The payment industry has become one of the world's most important sectors because of emerging technologies that provide faster and more flexible payment choices. However, as criminals increasingly use payment systems to commit fraud, launder money, and finance terrorists, the hazards associated with these advancements have grown. These hazards have prompted regulatory bodies to create comprehensive Anti-Money Laundering (AML) compliance decisions for payment processors in most economic zones. Therefore, transaction monitoring is becoming crucial in providing thorough and cost-effective solutions to many issues caused by these new developments.
What is Transaction Monitoring?
Transaction monitoring is the process by which financial institutions monitor and analyze their financial transactions to prevent fraud, money laundering, and other illegal activities. The process involves collecting and analyzing historical and current customer data in real-time using specialized software. Since transaction monitoring is done in real-time, it can generate a Suspicious Activity Report (SAR) based on the user's actions and send it to regulatory authorities for further investigation.
This fast and effective transaction monitoring is essential for payment processors' compliance with AML requirements because processors can no longer keep up with criminal money check using traditional methods.
What is the Role of Transaction Monitoring for Payment Processors?
Innovative technologies have transformed payment services, providing faster and more flexible payment options, including cross-border payments within minutes. However, this innovation has increased risks as criminals exploit these systems for fraud, money laundering, and terrorist financing. According to research, online payment fraud is estimated to cost merchants $343 billion between 2023 and 2027. Additionally, 34% of merchants worldwide experience first-party credit card fraud. Given these evolving challenges, implementing effective transaction monitoring software is crucial for payment processors for the following reasons:
- The anonymity and reach of social media: Maintaining a strong brand image is crucial for financial institutions and payment processors. By complying with requirements, AML payment screening prevents the business from being associated with financial crimes and protects its brand reputation
- Avoiding Penalties: In the first half of 2024, global financial regulators imposed 80 fines totaling $263 million for non-compliance with AML regulations. This includes know your customer (KYC), sanctions, SARs, and transaction monitoring violations.
- Customer Trust: Customers prefer doing business with payment processors they trust to protect their money from fraud and prevent customer harm.
- Legal Compliance: Non-compliance can lead to lawsuits and prohibit offering payment processing services in these regions.
What are the AML Requirements for Payment Processors?
Payment processor companies are subject to different AML compliance regulations within each region. It is every organization's responsibility to comply with these regulations.
US AML Requirements For Payment Processors
According to the Federal Financial Institutions Examination Council, payment processors are particularly at risk of money laundering and fraud if they do not have an effective system to verify their customers' identities and business practices. Moreover, the ENABLERS Act, which first entered the federal legislative process following the release of the Pandora Papers in 2021, puts more pressure on payment processors operating in the United States to follow the best practices of AML compliance-regulated financial institutions.
EU AML Requirements for Payment Processors
Payment processors are considered regulated financial institutions by the European Union. The European Union simplifies payment processors' compliance by requiring two AML Directives:
- The 6th EU Directive is the most recent AML directive, implemented in July 2021. It includes measures like listing high-risk third countries, inspection and risk assessment, and a risk-based approach to help the EU combat money laundering and terrorist financing.
- Payment Services Directive 2 (PSD2) promotes stronger customer authentication and aims to establish a more integrated European payments market.
UK AML Requirements for Payment Processors
Payment processors in the United Kingdom must follow His Majesty's Revenue and Customs (HMRC) regulations. These regulations ensure that only verified customers send money through payment processors.
Challenges for Transaction Monitoring for Payment Processors
Volume and Complexity of Secure Online Payment Transactions
It isn't easy to manage the large volume and complexities of secure online payment transactions. Robust systems are essential to efficiently deal with massive amounts of data and ensure accurate and on-time detection of suspicious activity.
Reducing False Positives
Traditional systems usually produce a high level of false positives, which wastes resources, while false negatives miss suspicious activity. Advanced analytics and machine learning can increase the accuracy of detection to minimize false alerts and improve the efficiency of payment monitoring.
Dealing with Changing Regulatory Requirements
Compliance becomes more difficult because of the differing demands of different regulators. It is crucial to stay aware of AML guidelines for the payment industry and develop strong collaboration with regulatory bodies to efficiently deal with changing regulatory requirements and ensure efficient monitoring for payment processors.
How Does Transaction Monitoring Work for Payment Processors?
The features listed below demonstrate how transaction monitoring provides case management, risk management and tracking, and ongoing surveillance with worldwide data coverage for payment processors.
Conducting Risk Assessments for a Risk-Based Approach
Performing a will help payment processors develop policies and procedures to create a risk-based approach that prevents money laundering. AI-powered transaction monitoring systems enable businesses to manage their data processing requirements with automated speed and accuracy that cannot match. It allows payment processors to:
- Create customer profiles and integrated financial profiles for individuals and institutions.
- Develop customer risk assessment using quantitative and qualitative criteria and risk rating mechanisms, scoring relevant risk as low, medium, high, or very high.
- Determination of future inspections according to risk level
Responding to Suspicious Transactions with Real-Time Monitoring and Alerts
When suspicious transactions occur, payment processors must quickly report such activities to the appropriate regulatory body under AML regulations. Transaction monitoring helps with this through the following capabilities:
- Continuous surveillance of financial transactions involving politically exposed persons (PEP), persons that are subject to international sanctions, and transactions from high-risk countries
- Instant flagging of irregularities and deviations, such as high frequencies or high volumes of transactions that do not match a customer's risk profile.
- Rapid reaction by generating a SAR based on the user's actions and sending it to regulatory authorities for further investigation.
Sanction Scanner's comprehensive AML transaction monitoring empowers payment processors to enhance real-time transaction monitoring, ensure regulatory compliance, and remain alert against financial crime. Experience the power of our advanced AML solutions firsthand—request a demo today!
