The urgent need for strong customer screening in Finance: A focus on Instant Payments and AML

Customer screening is rapidly gaining importance across the financial sector and for good reason! Starting in 2025, the Instant Payment Regulation will mandate daily sanction checks for real-time transfers, alongside new requirements from the EU’s upcoming anti-money laundering package. Compliance is increasingly recognising just how important customer screening is for managing compliance risks and improving efficiency. But it doesn’t stop there: effective customer screening is also a key driver of customer satisfaction. Discover why here.

Customer Screening: Less risk, more transparency

Day in and day out, banks and financial service providers work to keep their customers safe and secure. A key part of this effort involves analyzing customer identities and assessing risks to prevent money laundering, fraud, and other financial crimes. This means checking customer data against sanctions lists, PEP (Politically Exposed Persons) lists, and adverse media, as well as any custom watchlists. Customer screening is an integral part of the Know Your Customer (KYC) process, ensuring thorough due diligence.

Customer screening has gained new momentum with instant payments. However, daily screening of customer data comes with its own challenges.

Customer Screening for Instant Payments

The Instant Payment Regulation (IPR) mandates that payment service providers (PSPs) be equipped to handle real-time transfers starting in January 2025, provided they check customer data against sanctions lists at least once daily.

Customers expect their PSP to provide reliable instant payments. Any disruptions can lead to significant frustration. The challenge lies in finding the right balance between meeting customer expectations and ensuring institutional security.

Here are six key challenges:

1. Customer screening every day: Screening customers daily may not seem like a big ask, but the rapidly changing nature of sanctions lists adds complexity. PSPs must find a way to harmonize customer screening results with instant payments, ensuring the process works 24/7, year-round.
2. Time pressure: For banks, manual checks before payments can be approved are simply not feasible—ten seconds just isn’t enough time. The only way to meet the demands of instant payments is to automate and optimize the screening process.
3. Weekend and holiday screening: Whether it’s a weekend or a holiday, sanctions screening remains a priority, and banks must have processes in place to ensure it happens every day without interruption.
4. The hassle of false positives: When a sanctions check flags an entry, the payment is initially stopped, often blindsiding and frustrating the customer. The bank then needs to investigate and determine whether it’s a true or false positive. Customer satisfaction is crucial here—too many false positives and payment stoppages may drive customers to switch to other providers.
5. Foreign payment screening: Banks dealing with international transactions—such as those with the U.S.—screen payments against the OFAC list using a transaction-based approach. This applies to non-euro payments, while eurozone transactions are subject to daily sanctions screening. The system must quickly recognize and apply the appropriate screening method in a fraction of a second.
6. AI for Efficieny: Efficiency is critical for PSPs. The goal is to minimize delays in instant payments and avoid overloading compliance teams. To reduce risks and false positives, providers rely on advanced algorithms and artificial intelligence, particularly machine learning, which can significantly reduce the volume of false positives.

Customer screening in the fight against money laundering: Greater efficiency & security and lower costs

Over and above instant payments alone though, screening customers is important for other reasons. It’s a key way to help prevent money laundering, for example. Companies that are regulated must check customer data when they first start doing business with someone, then regularly screen the entire customer base against sanctions and PEP lists.

This isn’t new, but customer screening is now a big part of making compliance more efficient. If the software is set up right, it’ll show as few false positives as possible, so compliance teams can focus on the real cases, the true positives. But how do they get there?

• The software must strike the right balance of caution. Not too cautious, so as to avoid unnecessary disruptions, but not too lax, to ensure the institution remains legally compliant. In other words, squaring the circle between overzealous and over-lax screening.
• It should meet due diligence requirements while remaining efficient and cost-effective. This is achievable when the software offers intelligent configuration options.
• Artificial Intelligence: Machine Learning (ML) is a method within AI. In the process of screening personal data, the screening algorithms are enhanced with ML models to identify and reduce false positives. Savings of up to 50% are possible here.
• Generative Artificial Intelligence (GenAI) opens up further efficiency potential. In the future, compliance officers will be able to automate time-consuming research and reporting tasks. GenAI will extract relevant information from complex datasets, evaluate the results, and summarise them in draft texts.

Summary: Customer screening key for Instant Payments and Anti-Money Laundering

Regulated entities have to scrutinise new and existing customers as part of their Customer Due Diligence (CDD) process. This multi-faceted approach encompasses Know Your Customer (KYC) identification and regular cross-checking of customer data against sanctions, PEP and adverse media lists.

The Instant Payment Regulation IPR mandates that payment service providers screen their customers against these lists at least once per day. This ensures that clients sending or receiving real-time transfers aren’t flagged on any watchlists.

The challenge for payment providers? Manual checks simply aren’t feasible with instant payments. Instead, the payment system must automatically halt transactions the moment a customer’s details match a sanctions list entry. False positives frustrate customers and create additional work for banks. The solution? Sophisticated algorithms, tailored configurations and ML models that dramatically reduce false positives.

Customer screening takes centre stage when it comes to instant payments and anti-money laundering. Get a robust screening system in place and you enhance efficiency, slash costs and bolster your competitive edge. The keys to success? Customer satisfaction, ironclad compliance risk management and the judicious deployment of compliance personnel.