Challenger banks need to work on AML and fraud control as they grow

Written by Kunal Sawhney, CEO, Kalkine

UK’s challenger banks have made deep inroads into the financial system of the country. These recently created retail banks have been giving tuff competition to the traditional banks with better digital services and offering a quick and easy application process. These neobanks have disrupted the conventional banks’ business model, and their customer count has witnessed a continuous rise.

The fintech innovation has led to a meteoric rise in the sector in just over a decade, and with ever-increasing fintech adoption among digitally active consumers, the growth is likely to increase further. The process they follow of providing improved customer support without face-to-face interactions has made them popular and lured many to shift to them from the conventional banking system.

When everything was going in favour of the challenger banks, the financial regulator raised an alarm bell. The Financial Conduct Authority (FCA), in its latest review, has said that challenger banks need to work on their process of assessing financial crime risk.

Finding of FCA on challenger banks

FCA review that was conducted last year has identified various Suspicious Activity Reports (SARs) from challenger banks, which has raised concern over the adequacy of checks while onboarding new customers by them. The regulator stated that the procedures for accessing customers’ risks were not developed properly and, in some cases, were ineffective, which made the customer due diligence (CDD) difficult. Also, as some of the challenger banks grew rapidly in the last couple of years, they failed to adjust to the norms. In a competitive rush to attract customers quickly, the information gathered at the primary stage of account opening remains incomplete and insufficient.

It was also pointed out that many of the challenger banks’ management of transaction monitoring alerts, especially for the application of enhanced due diligence (EDD), remained inconsistent and ineffective.

It’s not the first time that concerns have been raised about the functioning and the regulatory procedures followed by the challenger banks. They have been under scrutiny earlier as well by the regulators for reasons as grave as potential breaches of anti-money laundering laws. The regulator has advised them to work on their anti-money laundering (AML) and fraud controls with the growth of their business.

Enough scope of course correction

All is not bad, and the regulator has also identified some good practices like the use of technology in an innovative way to identify and validate customers at speed by the challenger banks. It has termed them as a vital part of the UK’s retail banking offering.

Also, the scope of the FCA review is limited as it was based on a sample selection of 6 challenger retail banks and that too who were relatively new to the market, but still, the challenger banks should consider the findings of this review. The findings indicate that they will have to work on enhancing their own financial crime systems continuously. There is technology available that can help challenger banks to prevent financial crime; they can use AI-based systems to identify fraudulent activities and can act promptly. The neobanks will have to take a risk-based approach to AML and should stringently follow the CDD norms.