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As transaction volumes grow exponentially in the digital world it is accompanied by a rapid increase in fraud, money laundering and the compliance costs. David Andrews, Director of Marketing at Identity Mind Global and Eric Buatois, General Partner at BGV are sharing their perspective. Since October 2015, online e-commerce fraud has jumped 11% in the US. In monetary losses, that means that $4.79 out of every $100 are at risk of fraud. In 2016, fraud is predicted to hit 4 billion in losses and the expectation is that that number will reach 14 billion by 2020. In 2014, fraud caused 12% of losses in P2P online lending. The Financial Action Task Force (FATF) estimated that implementing AML regulations cost $7 billion annually in the U.S. alone. In addition, regulators are keeping close tabs on digital transactions. The resultant regulations mean more fines associated with non-compliance than ever before. NERA (From ” Developments in Bank Secrecy Act and Anti-Money Laundering Enforcement and Litigation”, NERA June 2016) The Case for Automation Manual processes are effective at addressing risk and compliance only in a handful of use cases such as those with few recognizable patterns, those requiring unique expertise and the inspection of the human eye. Manual processes by their very nature are not able to scale. Why ? Because processing more volume manually means more employees, higher costs, and increased likelihood of inconsistencies and errors. While a computer can work around the clock with a level of accuracy that does not vary and capture large volumes of data effectively this is not possible with manual processes. This results in a far greater likelihood of being out of compliance. Further manual processes are more difficult to change. Far better results and greater efficiencies can be achieved by complementing automated processes alongside manual ones. Automated processes can replace some processes that don’t scale well when handled manually. For instance with high volume transaction monitoring, automation delivers efficiencies through the consistent application of software-based rules, alerts and case management. However, when there is a real exception and a transaction is flagged, people can be brought into the operational process, culminating in a report and a filing as appropriate. Automation can also supplement manual processes, e.g. prepopulating information for Suspicious Activity Reports before they are reviewed and manually sent. RegTech is the Disruptor RegTech is a set of technologies focused on the prevention of fraud, the management of risk and on complying with governmental regulations. RegTech provides the agility for organizations to:
Reduce risk management and compliance costs Expanding the team can significantly increase cost. Increasing capacity for an automated process is as simple as the elastic scaling capabilities of the risk management and compliance vendor
Increase compliance speed and accuracy Manual transaction monitoring can be slow with the quality varying with the experience and expertise of the team. Automated processes are fast and consistent regardless of the volume.
More efficient access to data Data can overwhelm manual systems where additional inputs and analysis can greatly slow processing speed. On the other hand, an automated system can capture data across multiple systems and analyze it regardless of volume. These systems can produce easier and faster access for information reporting from businesses through to their regulators.
Quickly address new regulations and process changes Changing a manual process requires training and a period for the team to absorb the new process. Changing an automated process can be as simple as changing one or more business rules.
For banks, fintech companies and merchants looking to get more efficient and effective, RegTech is the new way. It offers a lower cost, agile solution that is focused on operational efficiency across high volume processing and regulatory compliance. It also provides analytics for decisions that helps close the gap with the best members of your team. Areas where RegTech can be applied include:
  • Automated onboarding
  • Automated payment risk management
  • Automated compliance monitoring and execution
  • Automated reports generation
  • Automated notifications
However, not all solutions are created equal. In the digital world, companies deal with a wide variety of issues and customers. This spans customers from different demographics, geographies with different risk profiles as well as transactions that span the full life cycle from onboarding to purchases. So, when searching for warning signs in transactions it is critical to review multiple transaction attributes (e.g. IP address of user, phone number of user etc). Such approaches are far more accurate at detecting fraud. Furthermore, if the identity of the user behind a transaction is known, one can detect if they are suspicious i.e. attempting to make multiple transactions at the same time, attempting smurfing, structured layering or whether, they are legitimate customers with good behaviors based on their transaction history. Consequently, a broader full life cycle solution provides a stronger foundation over time, with greater coverage across a variety of risk and compliance issues that a business is likely to face. BGV portfolio company Identity Mind Global is one of the emerging leaders in RegTech.  IdentityMind provides a risk management and compliance platform that securely analyzes the entities involved in each transaction (e.g. consumers, merchants, cardholders, payment wallets, alternative payment methods, etc.) to build payment reputations. IdentityMind enables companies to identity and reduce potential fraud, evaluate merchant account applications, onboard accounts, enable identity verification services, and identify potential money laundering (