After leaning heavily towards deregulation for the past two decades, Manning said the reverse is now happening for a few reasons, beginning with behavior changes spawned by the COVID-19 pandemic.
Supply chains were threatened. Wars and tense geopolitics saw countries tighten regulations for national security.
“We’ve certainly been in a space where we’re seeing that pendulum swing back,” Manning said.
How the pandemic impacted compliance teams
Thanks to the pandemic, many were forced to shift to digital channels quickly. The pace and volume of that sudden move strained many compliance teams. The surge in anonymity provided by remote commerce and the explosion in alert volumes drove up costs.
“The true cost of compliance, according to a study of North America, nearly doubled since the start of the pandemic,” Manning said. The higher cost of labor drove it.”
It became a strategic imperative for companies to invest more in technology, but they faced additional obstacles, Manning noted.
Thanks to the Great Resignation, some companies lost institutional memory, which worsened the gap—all the more reason to invest in technology, so they don’t face that situation again.
“And we’re seeing regulators respond to this,” Manning said.
Take that combination of growing threat vectors, and it highlights the importance of viewing compliance through the same lens as fraud, financial crime and information security, Manning said.
When considering these as a group, there are opportunities to find efficiencies while not sacrificing the quality of response. More companies consider common data sets and put technology to monitor them together.
As businesses learned they had to adjust, criminals were doing the same, Manning said.
They, too, went digital almost overnight, buoyed by the heightened anonymity. In some cases, they encountered compliance controls based on physical risk more than digital risk.
Alert volumes rose, and CX was disrupted as compliance-induced delays impacted the customer journey at a time when a seamless experience was vital.
How technology provides new compliance solutions
The key to adapting is to leverage the extensive digital exhaust everyone generated. That allows the establishment of trusted linkages that can increase the confidence level of verification.
Can financial services firms benefit from novel technologies such as secure, multiparty computation? Manning believes so.
Criminals collaborate by sharing information on the dark web and repeat processes as long as they’re successful. They bank on the good side, continuing to act alone.
Manning said she sees more people, including law enforcement and regulators, open to a collaborative approach to identity verification.
We returned to the topic of an extreme digital shift and its resulting issues at a time when we also expect real-time decisions.
The best technologies gather as many data points as possible to help them make accurate decisions. This is happening as advances in robotic process automation can access more information across a wider variety of formats.
Technology contributes to quick and accurate decisions in another way, Manning said. They can also identify which data points provide the most value out of the many that provide some.
“For example, smart machine learning can help evaluate which data points provide the lift,” Manning said. “I think that learning and continuous feedback loops are increasingly important. Without these two, it’s even harder to stay ahead of the evolving criminal element.”
The impact of ISO 20022 on payments
ISO 20022 brings a new common standard for payment messaging, and it’s just in time, Manning said. It can improve speed, lower compliance costs and improve sanctions screening. She’s seeing banks ramp up their preparations for the next model of global payment transmission.
It’s needed because the pressure from geopolitics, new financial technologies, and even cryptocurrencies mean updated standards are necessary. Consumers demand fast and seamless experiences, while the industry is banking on the new expected standard to increase the pace of payments while reducing their costs.
The war, ESG, and BNPL
While the surge in compliance activity was happening before Russia invaded Ukraine, Manning said that the war resulted in an unprecedented activity level.
Expect this pace to remain high due to the many geopolitical issues combined with the heightened emphasis on ESG and the social pressure companies face on the right side of the many problems.
Manning said there is a growing regulatory focus on monitoring entities seeking to avoid sanctions through a series of digital transactions. FinCEN and OFAC have recently issued guidance on Russian sanctions evasion techniques. Collaborative data approaches are a suitable method of tracking such behavior.
With the growth of embedded finance and the many different payment methods consumers now enjoy, it’s incumbent upon the providers of these services to have proper compliance measures and third-party risk management processes in place.
This also applies to digitally native companies providing BNPL services. As the service becomes more popular and companies grow larger, they can expect more scrutiny.
“That’s the biggest shift,” Manning said. “Many companies cover their ears and say ‘they don’t apply to me,’ but this isn’t just a bank issue.”
Tony Zerucha is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.