When KYC is the reason for cross-border payment failure and how to fix it

Such is the frustration around frictions in cross-border payments the G20 decided to put its stake in the ground and make the improvement of cross-border payments a priority back in 2020. A couple of years on and the state of play has been assessed, 19 building blocks have been identified and set out in a roadmap and the G20 has provided much needed global momentum to solve this longstanding and complex issue. The improvement roadmap talks about faster, cheaper, more transparent and more inclusive cross-border payment services, including remittances, while maintaining their safety and security. Cross-border payments have long lagged domestic payment ones and the Bank of England recites stories of cross-border payments taking several days and costing up to 10 times more than a domestic payment. Change is long overdue.

The key challenges facing cross-border payments is not a short list and includes areas such as fragmented and truncated data formats, the complex processing of compliance checks, legacy technology platforms and long transaction chains to name a few.  

Some of the main reasons for failed cross-border payments include false declines, where banks cannot differentiate a genuine transaction from a fraudulent one - mainly due to the lack of ability to perform efficient enhanced due-diligence due to a lack of transparency from the origination point. Another example would be where is it unclear as to the exact source of funds and, in most cases, this means transactions get withheld for want of more information. In addition to this local data privacy legislation, local banking standards and non-uniform information sharing, mean cross-border payments participants do not have a harmonised information sharing system or templates as they would in a domestic environment.

A lot of the impetus around the G20’s drive to improve cross-border payments focuses on co-ordinated action. As an immediate action, business can work with financial institutions and payment tech firms by implementing robust KYC systems based on comprehensive, real-time global data that minimises false positives (so that efficiency is not sacrificed because of the need to be accurate) and processes. This will provide transparent risk assessment to FIs and payment firms to minimise any impediments to enable faster transaction processing.

There are also already a number of tools and strategies businesses can use right now to mitigate risks and ensure they are compliant with regulations in different countries. For example, implementing comprehensive checks on both parties (whether individuals or legal entities) that include not only identity but sanctions, watchlists, crime and any adverse media on the entity along with network risk (risk because of risky associated entities). In addition, transaction monitoring based on various scenarios as well as AI-based pattern recognition can be performed and details provided to all parties concerned to infuse confidence in the validity and authenticity of the transaction. 

Other examples include being familiar with the legal and regulatory context of the countries you are dealing with, consult with payment experts who understand the KYC landscape, use a global payments platform, an all-on-one platform, to enable easy, secure and fast international payments between several countries. The global payments platform will usually have its own payments experts and relationships with regulators that will ensure a lot of the aforementioned is pre-baked. Finally firms can partner with an embedded finance platform to manage global payments and is equipped with everything a company needs to complete cross border transactions in the most effective manner possible at this time. The platform is also responsible for remaining informed on country-specific regulations and currency exchange rates, so the company doesn’t have to.

A lot of what can be done now is about having the right procedures in place to get ahead of any potential issues with cross-border payments. For example, real-time enhanced due diligence combined with a configurable risk policy template to identify potential risk. Creating a configurable questionnaire based on the jurisdiction - addressing origin of funds etc, putting in place compliance training in the form of local compliance rules, regulations and guidelines, a continuous transaction monitoring based on a rules-engine augmented by AI-based behavioural analysis and pattern recognition of cross-border payments can also help identify suspicious transactions and finally a robust and efficient system to remediate suspicious transactions in a timely manner.  

Solving the friction in cross-border payments is still very much a work in progress. It is a growing market and a lot of the challenges associated with cross-border payments that arise from a series of frictions in existing processes are set to be tackled as the market pulls together to work through the building blocks set out by the G20’s initiative. That said, the good news is that there are also practical steps that can already be taken and now is the time to start.