8 Compliance Trends That Shaped the Future of Financial Environment in 2020

The financial compliance requirements are among most important fields in the financial ecosystem as it is seen as the main source in maintaining public trust in the banking system. Together with the technological developments and digitalization trends, the risks and the threats facing the security of the financial world have started to get more serious. Therefore, the regulations to cover and prevent all the potential financial crimes have become stricter than ever before. However, technology has also the empowering side to offer the most effective solutions to the financial institutions in dealing with demanding compliance requirements and in providing the most secure and satisfying service to the customer of the digitalization age.

1. RegTech for efficient regulatory compliance

RegTech (Regulatory Technology) appeared in the landscape of the finance industry in order to manage the compliance-related processes and to make sure that financial institutions and FinTechs have always up-to-date information about the regulatory changes. As it increases the overall operational efficiency of the financial institutions with the benefits like scalability, cost-effectiveness, security and flexibility, the cloud-based nature of RegTech has become essentially important in the procedure of meeting dynamic regulatory requirements. RegTech utilizes technologies like AI (artificial intelligence), ML (machine learning), analytics etc. to ensure the most comprehensive, functional and effective regulatory compliance.

2. AI technology for challenging regulatory requirements

Increasing digitalization in payment processes caused regulatory requirements to become stricter and more challenging to protect customers and prevent financial crimes.  The manual solutions could not keep up with the pace of the technology and the threats it is posing, and eventually financial institutions started to look for ways to ensure safe, quick and effective payment processes for the best customer experience. Machine learning and artificial intelligence offer the solution in detecting risky financial activity and minimizing the false positives. Financial institutions benefitting from AI technology increase their overall business quality by achieving the customer satisfaction and remain compliant with the regulations at the same time.

3. COVID-19 reflections on the financial industry

 The COVID-19 outbreak affected almost all the industries negatively as it caused interruptions and halts in the operations. In the financial ecosystem, the reflections of pandemic are seen as the tendency to become more digital and less physical. In ensuring a zero-touch environment to refrain from spreading the virus, people tend to go for the contactless payment methods like digital wallets or no-contact payments instead of cash. As the consumer behavior was evolving around the standards of the new normal, the financial processes, regulations and the cash circulation habits had to face some alterations. The economical term “Coronavirus recession” was used during this period to describe the economic downturn of the world in 2020 resulting from the COVID-19 pandemic. Unfortunately, it is forecasted that even though the end of the pandemic may seem soon, the effects of it on the world economy will outlast in the long-term.

4. FinTechs disrupting financial ecosystem

 FinTech reformed the financial industry by introducing and improving the end-to-end transaction processing with cloud-based services. It has reached out to the sub-fields like payments, customer experience, investments, trade, insurance, and the money itself too (cryptocurrencies). With this innovative power, FinTechs have started to cause some disruption in the financial ecosystem, some of which are:

• Online shopping and cashless solutions for transaction
• Moving away from traditional banking services to digital and functional solutions for better customer experience provided by FinTechs
• Use of AI technology and other analytical tools in achieving a holistic unified approach for data accumulation and management
• Instead of making big investments in buying, implementing or renewing technological infrastructures in-house, financial services prefer to work with a FinTech company as a more economical solution.

5. Digitalization of compliance processes

 The fact that financial industry is becoming more and more digitalized as a result of the technological developments, the regulatory landscape is evenly getting more overwhelming and demanding to ensure the safest financial environment to tackle with the uncontrollable nature of the digital world. Financial institutions are forced to achieve many things at the same time such as remaining compliant with regulations while ensuring customer satisfaction, keeping the costs at minimum level while increasing efficiency, or protecting customer privacy while offering the best services etc. These challenges can be solved via the new methods presented by the digital products and services. The RegTech solutions empower banks and other financial institutions to fulfill their regulatory requirements and sustain the customer trust by using the AI and AML compliance technologies.

6. AML solutions in 4 steps

 The increasing number of risks and threats related to financial crimes due to the digitalization of the financial payments landscape, led to serious re-adjustments in the area of regulations. To prevent money laundering activities, there are four main points that the financial institutions need to give special attention to:

1. Know Your Customer (KYC): It is in the banks’ responsibility to collect and store personal information about their customers to prevent or identify the money laundering or other financial crimes.
2. Real-time transaction monitoring: Real-time tracking of the financial activities have gained tremendous importance with the digital payments processes because in case of any risky activity, banks should be able to take action immediately.
3. Reporting: Regulations require financial institutions to follow, analyze and report suspicious financial movements.
4. Keeping up with the policies: One of the essential points in fighting money laundering successfully is to remain up-to-date with the policies and keeping the trainings, risk-management and inspection controls abreast.

7. Integration of AI technology in ID verification processes

To endure challenges for meeting the requirements of KYC and AML regulations, financial institutions can apply to AI-powered technologies to automate and accelerate the processes related to customer due diligence (CDD) and ID verification. With the integration of AI technology in the biometric verifications and ID checks, it is possible to reduce the costs, increase the speed, accuracy and scalability of authentication processes and finally detect the fraudulent activity more effectively. In digital onboarding processes, using an AI-powered technology for ID verification and CDD procedures, can minimize the risks related to fraud and money laundering.

8. Blockchain in the area of compliance

With the features of immutability, immediacy and transparency, the blockchain technology promises many opportunities and benefits to the financial industry such as reducing costs, preventing delays and errors, increasing security and making data more available. It is anticipated that blockchain technology can be also useful in matters of regulatory compliance, risk management and crime prevention. Especially in the compliance area, the immutability feature offers a trusted record of the financial activities since it is not possible to change or delete the data once it’s encrypted. This specification can also help in KYC and AML related processes like data collection, verification and authentication.

To find out more about compliance environment download and read our whitepaper: Future of Compliance

Mehmet Ali Tombalak, Chairman of Fineksus