An analysis of why legacy AML systems are failing in real-time payments, and how flexible, risk-based and collaborative compliance platforms can support sustainable growth.
Compliance has long suffered as the forgotten actor in the payments world, and that’s a problem. Now that real-time settlements and diverse payment rails dominate the sector, the time to modernise failing legacy systems has completely passed institutions by.
Already behind, there’s little room to respond to rising transaction volumes and new digital assets, as well as operational hurdles, given that over 70 countries now utilise instant payment systems (also required by the EU). Without the safety net of settlement windows to act within, outpaced payment firms are left to own the risk, with potential regulatory ramifications.
Payment velocity continues to accelerate, and companies that are ill-equipped can essentially say goodbye to product innovation and business growth. Getting up to speed is a periodic, not a seismic, all-at-once shift, and strategic technology partnerships can ensure AML readiness for a complex compliance future that’s coming faster than we think.
Accelerated risk vs uncontrolled innovation
Financial firms spend billions on AML. Partly in a mission to morph into a fully digital anti-financial crime unit, but also to remain accountable in the eyes of global and regional regulators that are accelerating legislation, expecting high-quality AML protocols and technology to be adopted quickly.
Of course, the gulf between a payments giant and a scaling market entrant in meeting rising expectations (and their costs) is massive. This is why such strong regulatory pressure is seen as a barrier to improving financial inclusion and serving diverse consumer bases, and to supporting evolving digital payment methods amid a growing need to facilitate real-time transactions.
There’s a Catch-22 here. The market is calling out for payment companies that can increase their throughput safely and launch new products without delay. But that’s at odds with strict mandatory AML, where shortcutting guidance leaves a business prone to criminal exploitation, reputational damage, costly fines, and blocked business expansion altogether.
Three core compliance principles for today
This is why every payment must take this chance to adopt flexible AML platforms that keep up with continuous regulatory change, as they threaten to speed too far ahead:
1) Centralising solutions
Legacy systems siloed individual AML steps from initial KYC to report submission, hindering payment teams’ oversight for payment volumes amid global cross-border transparency standards (ISO 20022 as an example) and strengthened data privacy laws, with huge operational overheads.
Integrating compliance measures with historical transaction data and existing workflows is crucial, enabling an end-to-end platform that scales to evolving regulatory requirements and digital payment types such as e-wallets, account-to-account payments, and variable recurring payments, through a modular architecture.
2) Moving to risk-based intelligence
The old way of identifying payment risk relied on static rules, resulting in an unwieldy number of false positives. When time is wasted on non-essential investigations, payments are delayed or blocked, customers become frustrated and leave, and high merchant churn for payment companies reduces revenue. Traditionally, rules-based AML can cause immediate pain visible across the entire payment company.
The trouble is that more than 70% of organisations still automate less than half of their AML activities. That’s not dynamic enough to scan real-time transactions in the same way user-set risk thresholds can. Rich ISO 20022 data fields contextualise transactions and enable real-time payment decisioning, alerting on anomalous activity to support quality investigations of genuine high-risk behaviours.
3) Evolving AML through cooperation
Payment provider partners are utilising automated regtech to streamline investigative workflows with greater accuracy, from digital-first fintechs to larger, more holistic financial services SMEs. Regtech partnerships help consolidate previously separate payments stacks that were a barrier to safely onboarding customers at scale, or facilitate faster time-to-market for new products.
With harmonised data-powered systems set up according to regional or industry-specific regulatory requirements where they operate, payment teams can utilise AML as a strategic lever for growth, and away from traditional compliance’s reputation as a suffocating cost centre.
At this pivotal juncture, the regtech market’s nearly $20 billion valuation is warranted, as payments that fail to modernise their legacy AML controls create compliance liabilities for the entire financial ecosystem. But firms that seek to embrace collaborative solutions will be better aligned with digitalised payment rails, typologies, and stronger regulations that are inevitable to mitigate criminal risk—and will stand as revolutionary players in a more inclusive, swift, and safe payment space.
