risk the security and trust of their customers, as well as scrutiny from the regulator.

It’s therefore crucial that as they scale, fintechs make effective compliance with regulations as much of a priority as revenue growth and development of new offerings. Efficient compliance processes act as an enabler for expansion into new markets or territories, not a barrier, when you consider that technologies like automation help to reduce the cost and effort required to onboard and manage a client’s lifecycle. 

On the flip side, scaling rapidly without any proper compliance framework can lead to serious complications down the line for fintechs, especially when regulators like the UK’s Financial Conduct Authority (FCA) are starting to get strict with smaller financial services providers like fintechs and crypto platforms.

Faisal also highlighted that, as fintechs go through rounds of funding and work towards an Initial Public Offering (IPO), investors at the Series C and D stages are looking for predictability in costs as well as profits and for processes across the business, like transaction monitoring, to be optimised.

The key to efficiency? Automation. 

Why Fintechs Need to Automate KYC Processes

When we asked fintechs in attendance how automated their KYC data refreshes are, one in every ten admitted that this process is fully manual or features no automation at their organization. The most common approach (90%) taken by fintechs was revealed to be partial automation with human intervention. None surveyed considered their KYC data refresh process to be fully automated.

According to Fenergo’s global KYC trends research report, which surveyed over 1,000 C-suite executives across 100 corporate and institutional banks, most banks (40%) estimate that KYC reviews take them between thirty-one and sixty days to complete. 

Time Spent on KYC Reviews (From KYC in 2022: A Global Research Report by Fenergo)

On top of that, the average KYC review costs banks $1,501 and $3,500 (according to two-thirds of survey respondents), a cost which will quickly begin to put pressure on a fintech as it scales and begins to onboard more clients per annum. Fintechs don’t tend to have as much capital to spare as banks do, so it’s even more important that compliance processes like KYC and transaction monitoring are made more efficient, so that they don’t drown under operational costs.

Increased automation can help reducing these costs, by improving both the accuracy and availability of transaction monitoring data. When this data is fed back into your other compliance systems, your firm is less likely to miss suspicious client behaviour, and your fintech is better protected from massive regulatory fines and financial crime risks.

Watch How Fintechs Can Win with AML on-demand for the full discussion.