Hyper Transparency: A Key Ingredient for Mitigating Fraud Risk and Maintaining Compliance in a Rapidly Changing Regulatory Environment

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The banking industry is in the midst of a radical shift. Rapid digital adoption alongside growing consumer expectations for an Amazon-like experience has accelerated the industry’s move away from legacy systems and antiquated processes. At the same time, fraud surged during the pandemic, catching the attention of legislators and shining a light on the need for new regulations to better protect consumer data.

All of these factors point to new challenges for financial services providers that no doubt have their work cut out for them. Keeping pace with the regulatory activity alone is a big job and one that can’t be ignored, particularly with the multitude of recent revisions to the Bank Secrecy, Community Reinvestment and Anti-Money Laundering Acts, to name a few.

As fraud risk continues to increase, regulatory pressures tighten and it becomes more and more difficult to attract and retain customers, how can financial institutions keep pace?

The Growing Need for Greater Transparency

At the intersection of maintaining compliance, delivering a seamless customer experience, outperforming the competition and reducing fraud risk, transparency becomes critically important.

With the adoption of machine-learning algorithms and artificial intelligence (AI), concerns grow that these technologies will introduce bias into decisioning. AI systems are programmed using “training data” that can include human bias or other inequities. AI algorithms don’t have a moral bias; they do what they’re informed or told to do so reliance on AI without transparency to counter its potential for bias can have serious consequences.

New regulatory developments, such as the Corporate Transparency Act (CTA) and Customer Due Diligence, focus on the need for greater transparency. However, financial services providers can’t be truly transparent with regulators or consumers without the ability to explain their policies and decisions, whether approving a customer for a banking account or making a peer-to-peer transfer.

Identity Verification: A Starting Point and Important Ingredient to Unlocking Transparency

Complying with regulation requires financial services providers to be transparent about their decision-making policies, processes and reasons behind the choices they make. Today, and as regulations tighten in the future, this ability to explain to regulators why a consumer was declined or denied access to services will be an important element in a financial institution’s compliance arsenal.

Transparency around policies, procedures and decisions hasn’t been easy for financial services providers to achieve. This is especially true when it comes to verifying customer identities. The culprit? The identity verification solutions that many banks rely on utilize ambiguous scoring and machine-learning models that don’t provide closed-loop data feedback for visibility into decisioning. In this sense, financial services providers lack the data transparency needed to understand why a decision was made so they can accurately speak to regulators and defend their choices. A critical first step is selecting integration partners that pack their results with analytics, result codes and data that can be used to make informed decisions and adjust machine-learning systems to higher levels of sophistication that reduce false positives and eliminate bias.

On the path to transparency, financial services providers must also:

  • Implement an onboarding tool for consistency in educating new employees on compliance with Know Your Customer (KYC) minimums and anti-money laundering policies for spotting high-risk activity and fraudulent activity. While most financial institutions act on policies that were built to meet regulatory guidelines, risk can creep in depending on how those policies are implemented and enforced.
  • Track policy changes. Many regulators offer subscriptions to newsletters and notices. Additionally, news aggregators, such as Google News, can help financial services providers stay on top of changing regulations. As regulations change, ensure the staff and technology needed to adapt are in place and shifting policies are transparent throughout the organization.
  • Work with technology partners that are also tracking regulatory changes and offering solutions to help you comply.
  • Ensure technology partners have tools for quick change management with little-to-no integration requirement for managing KYC.
  • Put case-management tools in place to address fraud and risk reviews and address consumer requests. These tools should provide deep insights into account-opening details and offer analytics or links between data used at account opening and in other areas of the business such as payments, ACH deposits, debit activity and credit activity. This will provide insights throughout the customer journey, especially for suspect accounts that incubate over time and later “bust out.”
  • Foster a harmonious and tight relationship between Anti-Money Laundering (AML) and risk teams. Compliance, anti-money laundering and fraud prevention teams should work closely together so that new policies can be implemented quickly.

While financial services technologies have moved faster than regulations, the tide is turning.

Regulators will soon catch up with artificial intelligence, machine learning and other emerging technologies, such as blockchain. At the same time, consumers are more empowered than ever and excited about new payment methods and cryptocurrencies. As financial institutions further their use of these technologies, it will be important that they have a flexible stack of solutions, diversity in data sources, transparency and clear policies and communication between AML and risk teams to maintain compliance and meet high consumer expectations.

About the Author:

Heidi Hunter is the Chief Product Officer for GBG Americas, comprised of Acuant and IDology, the premier identity verification, regulatory compliance and fraud prevention provider for all industries to establish trusted digital identities.