Payment screening allows banks and financial institutions to check whether incoming and outgoing payments pose a risk or are in breach of compliance regulations. But how to strike the right balance between cost and risk?
Checking customer data against sanctions and embargo lists costs money – but failing to detect a compliance risk can be even more expensive, resulting in severe penalties and reputational damage.
What is to be done, particularly when financial regulators are constantly tightening the reins?
Financial regulators increasingly require the use of fuzzy matching. This means that it is still possible to identify risky transactions even if the name in the transaction does not exactly match the name on the sanctions list, perhaps due to typing errors or even the deliberate misspelling of names. The problem is that a fuzzy search always produces more hits than an exact search, which increases the workload of compliance teams.
Inevitable trade-off between cost and risk, effectiveness and efficiency
Financial institutions find themselves caught between the conflicting priorities of effectiveness and efficiency. This means:
- finding as many risky transactions as possible (effectiveness = low risk but high costs)
- finding as few transactions as possible that, on closer inspection, turn out to be innocuous (efficiency = low costs but high numbers of hits).
Why is payment screening so important in the financial industry?
Financial institutions are under extreme pressure to comply with regulatory frameworks. The work of compliance departments is dominated by the need to prevent financial crime. Payment screening has a vital role to play in this respect. It is a key component of risk management that protects financial institutions from legal consequences, penalties and damage to their reputation.
Real-time payments and other digital payment options mean that risk decisions have to be made faster than ever before. Banks have to strike a balance between due diligence, customer expectations and the cost situation.
How important is efficiency and effectiveness in payment screening, and what exactly is the difference?
During the screening process, the compliance software checks payment data against sanctions lists, embargo lists and other blacklists. This data matching is based on criteria such as first and last name, company name, alias name, alternative spellings, countries involved, banks, BICs, accounts, amount, keywords and whitelist exceptions. Financial institutions are under increasing pressure to ensure their systems are both efficient and effective.