Managing Financial Crimes In The Age Of Digital Payments

On 06 Nov 2023

Managing Financial Crimes In The Age Of Digital Payments

The Evolution of Payment Services Over the last two decades, dedicated payment service providers (PSPs) have transformed the global payments landscape, generating revenues of $1.9 trillion in 2020. Electronic payments are proliferating with a substantial increase in consumer-to-business and business-to-consumer payments, especially in North America, Europe, and Asia. This surge is primarily driven by e-commerce and m-commerce trends, resulting in a shift away from cash payments. The rise of digital wallets and other innovations signifies a continued growth towards digital payment methods.

The Consequences of Success As PSPs experience remarkable growth, they also face a growing threat – financial crime. The massive sums in the payments industry make it an attractive target for criminals. Money laundering, tax evasion, and consumer scams are increasingly occurring through digital payment channels. The Financial Action Task Force reports a significant increase in financial crime incidents during the pandemic, with particular vulnerabilities observed in the consumer sector. Adopting remote onboarding and customer due diligence has become critical in combating fraud.

Regulatory Scrutiny and Expectations Regulators are taking notice of the rising risks.

Money laundering activities have been estimated to reach up to 5 percent of global GDP, amounting to $800 billion to $2 trillion annually.

The regulatory focus on financial crime is intensifying, and PSPs are expected to meet stricter anti-money laundering (AML) and fraud control standards. Banks are also increasingly demanding robust controls from the PSPs within their networks.

The Proactive Approach for PSPs Rather than waiting for new regulations, PSPs can proactively address financial crime while leveraging their technological prowess. Learning from the experiences of banks, they can design strategies that not only counter the threat but also enhance the customer experience.

Key Principles for PSPs:

Acknowledging the Regulatory Shift: PSPs must recognize the rising regulatory focus on financial crime and understand its implications for their business.

  • Risk Assessment and Appetite: Conduct a tailored risk assessment to define the risk appetite and tolerance thresholds, continuously monitoring deviations.
  • Segmentation: Implement a nuanced customer and transaction segmentation model to effectively target high-risk areas.
  • Integration of Controls: Integrate and streamline anti-financial crime controls across different risk types, leveraging data and technology.
  • Data-Driven Continuous Monitoring: Utilize innovative technologies and data-driven approaches to enhance the efficiency of transaction monitoring.
  • Customer-Centricity: Ensure anti-financial crime measures do not hinder the customer experience; redesign processes to improve user-friendliness and transparency.

Building a Sustainable Model as PSPs navigate the complex landscape of financial crime, they must balance the need for speed, lower risk, and regulatory compliance. Proportionate control frameworks and innovative technological solutions will be crucial in achieving this balance.

The road ahead for PSPs in combating financial crime is challenging but navigable. By proactively addressing risks, designing robust controls, and maintaining a customer-centric approach, PSPs can continue to thrive in the evolving payments ecosystem.