Exploring compliance challenges in the payments industry

We kicked off discussions with the challenge of balancing quicker onboarding processes with the ever-increasing complexity of customer due diligence (CDD) expectations laid out by the regulators. A key concern that seemed to cut across industry players was the question of sufficiency of source of wealth (SOW) corroboration. Payment service providers (PSPs) questioned the viability of a one-size-fits-all approach to SOW and highlighted the importance of balancing the efforts on corroboration against the risks faced by each PSP.

The participants discussed the prevalent levels of fraud that exists within the system and the more complex impersonation tactics which has only been exacerbated by artificial intelligence. Most participants agreed that the increased risk would need to be mitigated by implementing safeguards either internally, or externally, through the use of outsourced service providers.

The necessity for more complex CDD procedures naturally ended in a consideration of resource constraints within the industry and PSPs efforts to invest in better systems and processes to alleviate the strain. One common practical option identified by many PSPs was to stagger the CDD process depending on the nature of the product or the volume of transactions. For example, a user could be permitted to create an account and learn about the use case of the application without requiring any CDD. The user would only be subject to CDD at the point they wish to conduct their first transaction. Many PSPs shared that this approach could be taken a step further by requiring a simplified CDD exercise when a customer is only transacting simple products or at low volumes. The requirements would then increase if the customer wished to transact more complex products such as crypto.

Key takeaways:

• There is a clear understanding of the importance of security within the overall system and the role that PSPs play as the gatekeepers of the financial industry.
• PSPs appreciate that the regulator has been active in issuing guidance on effective methods to enhance the overall CDD process and they look forward to further papers from the Monetary Authority of Singapore (MAS).
• PSPs focus on balancing speed and security by investing in more robust processes and systems to ensure quicker and more effective CDD practices.
  

Transaction monitoring (TM) was another critical area of focus. Participants explored how machine learning (ML) and artificial intelligence (AI) can enhance AML efforts. Larger industry players shared benefits and drawbacks of implementing ML models within the overall transaction monitoring framework. These include more precise transaction monitoring alerts and building a system that is overall more dynamic resulting in more positive hits compared to traditional static rules. In fact, in most instances, ML models far outperform static rules in detecting actual suspicious transactions.

A key point discussed was the availability of high-quality data to train in-house ML models. MAS’s Collaborative Sharing of Money Laundering/Terrorism Financing (ML/TF) Information & Cases (COSMIC) program was discussed as a viable first step in the journey.

Lastly, participants considered the need to balance the benefits against increased investment needed by PSPs both from the perspective of infrastructure and manpower costs.

Key takeaways:

• AI and ML models can be effectively implemented today to better manage AML risks.
• A key bottleneck within the process is the availability of data to train the models.
• PSPs are generally concerned over the cost of investment but recognise that the benefits are significant.
  

The rising threat of online scams and human trafficking was a significant concern among the participants. Participants noted that scammers are becoming increasingly sophisticated, often targeting highly educated individuals. PSPs noted that despite the industry players constantly enhancing anti-scam requirements, scammers too continue to develop and sharpen their approach. As a result, the first time a new type of scam occurs, it’s a race against the clock for PSPs to identify and understand the trend, then implement an adequate counter-response.

Participants continued the discussion by considering the impact of enhanced anti-scam measures against user experiences. Participants also referenced their own data to make a case for instances whereby transactions could be lost when additional verification steps are required in select instances.

The discussion also incorporated the latest issuances by the MAS, namely the E-Payments User Protection Guidelines (EUPG) and the Shared Responsibility Framework (SRF). Participants generally agreed that these measures were definitely a step in the right direction of mitigating scams and in the case of the SRF, to distribute responsibility among financial institutions, telecommunication operators, and consumers to create more robust defense against scams.

When discussing the SRF, participants noted that upon implementation the SRF would hold almost all financial institutions to the same standard. The general consensus amongst participants was that, the resources required to investigate scams would incur additional costs. However, participants agreed that the investment would almost certainly translate to tangible benefits for the industry as a whole.

Key takeaways:

• The anti-scam game is a constantly evolving exercise. This poses a significant challenge due to the advanced nature of modern scams.
• PSPs appreciate the guidance by the regulators overall.