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Best Practices for Implementing Transaction Monitoring

Best Practices for Implementing Transaction Monitoring

Implementing transaction monitoring is crucial for banks that want to meet their anti-money laundering and anti-terrorism financing obligations, as well as defend against other forms of financial crime. Transaction monitoring can spot suspicious transactions automatically, using risk-based rules to raise red flags when unusual account activity takes place.

In the modern-day banking sector, many types of fraud detection platforms are required – with transaction monitoring being just one of the chief examples – but it’s not just about buying basic systems. Financial establishments need intelligent fraud detection solutions accompanied by staff training if they are to be efficient and effective.

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Demand for Digital Banking

Customer demand for digital banking has grown hugely in recent years and is set to continue doing so over the years ahead. As per survey, leaders expects the global digital banking platform market size to increase at a CAGR of 20.5% from 2022 to 2030, from a base value of $20.8 billion in 2021.

Hand in hand with this growing appetite for digital banking platforms is an increase in the volume of attempted fraud aimed at banks. In fraudsters’ eyes, every element of the banking system is worthy of attack – from customers’ current accounts to their credit cards.

The Association of Financial Professionals (AFP) and JP Morgan’s 2023 AFP Payments Fraud and Control Survey Report found that the share of businesses reporting commercial card fraud increased by 10% since 2021.

Fraud Fighters Respond in Force

Businesses fighting fraud are not taking the situation lying down. As attacks on the banking sector have increased in scale and sophistication, fraud fighters have formed a range of new partnerships and developed an impressive array of automated and AI-powered fraud fighting solutions.

This means that banks are in a strong position to leverage intelligent fraud detection advancements through transaction monitoring and other anti-fraud measures designed to tackle trends ranging from account takeovers to sophisticated business email compromise attacks.

Best Practices for Implementing Effective Transaction Monitoring

Banks now have a wide range of fraud fighting solutions to choose from. There are various best practices to keep in mind when doing so.

The first is to choose a solution that’s continuously evolving. The banking industry itself is evolving rapidly in response to demand for digital services. Consider the launch of the US’s FedNow Service in July 2023, for example. As the industry evolves, so do the cybercrime threats that it faces and the solutions designed to combat them.

In the case of FedNow, this service evolution underpins the importance of real-time transaction monitoring. It also emphasizes the need for banks to choose solutions that are evolving rapidly.

Another best practice is to use risk-based monitoring and dynamic friction to apply a greater level of security where it’s warranted while avoiding excessive friction where it’s not. This is all about striking a balance between keeping customers happy (via minimal friction) and implementing sufficient security. Banks can use behavior analysis to flag up when a customer’s log-in doesn’t look like it usually does, then enforce additional security checks dynamically in response.

Banks also need to make the most of artificial intelligence and machine learning.

After all, fraudsters are certainly doing so. Evolving technology means evolving threats, so banks must respond in kind if they want to continue using intelligent fraud detection to keep their customers’ funds and data safe.

Another key best practice tip is to focus on the people element of fighting fraud as well as the technology. Putting a system in place then neglecting to regularly train staff on how to use it is a surefire way for the process to fail. Employees need to understand not just what the system does and why it’s important (in terms of regulatory compliance, as well as fighting fraud), but what they need to do when the transaction monitoring system raises red flags.

Doing so is part of ensuring that transaction monitoring is a core operational priority, with adequate resources to ensure it’s implemented effectively. That means allocating sufficient staff, time, and money. Fighting fraud isn’t free but when implemented well it can be far more cost-effective than becoming a victim of fraud and facing regulators’ fines.

It is also important for banks to understand the overlap between transaction monitoring and customer monitoring. Customer due diligence and know your customer processes are essential for anti-money laundering legislation compliance, so a system that handles these as well as transaction monitoring could prove particularly efficient and cost-effective.

Another essential step is to test transaction monitoring systems regularly to ensure everything is functioning as it should. Test results should be logged and reported on regularly to ensure that testing is more than simply a tick box exercise that can easily fall by the wayside. A robust logging and record-keeping process will also come in handy if the submission of a suspicious activity report (SAR) is required, as all the necessary information will be ready to submit. In fact, some transaction monitoring systems can handle the submission as well.

It’s also important to keep up with changing regulatory requirements. If banks want to ensure their systems remain compliant in terms of transaction monitoring and all other anti-money laundering and anti-terrorism financing requirements, they need to keep abreast of changes in the landscape.

The final best practice tip for implementing transaction monitoring is to ensure there are clear reporting structures all the way up to senior leadership. If senior managers are brought in to value, monitor and oversee intelligent fraud detections systems, staff will follow their example in terms of taking the system’s importance seriously and engaging with it sufficiently.

Putting the Power in Banks’ Hands

Empowering banks with intelligent fraud detection advances in ways such as the above can ensure they fight fraud effectively and keep regulators happy, even when regulatory requirements change.

This approach also does much to underpin customer satisfaction. Customers’ expectations are evolving: They expect maximum security with minimum friction. By implementing effective transaction monitoring, banks can ensure that customers’ money and information is kept safe while bringing as little friction-causing processes to their customers as possible. It’s altogether a win for customers, banks and regulators alike.

[To share your insights with us, please write to sghosh@martechseries.com]

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