A handful of topical areas were canvassed in the ‘Friction or fiction: compliance in a real-time world’ panel session on day one of Sibos 2020’s virtual event. While there has been significant innovation in domestic and global payments, financial institutions still play a critical role in the global payment process.
To support real-time payments there is still much to be done in the way of continued application of innovation, compliance and operations. There is also a significant need for financial institutions to continue to engage with their regulators to discuss innovation in compliance, and the sector is undoubtedly well placed to collaborate on any such changes or improvements.
Erin Zavalkoff, global head of AML compliance risk management for foreign correspondent banking, Citi, provides her perspective on the subject in light of correspondent banking and the challenges presented across this sector.
“I think the biggest challenges is that the fintechs are very tech driven and client focused and may not be as appreciative at least at the outset of the regulatory constraints as banks. This makes fintechs ripe for training, and banks well placed to assist them in coming to appreciate their regulatory obligations.
“In the correspondent banking space as a whole we’re moving toward looking at and governing entities based on the activity that they’re doing, irrespective of whether they’re a fintech or a bank or a digital bank.”
Noting that these challenges have existed in correspondent banking for quite some time, moderator Ron Giammarco, partner, financial crime compliance, innovation, technology and operations, EY, questions whether it is therefore fair to say that while there has been plenty of innovation in payments, there hasn’t necessarily been a great deal of disruption.
Pointing out that while it is logical that correspondent banking has existed relatively unchanged on a global scale to date (given that firms have typically focused on ensuring they have their primary bank and/or merchant processor as a stable provider) Jeremy Warren, MD financial crimes compliance CIB, JPMorgan, adds that banks are increasingly seeing a need for partnerships and acquisitions which allow banks to deliver offerings provided very well by fintechs.
“Banks aren’t able to build as quickly or execute as efficiently so there are opportunities to buy or partner in these spaces. For instance, due diligence related to the onboarding of a client typically goes hand in hand with partnerships and acquisitions.
“There is a bit of disruption, but mostly banks and fintechs are working in this hand in hand fashion.”
It isn’t just the banks leveraging the fintechs, Warren furthers. During partnerships with fintechs it appears that the fintechs have been very curious and engaged on how banks approach projects such as building programs from a compliance standpoint or understanding the local regulations and compliance regulations when expanding into a new country.
Elaborating on this in the context of real-time payments, Warren argues: “I’m pretty bullish on compliance. More and more, the laws, rules, regulations and complexities become a source of friction, but the more that compliance becomes a partner to clear and streamline the roadway the easier and more robust faster payments structures will be.”
Zavalkoff follows that the challenge of poor data is another key source of friction and something that needs to be manually fixed. It is a large issue which causes payments to fail leading to increased costs and unhappy customers who are unable to process the services they need.
She furthers that as the percentage of financial crime that is actually detected by financial institutions is somewhere below 5%, we need to focus on collectively developing solutions to detect financial crime rather than just report it. Zavalkoff adds that the success or failure of such exercises really depend on how the regulation can be altered to allow for such innovation, namely, easing restrictions on the sharing of KYC information between banks.
Concluding on the progress being made in the space, Zavalkoff observes that “it’s important to note that it’s the bank’s job to detect and report financial crime. We’re not law enforcement, our mandate isn’t to prevent financial crime.
“But if the objective is to prevent financial crime then that can only be achieved through these greater partnerships and by lessening the burden on banks to do the more rote technical compliance and allowing more compliance resources to be put to work toward projects that may actually detect financial crime before it occurs.”