Author: Gabriel Hopkins, Chief Product Officer, Ripjar
UK challenger banks have revolutionised the banking sector with innovative products and services, offering greater flexibility to consumers that their legacy competitors have been unable to match. Research tells us that the value of the neo and challenger bank market will continue to grow rapidly, reaching an estimated $471 billion globally by 2027. However, the opportunities that challenger banks bring also provide new regulatory challenges, with the potential for disruptive services to increase the risk of money laundering and other financial crimes.
Challenger Bank AML Vulnerabilities
The Financial Conduct Authority (FCA) last month raised concerns over the adequacy of challenger bank tactics in meeting regulatory requirements. The review reveals that some are falling short of effectively implementing important anti-money laundering (AML) procedures and controls, following a substantial increase in suspicious activity reports reported in 2021. The findings come as the regulator attempts to bolster its approach against money laundering, which the National Crime Agency estimates costs the UK £100bn annually.
The FCA review investigated six unnamed challenger banks that had recently entered the financial market and which together had a customer base of over 8 million customers. While the FCA commended the challenger banks’ “innovative use of technology” accelerating average customer identification and verification, it, also raised serious areas of concern stating: “there cannot be a trade-off between quick and easy account opening and robust financial crime controls.” These concerns broadly cover the following four points:
- Failures to carry out adequate checks on customer income and occupation
- Failures to assess customers’ risks, making it difficult to carry out due diligence measures for high risk AML alerts
- A lack of sufficient detail in customer risk assessments
- Unproductive management of AML alerts, hindering quick responses
The above findings as described above indicate there is a critical need for challenger banks to pair their innovative fintech capabilities with a safety-minded approach to their AML processes.
The Importance Of Customer Data
AML compliance, and the due diligence and screening processes it encompasses, may be especially complex for challenger banks since their propositions rely on swiftness, simplicity, functionality and flexibility.
The FCA’s review tells us that challenger banks’ AML issues are caused by insufficient quality of customer data with which to base precise risk-profiles and make key compliance conclusions. When challenger banks have difficulty in meeting their data collection and risk management needs, they are forced to compromise the benefits of their products and services by spending resources on AML compliance – or risking regulatory consequences.
Challenger Bank AML Solutions
Many challenger banks are able to meet their AML obligations by rolling out tailored risk management solutions, however, they may become unstuck balancing their compliance responsibilities while also delivering innovation. To keep up with the ever evolving threat landscape, the AML regulatory environment is engaged in a game of cat and mouse, often implementing new legislation to remain on the heels of new criminal tactics and methodologies.
However, rather than depending on a potentially-exposed and unproven bespoke solutions, challenger banks can instead turn to the expertise of established, industry-trusted platforms with dedicated CDD and EDD resources and multi-faceted AML and KYC screening tools.
Automated AML compliance solutions help challenger banks grapple with threats, incorporating customer data from sources across the world quickly and efficiently, and adjust in real time as the risk landscape evolves. Trusted AML solutions may include multiple language screening capabilities, helping challenger banks better manage CDD and EDD for customers around the world without producing unmanageable volumes of false positive alerts.
Financial crime is on the rise. Addressing the common weaknesses in key areas of challenger banks’ financial crime systems should be seen as a priority. Evaluating their approach to identifying and assessing the financial crime risks they are exposed to is a first step in the right direction. Extra attention should be paid to risk assessment processes to avoid running afoul of the Money Laundering Regulations. It would be especially prudent if this is carried out as the FCA has signalled they will be seeking updates from challenger banks regarding their financial crime frameworks.
