With their innovative products and services challenger banks have revolutionised the banking sector. They offer greater flexibility and choice to consumers, something that their legacy competitors are currently unable to match. Research shows that the value of the neo and challenger bank market will continue to grow rapidly, reaching an estimated $471 billion globally by 2027.

However, the opportunities that these emerging banks bring can also lead to new regulatory challenges. There’s potential that as disruptive services continue to grow in popularity that the co-risk of money laundering and other financial crimes will increase.

The AML Vulnerabilities of a Challenger Bank

Last month, the Financial Conduct Authority (FCA) raised concerns over the adequacy of challenger bank tactics in meeting regulatory requirements. The review revealed that some are falling short of effectively implementing important anti-money laundering (AML) procedures and controls, following a substantial increase in suspicious activity reports reported in 2021. The findings come as the regulator attempts to bolster its approach against money laundering, which the National Crime Agency estimates costs the UK £100bn annually.

The FCA review investigated six unnamed challenger banks that had recently entered the financial market and which together had a customer base of over 8 million customers. While the FCA commended the challenger banks’ “innovative use of technology” accelerating average customer identification and verification, it, also raised serious areas of concern stating: “there cannot be a trade-off between quick and easy account opening and robust financial crime controls.” These concerns broadly cover the following four points:

● Failures to carry out adequate checks on customer income and occupation

● Failures to assess customers’ risks, making it difficult to carry out due diligence measures for high-risk AML alerts

● A lack of sufficient detail in customer risk assessments

● Unproductive management of AML alerts, hindering quick responses

These indicate that there is a critical need for challenger banks to pair their innovative fintech capabilities with a safety-minded approach to their AML processes.

Customer Data and Its Importance

Relying on speed, simplicity, functionality and flexibility, AML compliance, and the due diligence and screening processes it encompasses, may be especially complex for challenger banks.

The review informs us that challenger banks’ AML issues are caused by insufficient quality of customer data with which to base precise risk-profiles and make key compliance conclusions.

When challenger banks have difficulty in meeting their data collection and risk management needs, they are forced to compromise the benefits of their products and services by spending resources on AML compliance – or risking regulatory consequences.

Possible Solutions

By rolling out tailored risk management solutions, many challenger banks will be able to meet their AML obligations. However, they may become unstuck balancing their compliance responsibilities while also delivering innovation. To keep up with the ever-evolving threat landscape, the AML regulatory environment is engaged in a game of cat and mouse, often implementing new legislation to remain on the heels of new criminal tactics and methodologies.

Rather than depending on a potentially-exposed and unproven bespoke solutions, challenger banks should instead turn to the expertise of established, industry-trusted platforms with dedicated CDD and EDD resources and multi-faceted AML and KYC screening tools.