Need for speed – How is the race towards instant payments shaping the world of compliance?

As demand for speedier cross-border payments continues to grow, so too does the burden on banks to keep these payments compliant and secure. Heather Lee, financial crime compliance, sanctions strategy at Swift, explores how industry collaboration can satisfy the needs of both business and regulators

In today’s fast-paced world, we expect everything to happen immediately. Businesses can operate rapidly and nimbly on a global scale – and they expect the same from their banking partners. 

Cross-border payments that take days to arrive are no longer adequate. Instead, businesses want the same speed they experience in person-to-person and consumer interactions in an increasing number of domestic payment systems.

Much of this expectation has been driven by the proliferation of such real-time payments. Numerous domestic payment schemes already allow beneficiaries to receive and access funds in real time, and many operate in 24/7 settlement models. 

Cross-border payments are inherently more challenging than domestic ones because they involve bridging the ‘closed loops’ of multiple currency systems. Even so, correspondent banking is rapidly catching up with its domestic counterpart; cross-border transactions are often credited in just minutes – and action is underway to ensure they can happen in seconds.

That speed is putting a new emphasis on the role of compliance teams.

 

The compliance challenge 

Regulators have put a spotlight on international payments, which are subject to expanding and increasingly complex anti-money laundering (AML) and sanctions regulations.

Against this backdrop, the trend towards instant payments presents a number of challenges. Firstly, as the correspondent banking network is global in nature, payments have to travel across a number of jurisdictions – and sometimes through several intermediaries. 

As many as 10% of cross-border payments are stopped and screened by different banks – sometimes multiple times – making straight-through processing difficult to achieve.   

Secondly, with instant settlement, the opportunity to recover funds is greatly reduced. Criminals may seek to exploit the convenience of faster payments for fraud and money laundering purposes. In the UK, for example, the move to faster payments initially led to a significant uptick in fraudulent transactions. However, with the right compliance and AML tools in place, this challenge can be overcome.

Finally, the cost of compliance is growing. As payments get faster, so too will their quantity. Greater velocity means more work for compliance teams, which often means more staff to check payments, and, as a result, more cost.

 

Data is king

What can compliance teams do to tackle these challenges? The answer partly lies in data. 

Unlocking real-time payments will depend on banks having clean, complete and correctly formatted payment data. Compliance processes – including sanctions screening, know your customer (KYC) and transaction monitoring – can only be effective if the information in payment messages is accurate. 

Banks that receive suspicious payments must often follow a trail of breadcrumbs across time zones to find missing data. Simply misspelling a name can quickly result in higher costs, missed shipments, idle factories and empty shop floors.

Collaboration is key in addressing this issue. Compliance teams will need to work even more closely with payment teams to assess and improve the quality and accuracy of their payment data.

New standards – such as the International Organization for Standardization’s (ISO’s) standard ISO 20022 – provide a once-in-a-generation opportunity to deliver a more consistent industry-wide approach to payment data. ISO 20022 will become the norm from 2021 for all cross-border payments as the community begins to migrate from the Swift message type standard to ISO messages. 

With clean data, the opportunities for compliance are enormous. Tools harnessing powerful technologies – such as artificial intelligence and machine learning – can use this data to improve screening algorithms, reducing false positives and lessening the need for manual intervention. That has game-changing potential to help compliance teams shift people to higher-value roles focused on more complex and challenging risk management matters, rather than reconciliation work.

 

A community approach

Making safe, secure real-time cross-border payments a reality requires community involvement. Unlocking real or near real-time compliance can’t be achieved in isolation; compliance teams must harness mutualised solutions to create a globally secure network. 

Over the past decade, the banking community has taken significant steps towards creating community-wide solutions to accelerate the compliance process. Swift’s KYC registry is one such example, enabling banks to exchange rich data in a secure way to streamline the KYC process between correspondent banks. 

As payment teams invest to upgrade systems in preparation for ISO 20022 and improve data quality for real time, compliance teams have even greater potential for innovation. It is possible to anticipate more shared solutions, which will not only reduce cost, but deliver greater precision in the identification of possible sanctions and AML breaches. 

Real-time cross-border payments will deliver cleaner data and more transparency across the payment process. This is an opportunity to build greater levels of trust across the banking community and new, more collaborative ways to address financial crime.

 

To learn more about real-time payments and compliance, join industry experts and your peers at this year’s Sibos in London from 23–26 September 2019.     

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