The importance of compliance in the remittance industry

It should be no surprise that financial services are among the most heavily regulated industries. Any business that involves the management and transfer of money, particularly across international borders, requires careful monitoring and control. Moreover, as a result of the 2007-2008 financial crisis and the rise of cybercrime, the regulatory environment has become far more stringent.

While banks and other traditional financial organisations have been in the money transfer business a long time and have mature compliance models, there are many new players and the remittance landscape is now far more diverse and competitive. Money transfer operators have developed quickly thanks to digital technology and are reaching more parts of the world with a wide variety of new services that are fast and convenient. And with the growth of these services comes the fundamental requirement to be safe and secure.

That’s why compliance is a top priority for the remittance industry. Remittance volumes are rising every year and more corridors are being connected through sophisticated networks developed by today’s global money transfer operators. All organisations are subject to local, national and international regulations. Whether the remitter is a money transfer operator or a bank, it is bound by long-standing due diligence and compliance obligations. For example, all remitters must be licensed, otherwise they will be deemed underground and outside the law.

 It is an entirely good thing that transfer infrastructures and remittance flows are being transformed by digital technology and mobile money. It means more people worldwide now have access to versatile and cost-effective remittances. But new technologies and practices bring vulnerabilities as well as opportunities, so compliance must match the pace of change. This is evidenced in the recently enacted second Payment Services Directive (PSD2), which is bringing European payments up to date with online transactions and the mobile revolution.

 Compliance means greater operational efficiency and better customer service. Without regulation there would be no accountability to ensure money moves safely and securely from sender to receiver or to identify and block transactions that are not legitimate. Now that transactions are increasingly digital, regulations such as know your customer (KYC), anti-money laundering (AML) and anti-terrorist financing (ATF) must also extend to the new world of digital remittances. Irrespective of whether a transaction is completed through a mobile app or by a bank, the same levels of compliance are required.

While technology has added to the complexity and demands of compliance, it also offers very effective solutions for compliance. The technological advances powering the remittance industry are also driving big advances in visibility and security. The industry is embracing compliance technologies such as automated identification, real-time transaction scanning, data analytics, data enrichment, and artificial intelligence. Collectively, these and other digital developments provide a more complete understanding of transaction flows and counterparties, which is vital as transfer pathways grow in reach, scope and complexity.   

Because online remitters don’t meet clients in person, and mobile money is spreading worldwide, KYC is a very important compliance issue. One solution is biometrics, which is growing in popularity as a reliable and frictionless method of verification for financial services. Biometric methods, such as fingerprint IDs stored on phones, are helping to authenticate transaction parties and reduce fraud. This is just one example of how technology can set the rules as well as provide the infrastructure for fast and efficient money transfers.

Compliance is also important because of a trend that could restrict growth in the remittance industry. This is the practice of de-risking and it means that some financial institutions are assessing the cost-benefit of certain operations and deciding to withdraw from high-risk activities so that they can improve their risk profiles.

Active compliance, rather than compliance by cutting commitments, is the more desirable option because when you remove a financial service, the void can be filled by underground operators who are not regulated and therefore not compliant. In addition, it does nothing to alleviate financial exclusion. Instead of de-risking, it is ideal to focus on prudent risk management. It is important for remittance providers to inspire confidence in their correspondent banking partners, and this is something they can do by demonstrating that they are risk-aware and have robust security and clear audit trails.

The remarkable expansion of the global remittance industry is due to technological progress, which also provides the foundation for greater security. Looking to the future, money transfer operators will continue to use new and emerging technologies to refine their services while ensuring that the latest technologies also keep remittance networks regulated and compliant.