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PSPs and the Risks of Financial Crime: 4 Focal Points

by Pedro Ferreira
  • How should payment service providers look at their operational models?
payments 2022 psps
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Digital payment channels and PSPs have completely revolutionized the industry and while convenient, there are inherent risks namely in what concerns financial crimes.

Payment service providers are in a prime position to effectively address these risks but crafting a sound strategy to tackle financial crime isn’t a straightforward endeavor. To do so, there are at least 4 critical points which should be considered.

Risk Focused Transactional Flow Monitorization and Client Segmentation

Risk management can greatly improve under the right segmentation strategies. However, operational costs can run high for payment service providers given the resources needed to monitor all clients and their respective transactions. As such, the process needs to be leaner but effective, meaning that payment service providers should be setting their sights on finding that small subset of potentially riskier customers, bad actors, and illegal transactions.

payments fintech 2023 psps

Pursuing this strategy should lead to more sophisticated segmentation models which will rank transactions and clients to more efficient use of data and datapoints, namely in what concerns up-to-date databases which draw from external sources.

By reengineering their models and having external data pulled in, PSPs will complement their static historical data with real-time assessment of information, something which leads us to our second point.

PSPs Risk Management Strategies through AI Data-Driven Approaches

Innovation fosters better monitoring technology. Accordingly, payment service providers' automated processes should aim at integrating machine learning.

As we enter the age of Artificial Intelligence, AI models are most likely a certainty going forward due to how they can constantly learn from historical data while being able to optimize transaction monitoring. AI can also lead to faster and more conclusive results into deviations from expected customer behavior, something which in turn allows for better decision-making and precise control targets. However, having the technology and being able to deploy machine learning shouldn’t make PSPs sit back and deviate from what’s at their core: the customer.

Customer-Centric Models for PSPs through Unified Infrastructure

Crime control measures should not, in any way, lead to a bad customer experience. As such, when payment service providers design their customer onboarding and their overall customer journey, crime control measures should not be a pain point along the way, but rather something which greatly enhances these processes.

With transparency at their heart, both customers and PSPs stand to gain. Having different risk types identified and overlaying their controls with their customer journey or other products PSPs can effectively integrate teams and unify their infrastructure, leading to:

  • Anticipate potential needs and financial crime controls as a way of bringing different controls together and reducing internal and external friction within processes
  • Identify possible pain points within processes while molding them to become compliant by design
  • Identify different risk types, mitigate their respective risks (ex: sanctions, AML, and so forth), and use their respective data to fuel other processes
  • Ensure that they are transparent in their requirements
  • Achieve faster decision making while communicating clearly with their customers
  • Improve existing and new features

Consequently, not only will customer experience be much smoother, but the PSPs view of the customer will also be much clearer.

Effective Risk Assessment as a Building Block for Infrastructure

As each payment service provider operates under different conditions and is exposed to different types of risks, so do their potential risk scenarios need to differ. Accordingly, risk identification must go beyond theoretical hypothesis and transcend into an understanding of where and how each merchant is positioned along the value chain, what their role is, which type of clients they attract, and what their transaction flows will look like.

This commitment to data-driven analytics should be ongoing as it will bring PSPs monitoring to the next level by allowing for tighter settings in terms of risk appetite in tandem with harder control when a divergence is found.

Wrapping Up: PSPs Collaboration and Taking the Lead

As regulatory scrutiny increases it will be better for PSPs to take the lead on three distinct fronts (market participants, regulators, and clients). By having a seat at the table when the time comes for setting regulatory agendas, PSPs can bring in the best ideas in the industry and be in a prime position to better define it.

Moreover, data sharing solutions between PSPs, banks, and clients can certainly lead to a better understanding of financial crime and to the development of new ways to fight it.

Lastly, client education is another subject which can help fight financial crime. PSPs' future is certainly bright but between them, banks, and clients the motto for fighting financial crime might be “E Pluribus Unum.”

Digital payment channels and PSPs have completely revolutionized the industry and while convenient, there are inherent risks namely in what concerns financial crimes.

Payment service providers are in a prime position to effectively address these risks but crafting a sound strategy to tackle financial crime isn’t a straightforward endeavor. To do so, there are at least 4 critical points which should be considered.

Risk Focused Transactional Flow Monitorization and Client Segmentation

Risk management can greatly improve under the right segmentation strategies. However, operational costs can run high for payment service providers given the resources needed to monitor all clients and their respective transactions. As such, the process needs to be leaner but effective, meaning that payment service providers should be setting their sights on finding that small subset of potentially riskier customers, bad actors, and illegal transactions.

payments fintech 2023 psps

Pursuing this strategy should lead to more sophisticated segmentation models which will rank transactions and clients to more efficient use of data and datapoints, namely in what concerns up-to-date databases which draw from external sources.

By reengineering their models and having external data pulled in, PSPs will complement their static historical data with real-time assessment of information, something which leads us to our second point.

PSPs Risk Management Strategies through AI Data-Driven Approaches

Innovation fosters better monitoring technology. Accordingly, payment service providers' automated processes should aim at integrating machine learning.

As we enter the age of Artificial Intelligence, AI models are most likely a certainty going forward due to how they can constantly learn from historical data while being able to optimize transaction monitoring. AI can also lead to faster and more conclusive results into deviations from expected customer behavior, something which in turn allows for better decision-making and precise control targets. However, having the technology and being able to deploy machine learning shouldn’t make PSPs sit back and deviate from what’s at their core: the customer.

Customer-Centric Models for PSPs through Unified Infrastructure

Crime control measures should not, in any way, lead to a bad customer experience. As such, when payment service providers design their customer onboarding and their overall customer journey, crime control measures should not be a pain point along the way, but rather something which greatly enhances these processes.

With transparency at their heart, both customers and PSPs stand to gain. Having different risk types identified and overlaying their controls with their customer journey or other products PSPs can effectively integrate teams and unify their infrastructure, leading to:

  • Anticipate potential needs and financial crime controls as a way of bringing different controls together and reducing internal and external friction within processes
  • Identify possible pain points within processes while molding them to become compliant by design
  • Identify different risk types, mitigate their respective risks (ex: sanctions, AML, and so forth), and use their respective data to fuel other processes
  • Ensure that they are transparent in their requirements
  • Achieve faster decision making while communicating clearly with their customers
  • Improve existing and new features

Consequently, not only will customer experience be much smoother, but the PSPs view of the customer will also be much clearer.

Effective Risk Assessment as a Building Block for Infrastructure

As each payment service provider operates under different conditions and is exposed to different types of risks, so do their potential risk scenarios need to differ. Accordingly, risk identification must go beyond theoretical hypothesis and transcend into an understanding of where and how each merchant is positioned along the value chain, what their role is, which type of clients they attract, and what their transaction flows will look like.

This commitment to data-driven analytics should be ongoing as it will bring PSPs monitoring to the next level by allowing for tighter settings in terms of risk appetite in tandem with harder control when a divergence is found.

Wrapping Up: PSPs Collaboration and Taking the Lead

As regulatory scrutiny increases it will be better for PSPs to take the lead on three distinct fronts (market participants, regulators, and clients). By having a seat at the table when the time comes for setting regulatory agendas, PSPs can bring in the best ideas in the industry and be in a prime position to better define it.

Moreover, data sharing solutions between PSPs, banks, and clients can certainly lead to a better understanding of financial crime and to the development of new ways to fight it.

Lastly, client education is another subject which can help fight financial crime. PSPs' future is certainly bright but between them, banks, and clients the motto for fighting financial crime might be “E Pluribus Unum.”

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