Research from Featurespace and PYMNTS found that fraud and Anti Money Laundering (AML) professionals have at least one thing in common: they both cited the complexity of modernization and compliance as the single biggest hindrance to innovation.
Where they differ is in their attitudes to overcoming that inertia. AML professionals are far more likely to pursue innovations in the name of efficiency and accuracy, even if that means being the first in the market to test the approach.
Whereas in large financial institutions (FIs) fraud and AML teams have historically been separate entities, there’s a new breed of neobanks, digital-native FIs and fintechs entering the market who consider fraud and financial crime prevention much more holistically. We saw with their attitudes to cards and payments, that many launched with a complete payment hub that could orchestrate across traditional business lines to create efficiencies as well as enable new value propositions for their customers. Well, payment hubs might be old news, but risk hubs are de rigour.
What is a risk hub?
A holistic financial crimes risk hub converges fraud (including cards and payments, application fraud and analytics) with AML to create a single orchestration and analytics platform that brings strategy, cost and innovation benefits across the business. Sometimes termed FRAML in fintech and smaller institutions, this approach is not merely a cost-cutting exercise. It’s about leveraging insights from across the business to inform strategies and deliver the best possible results.
The benefits of a converged approach for regulators
Sharing insights across the divide in a structured and interrogable fashion enables better understanding of how fraud and AML typologies overlap and impact each other. We of course know that – for funds obtained from fraud and other illicit activities by criminals – will eventually be laundered as proceeds into the economy.
That’s why financial regulators are beginning to expect organizations to consider them more holistically. In the U.S., The Financial Crimes Enforcement Network (FinCEN) issued its first government-wide priorities for anti-money laundering and countering the financing of terrorism (AML/CFT) policy which included fraud alongside corruption, cybercrime, domestic and international terrorist financing, transnational criminal organizations, drug trafficking organizations, human trafficking and human smuggling, and proliferation financing.
FinCEN ultimately included fraud in the priorities because fraud is one of the most significant illicit finance threats and generates the highest volume of illegally gotten funds. Fraud has become ‘professional’. Most fraud is now run at scale by criminal organizations, including foreign entities that would seek to use those fraudulently obtained funds to further their criminal activity, influence political campaigns and U.S. markets, or to conduct espionage. The FinCEN national priorities are a clear example of how regulators understand the benefits of a holistic approach to fraud and AML efforts and to guide the prioritization of resources and prevention efforts.
FRAML technology and operational efficiencies
Technology consolidation is often driven by a desire to control costs, but the reality is that for many large FIs, the total cost of fraud and AML is unclear to the organization due to the tangled web of legacy systems and contracts in place. For those with legacy on premise deployments, the natural route is to consider the cloud. If an FI is undergoing a broader digital transformation and making the shift to Software as a Service (SaaS) then it becomes more opportune to include convergence of fraud and AL as part of that program. Additionally, the benefits of cloud technologies facilitates easier orchestration and convergence of the data sources needed for a risk hub to be effective, compared to the data pooling projects of past on premise attempts.
For new entrants to the market, there is a need for speed. They need to be live with their proposition at the right time to catch the adoption wave, and non-compliance could seriously hinder this. A holistic risk hub as a Service solves for speed and compliance, and includes the insights from the provider to ensure it performs optimally across fraud and AML false positive ratios to manage operational margins as well as ensure a positive customer experience.
Fraud and AML teams have more in common than ever, and by levering a holistic risk hub FIs can begin to share insights and strategies across both teams. An analytics enabled, orchestration layer across fraud and AML threats, is the best approach to combatting illicit finance and truly realizing operational gains. Discover how to deliver on the vision with the guide from Featurespace and PYMNTS.