The fintech space is experiencing unprecedented challenges when it comes to anti-money laundering (AML) compliance.

From a global pandemic that shifted users online to economic downturns and sanctions resulting from geopolitical conflicts, fintech firms face daunting challenges that can harm their operations. With the fintech industry expected to grow by US$305.7 billion in 2023, compliance with AML regulations is more crucial than ever to avoid reputational damage and monetary losses.

Financial data specialist Refinitiv in collaboration with Fintrail has interviewed fintech experts to understand the AML challenges facing the industry. The resulting whitepaper delves into the cause and effect of rising AML compliance pitfalls for fintech companies.

Fintech News Malaysia takes a look at just a few of the key trends and issues covered in the whitepaper.

Fintech trends weighing on AML needs

Technology, Data and Governance: Effective Risk Management

AI-based AML technology requires high-quality data to produce better outputs and support proactive risk management. Fintech companies need to strike a balance between not creating too much friction during onboarding and not attracting malicious actors.

Quality data is obtained and analysed, including underlying data which contains high quality secondary identifiers such as date of birth and gender for more pinpoint, targeted results. Successful implementation of data deduplication can eliminate copies of the same entry, while also optimising storage and minimising ineffective processes, improving the hit rates of monitoring procedures along the way.

Governance becomes a critical component of success for fintechs scaling up, requiring a shift to a more robust governance model that adapts over time as the company grows.

Scaling Fintech AML Teams: Finding the Right Talent

Fintech outfits tend to face a shortage of specialised, qualified workers. And they need to find the right talent to scale their AML operations — from the first and second line of defence to engineers and data scientists.

Financial crime compliance is largely considered recession-proof, and the demand for financial crime compliance roles is expected to remain high. Outsourced solutions can help balance a firm’s increasing alert volumes or strong customer growth with increasing regulatory scrutiny.

Even more pressing trends in fintech that affect AML efficiency can be found in the Refinitiv whitepaper, ‘AML Challenges for Fintechs: Insights for the Future’.

AML challenges facing FIs and fintech

Online Fraud: The Rising Threat

The shift to remote and digital banking has caused a swell in cybercriminals targeting financial institutions. One of the biggest threats is fraud, particularly the rising impersonation of individuals’ and organisations’ identities.

Fraudsters can manipulate information, including likenesses, at a rate that is extremely difficult to discern. AML compliance teams focus on awareness and education to help consumers avoid bad actors, who often use social media to promote their scams. These scams are present both in traditional fiat and cryptocurrency spaces.

Role of Digital Assets and Cryptocurrencies

Speaking of cryptocurrencies, digital asset-related legislations are advancing globally, increasing the need for all fintechs to consider the risks and exposure associated with the more widespread adoption of virtual assets.

As regulations for digital assets and cryptocurrencies evolve, fintech firms need to create and review their AML risk-rating methodology to consider the nuances of different cryptocurrencies and non-fungible tokens (NFTs). Digital asset companies must stay on top of new asset classes, functionalities, and potential risks, leveraging data and automation. Fintechs must decide which product falls within a firm’s risk appetite for buying or selling, or for assessing how they interact with virtual asset service providers (VASPs).

Sanctions

Fintechs face challenges, including asset flight risks and sanctions breaches resulting in fines. In 2022, AML teams faced the challenge of keeping up with Russia-related sanctions in response to the conflict in Ukraine.

In 2023, the exposure to sanctions risk will likely continue, stressing the need for fintechs and their sanctions teams to remain alert and agile.

More on the use of tech, regulatory guidance, and prioritising efficiency in the full Refinitiv whitepaper.

Looking to the future

Regulatory AML Opportunities and Fintech Community Collaboration

Regulatory changes and requirements are constantly evolving alongside financial crime threats. Fintechs need to remain agile in response to these upcoming changes and be aware of opportunities, adopting a “global but local” approach.

Fintechs should engage with regulators, collaborating when possible to ensure meaningful outcomes. Regulatory sandboxes demonstrate how regulatory tech firms can support the ecosystem by creating innovative solutions for greater anti-financial crime efficiency.

Balancing Customer Service and Compliance

Customers are increasingly demanding personalised, one-to-one service. Fintechs must balance customer service with the right level of friction for AML compliance. The demand for faster and more convenient customer experiences is increasing, increasing the need for frictionless onboarding journeys.

Using digital identities is one solution that can help achieve a frictionless customer onboarding journey, which has been implemented in some jurisdictions. Fintechs must remain agile and innovative while balancing compliance requirements with the common goal of meeting customers’ demands for faster and more convenient experiences.

Fintech pros interviewed in the Refinitiv whitepaper gave examples like MyInfo in Singapore, a government tech centralised KYC solution, has led to lower fraud or account takeover rates. Other practical examples of fintech firms bolstering their AML compliance processes with tech without disrupting customer experiences can be seen in the full whitepaper.

Refinitiv’s AML assistance for fintechs

Refinitiv provides comprehensive solutions to help the fintech sector tackle AML and KYC-related challenges and meet evolving regulatory obligations, prioritise customer centricity, and promote seamless digital experiences. Refinitiv’s targeted solutions include risk screening, due diligence, identity, and account verification, and digital onboarding.

Fintechs must stay alert, agile, and innovative while navigating the evolving regulatory landscape and balancing customer service with compliance requirements. Download the full Refinitiv report to learn more about the practical solutions and strategies recommended by the fintech community to futureproof your AML compliance operations.