How Banks Can Evolve Financial Crime Risk Management

Feedzai CEO Nuno Sebastiao recently sat down with Chris Phillips, SVP of Corporate Functions Technology of Royal Bank of Canada (RBC), at the Payments Canada Summit for a fireside chat. RBC is a global bank serving 17 million customers in Canada, the US, and 27 other countries. The financial leaders discussed how the rapidly shifting nature of fraud poses a growing threat to banks and how the consequences cast a shadow on brand reputation, customers, financials, and even shareholder value. At the same time, the continuous innovation in banking and payments creates an opportunity to re-assess risk management at each crossroad, and ensure that financial crime does not stifle new product innovations.

Three key trends are emerging globally and creating imperatives for change in financial crime.

Challenge 1. Digital Banking is Still Expanding

The trend was already very clear: more people are accessing banking products and services digitally. During the past two years, the pandemic only accelerated this pattern. The expansion of digital servicing into more complex or new financial products, and the rapid digital adoption by corporate and commercial clients led to exponentially higher volumes and new threats, hence higher risk exposure for banks. As more people transact online and in real time, protecting customers from fraud threats scattered across multiple channels grows increasingly challenging.

Imperative: Banks Must Focus on Building Stronger Digital Trust

To compete in a highly digitalized world, financial institutions (FIs) need to maintain trust by building even stronger defenses and wiser interventions. Prevention layers built on legacy, rules-based risk engines that leverage limited customer data points can no longer keep up with today’s fraud risk management demands. As a result, machine learning technology becomes an imperative to maximize outcomes.

These prevention layers need to be multi-threaded and cross-referenced as follows:

Multiple access point defenses: This applies to client devices, risk-based multi-factor authentication (MFA) stages, or voice authentication.
Channel level navigation patterns: Including IP addresses and in-app user experiences.
Channel level transaction patterns: Such as a customer’s in-channel spending patterns, etc.
Cross-channel patterns: Behaviors across different channels, including point of sale (POS), in-branch, or digital channels.
Entity link analysis: Which covers networks associated with an identified suspicious account, entity, or individual to determine if a case is limited to an isolated individual or is part of a broader fraudulent pattern.

Challenge 2: New Digital Payment Methods Are Emerging Quickly

The payments domain has experienced significant disruption from new offerings built by new entrants as well as the vast modernization initiatives of national- and regional-level payment rails. Global banks have specifically encountered the biggest challenges, such as accelerating payments innovation and offerings, remote teams across diverse geographies, and dealing with exponentially-growing digital payments volumes and data.

Growing risks and threats have been attached to this new reality. This has been reflected in the news on an ongoing basis, from fraud with email money transfers, scams on the Zelle network, attacks on digital wallets, to digital identity theft leading to irrevocable instant payments used for money laundering.

Imperative: Invest in global, data-driven hubs for financial crime

Ultimately, this means adapting fraud and financial crime operations and technology to enable the roll-out of more accurate and granular risk-scoring models, at customer level, in faster time to market. Moreover, real-time business and payments also mean real time or near-real time approaches to financial crime management.

Native, cloud-based platforms are becoming the norm. Cloud technology enables intelligent leverage of the massive build of payments and customer data, breaking down data silos and enabling application of effective machine learning. A modern financial crime platform also needs to support nimble integration of data, in a low code approach that can be simply executed by bank resources with little training or support.

Challenge 3: Increasingly Demanding Customers And Employees

Financial crime management can negatively impact customers and employees when it’s done incorrectly. Too often, this may be left at the bottom of the priority list. However, it’s one that can have dramatic consequences.

Such consequences include:

Too many false positives: create customer frustration and delays in financial product consumption. It contributes to customer attrition, brand reputation issues, and added stress for fraud analysts.
Cumbersome KYC/CDD processes: A manual Know Your Customer/Customer Due Diligence (KYC/CDD) onboarding process causes friction and high abandonment.
External data gathering is a tedious manual journey: Relying on humans to collate information is not only error prone but also frustrating for bank personnel. Manually gathering data from external sources is especially problematic as part of the investigations process, and puts unnecessary burden on your teams.

Imperative: Automate and digitize financial crime management

Financial crime technology investments have been left as an afterthought relatively speaking compared to other areas in global banks. But one cannot digitize, automate, and improve on product, customer and employee engagement without addressing financial crime management with these same principles.

Banks traditionally view risk management through the lenses of reducing net losses and minimizing false positives. Automating financial crime risk management requires allocation of funds made on the basis of holistic business cases where additional lenses are applied. These lenses consider customers, employees, and shareholders. It also opens new opportunities to transform global banks’ risk management functions into strategic levers for new product developments and launches.

But furthermore, financial crime can bring the best of artificial intelligence value demonstrated in financial terms and as a way of seeding wider capability development in banks.

Re-Think Financial Crime Risk Management with RiskOps

Risk operations (RiskOps) enables banks and FIs to take a more holistic approach and is changing the way financial services think about risk. RiskOps platforms are designed to address three common financial services risks using three key pillars.

Digital identity. Identities are no longer linked to a single device, computer, or social networking account. This makes it more difficult to continuously authenticate an individual.
- RiskOps platforms enable a smoother customer experience with a customer-centric AI approach focused on understanding each customer’s baseline behavior and analyzing all available data points.

Real-time data. The data related to transactions or online exchanges is growing at a rapid pace. Meanwhile, the expansion of faster payment systems around the world and new non-fiat payment options like cryptocurrency creates new data challenges.
- RiskOps platforms are supported by a comprehensive architecture pillar that provides banks with a centralized hub to process data from any sources in real-time and at scale.

Connectivity. With increasing remote working and distributed global teams, the old methods of collaboration to resolve cases or review data are no longer viable.
- A modern RiskOps platform is built on a collaborative analytics suite that enables greater communication across teams, enabling them to develop compelling customer experiences, reduce decision bias, address emerging risk types, and lower costs.

The new reality is one where financial crime is taking new twists and cannot be simply viewed as “let’s keep doing what we are doing” and expecting different results. Collaboration between banks and FinTechs is imperative to accelerate and de-risk financial crime progressive modernization and ensure sustainable results.

Download the Q2 2022 Financial Crime Report to learn most popular fraud schemes, global fraud hotspots, and the latest in consumer spending trends.

Ruxandra Aldea

Ruxandra is Feedzai’s VP of Strategic Accounts, North America. She is an international FinTech leader with 20 years’ of expertise in global organizations including Feedzai, Finastra, Temenos, and Fiserv. Her experience in FinTech encompasses areas such as payments, FinCrime, core and digital banking. Throughout her career in technology, she held senior leadership roles in sales and marketing, product and service management in both start-up and Fortune 500 firms. She has a Master of Business Administration Degree from Simon Fraser University in Canada and, through her lifelong learning mindset, has also recently completed an Executive Education program in Strategy & Innovation at MIT Sloan. Ruxandra is also an active member, speaker and mentor in the Women in Payments Association, supporting career development and industry education for women in financial services.