New anti-money laundering directives for fintechs
The AML directives suggest financial institutions take a risk-based approach that considers geography, products/services, and customers/entities. The 5th directive calls for higher transparency of legal entities and evaluation by fintech companies using various data points. The 4th directive specifically mentions “Severe and public action for non-compliance (“name-and-shame” approach), including significant monetary penalties up to 10% from yearly total gross income of the financial institution and fines for individuals (“senior management”) up to EUR 5m” according to Deloitte.
The directives impact fintechs
The directives signal the licensing requirements that a risk scoring mechanism should be put in place by all financial institutions. It’s critical that fintech startups play fair while trying to scale and grow the business. However, most startups end up developing fundamental compliance solutions in-house which distracts them from their core business. Risk scoring is one of these areas. When it’s done right, risk scoring can be the foundation of a healthy revenue generator that improves unit economics, empowers a world-class compliance team, and contributes to fast revenue growth.
How Flagright can help
Flagright Dynamic Risk Scoring enables fintechs to risk score their business or individual users using different variables of their choice and advanced algorithms. These variables can be anything from business type (e.g. gambling, eCommerce, crypto, etc.) to the country or the age of a person (e.g. 65+). The key differentiator with Flagright is that the scoring is done as a time series algorithm, so you can always account for how user behavior changes over time. The standard approach only considers a user's static information like nationality, age, etc. We consider many more data points including the transactions users make, their account movements, and so forth. By doing so, we enable you to manage the risk of a user who might initially appear low risk but actually displays high-risk behavior over time. Similarly, you can enable a user who might appear high-risk upfront, but displays desired behavior on your platform. Over time, this user can become low risk with consistent evidence even though their user profile initially might make them appear high risk. This means you can enable users with a low dynamic risk score with a frictionless user experience. Consequently, this capability rewards you with a wide range of benefits when you look at the big picture:
- Maximize revenue
- Protect your business against a suspicious activity with fewer false positives
- Improve user experience for good users by decreasing friction
- Drive operational costs down and decrease manual work
- Increase customer lifetime value (CLV) and improve unit economics
One of the key pain points in the traditional transaction monitoring process is that it’s too inflexible. Flagright is a fully integrated platform, so the Risk Scoring Engine enables transaction monitoring to be more flexible. The above benefits are only possible using a dynamic risk scoring system that delineates a good user from a bad one. Using the risk score input, you can configure the Flagright real-time transaction monitoring system where you can define specific rules for each risk level within seconds with no code. Contact us today to learn more about our fully integrated, no-code platform here.