what faster payments means for aml...
TRANSCRIPT
What Faster Payments means for AML Compliance
Monday, April 3 | 1:30 PM
Speaker:
Henry Balani, Global Head of Strategic Affairs, Accuity
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Speaker Introduction
Henry BalaniGlobal Head of Strategic Affairs, Accuity
Henry Balani is Global Head of Strategic Affairs at Accuity, responsible for driving
thought leadership in the industry. He has extensive experience working with financial
services firms, having pioneered trade compliance screening solutions. Henry teaches
graduate-level classes in International Economics and Global Business and is currently
conducting doctoral level research at the University of Wisconsin.
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Audience Polling!!!!Today’s event will contain some interactive elements:
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Accuity
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• Understanding the shifting market dynamics driving the need for faster payments
• Recognizing the challenges for AML compliance teams in responding to dispositioning within a faster payment settlement framework
• Providing approaches to managing compliance and sanction screening processes while managing AML risks
Focus areas
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Agenda
• What is faster payments?
• Trends driving real time payments
• The challenges of implementing real time payment systems
• What real time payments means for AML Compliance
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How do Payment systems work?
Authorization of payment
Posting of payment and checking availability of funds
Settlement & reconciliation of outstanding obligations between banks
Notification for beneficiary and originator
4 hours to 2 days 4 hours to 2 days
Cross border payments can take up to 2 weeks to settle
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Faster or real time payments
Immediate posting of payment and checking availability of funds
Instant settlement & reconciliation of outstanding obligations between banks
Instant notification for beneficiary and originator
Immediate communication
Electronic payment systems where funds are irrevocably transferred and confirmed between originator and beneficiary of payment within a minute
Authorization of payment
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NACHA Payments Innovation Alliance definition of real time payments
“The Payments Innovation Alliance defines a real-time payment as an immediate, irrevocable, interbank account-to account transfer that utilizes a real-time messaging system connected to every end-user through a financial institution, third party, or another real-time system.” (page 4)
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Faster payment systems are gaining traction globally
FIS Report “Flavors of Fast 2016”
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Source: Deloitte – Real time payments are changing the reality of payments 2015
Faster payment systems are gaining traction globally
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Payment types in the US Payment system
Wire ACH Card Check Cash Virtual
Fedwire & CHIPS
AutomatedClearing House
Debit/Prepaid CardsCredit Cards
Federal Reserve
Direct Direct
High value transactions
High & lowvalue transactions
Low value transactions
High & lowvalue transactions
Low valuetransactions
Low valuetransactions
B2B B2B B2P P2B B2B B2P P2B B2B B2P P2B P2P
B2B B2P P2B P2P
P2P
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Trends in non-cash retail payments 2000 – 2015
Source: Federal Reserve Payments Study 2016
Cash most used by consumers for low value payments
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What are the benefits of Real time payments?
Faster settlement times Enhanced visibility Ability to track payment flows
Improved cash management Improved service levels Reduced risk exposure
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90% of surveyed banks report same day ACH origination volume is higher than or as anticipated
https://www.nacha.org/news/ninety-percent-surveyed-banks-report-same-day-ach-origination-volume-higher-or-anticipated
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The Clearing House offers a real time payments network
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Trends driving real time payments
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Trends driving Real Time Payments
7) GAFA’s entering the payments space
8) Fintech embedded in financial ecosystem
4) Changing economic balance
5) Changing demographics
6) Changing regulations
3) Change of traditional banking models
1) Changing buyingpatterns
9) Pace of technological change
2) Increasing mobility
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1) Changing buying patterns
Need for low cost real time settlement across multiple parties and channels with a fluent customer journey/experience.
Improved (global) logisticsResults in greater international trade
volumes due to lower costs and greater reliability
Sharing economyNew business model (Uber, Airbnb,
Taskrabbit) that increase demand for online payment transactions
New technologiesImproved online payment methods
encourage buying using mobile phones, ecommerce sites
E-conomyIncrease in B2B ecommerce volume
– from 2006 $2.7 Trillion to 2014 $5.7 Trillion (source US census
bureau)
Omnipresence consumptionavailability
ability to purchase online within apps (Facebook, WeChat)
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New flexbile variants of card paymentsThe rise of mobile phones, infrastructure and supporting services have led to payment solutions that can be used
anytime, anywhere.
Rise of mobile paymentsApple Pay, Samsung Pay, Google wallet, M-Pesa etc provide convenience and lost cost solutions to settling payment transactions with reduced reliance on cash for even the
smallest transaction.
Decline of cash
2) Increasing mobility (space and time are not relevant anymore)Ability to conduct financial transaction anytime and anywhere. Increased options for making online payments
Global use of mobile phones
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3) Change of traditional banking models
Disintermediation of offerings of traditional banking functions including payments, lending, investing, trading, mortgages intospecific silos being service by non traditional financial institutions (non-banks and challenger-banks)
Transition to online bankingConsumers, especially Millennials, are more comfortable and willing to use portable and online banking services
and will represent 40% of the work force by 2020.
Globalization and leap frogging in developing economiesIn Kenya, M-Pesa was successful because infrastructure (mobile
phones, convenience stores) already established and incremental cost of use was low (only requires text messaging to send and
deliver money).
Distributed Ledger TechnologiesDLT allows for point to point transfer of value using zero/low cost
payment units (eg Bitcoin). Continues to be rapidly evolving with no true production ready, scalable solution. Ripple leads the way in developing an alternative to the SWIFT correspondent banking
network.
Anytime, anywherepayment technologies are now portable and on demand (smart phones), driving greater
payment transactions.
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4) Changing economic balance
Shift of economic power from the West to the East resulting in changing payment flows
China as new super powerChina will be the world leading economic
power in 2031 with GDP of $35 trillion compared to US of $ 33 trillion.
China drives global innovationChina is the number one investor in African
economies that are developing rapidly.
Rise of AsiaProjected world population at 8.5 billion in 2030, with fastest growth in Asia. By 2100
Asia will have 4.9 Billion people (58%).
Singles' Day Sales Scorecard: A Day In China Now Bigger Than A Year In Brazil
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Dominance of new generationsRise in Millennials (born between 1980 and 2000). Millennial generation
is biggest in US history – 92M Millennials vs 61 M Gen X vs 77 M Baby boomers (Source: Goldman Sachs) who are digital natives comfortable with using technology for sharing, consuming, access. They prefer to
share then to buy and to buy online than in physical stores. Brands are not as important as experience, shared in comments.
Growing world populationGlobally Millennials are the biggest
demographic. Overall world population is rising faster in non OECD countries with
purchasing power and talent in Asia, Africa and S America.
New technological hotspots
Education for everybodyMillennials are more educated, greater disposal income and globally aware. Follows less traditional life path, staying with
parents longer and delaying marriage.
5) Changing demographics
Generations, geographies, income distribution, education, identification, culture, new entrepreneurial hotspots
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6) Changing regulations
Stricter compliance regulations (banking and non-banking) are putting a burder on financial institutions. (Non-banking: AML, Ban of cryptocurrencies, Patriot Act Banking: PSD2, Basel III, SEPA, MIFID, Dodd Frank, FATCA, BSA)
Specific regulations that drive faster payment trends include:
• NACHA mandates same day ACH• Payment Services Directive 2
drives customer expectations of faster settlement times
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7) GAFA’s entering the payments space (Google, Apple, Facebook, Amazon)
GAFA’s have the resources and the ambitions to be leading in the evolution to a new payments framework and to be a highlycompetitive player in this new landscape
Apple PayApple Pay has made a significant initial impact on the payments industry allowing users of their iPhones to
make contactless payments. Their strategy is to increase the use of their customers iPhones, building
up brand loyalty Still in early stages of adoption.
Samsung PaySamsung Pay similar solution using
Android OS. Other wallet variations are designed to increase use of mobile
phones
AmazonNew high profile entrants into
the Payments space look to shake up the Payments industry
Encourage app purchaseFacebook Payments Messgeng,
AliPay designed to encourage in-app purchases
Long term strategy GAFAs have significant financial resources and
recognize Payments is an important driver for use of
mobile phones and will continue to develop over
the longer term, significantly changing how
payments are currently being made and will be
made in the future.
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Consortia working on Blockchain technologyThere are also industry consortiums like R3, HyperLedger that are developing Distributed Ledger Technology use cases. The Fintech
market continues to evolve with significant venture funding in place. There is however no production ready commercial application
currently in place that uses DLT in the Payments ecosystem.
Innovation centres in traditional banksFintechs bring the advantage of speed & ‘outside in’ approach to
the issues of speed & cost of payments. However, banks bring the advantage of ‘the last mile’ in their customer relationships. Increasingly, banks are partnering with Fintechs or developing
their own innovation centers to prototype new ideas
Startups become matureFintechs will become increasingly relevant to
the Financial and Payments ecosystem. There will be competitive and partnership
opportunities.
8) Fintech are more embedded in the financial ecosystem
Fintechs become mature and gain traction. Fintechs and banks are increasingly collaborating to be successful. Banks lackinnovation power and Fintechs need scale and access to market.
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Steep adoption curves…More rapid product life cycles spurred by shorter consumer adoption lifecycles and sophisticated
development technologies.
And shorter product life cyclesAs a result, companies that are not agile with few
products to market risk becoming obsolete.
Join or dieThe global agile application lifecycle management tools
market increased from $291 M in 2013 forecasted growth to $1.1B in 2017, reflecting growing demand from
application vendors. The pace of innovation also is quicker with treater willingness to experiment and fail
quickly, learning from mistakes and improving products.
9) Pace of technological change
In an extremely dynamic world, adoption curves are very steep, but lifecycles can be shorter. How to remain competitive in thiscontinuously changing framework?
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Recognizing the challenges of implementing real time payment systems
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Nigeria
Zenith BankImport/export
AML
KYC
Sender
Fx
Request
Germany
Deutsche BankImport/export
Beneficiary
United States
CITI Bank
AML
KYCAML
KYC
Fx
$50
₦ 31.500.000 $100.000
$50
$99.750$99.900
$50
€90.5302 days 2 days
Nostro Vostro relations Nostro Vostro relations
Swift messageSwift message
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Sue wants totransfer $100K from her Nigerianbank account to a German bank account.
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The sender bank needsto execute KYC and AML before the transfer canbe confirmed. Thosechecks will be done byall banks involved in thisuse case.
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The money will betransfered in USD, so thelocal currency (Naira) need to be exchanged toUSD
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A lifting fee willbe taken in eachbank-to-bank transfer
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The cross border transfer is done on the Nostro-Vostro relationship between Zenith and CITI and then with CIT and Deutsche Bank
The funds are delivered tothe benficiary, who receivesthe money in Euros 87
The funds are exchanged from US Dollars to Euros, resulting in Fxcosts
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Messaging flowsthrough the Swift network
Today’s payment networks makes it challenging to facilitate cross border real time payments effectively
1 day 1 day
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Issues to consider when implementing real time payment systems
Operational overhead Infrastructure costs
• Different payment networks across countries
• Different type of payments• Foreign exchange exposure• Need to handle different remittance
data and formats• Lack of interoperability between
different messaging standards (IS20022)
• Physical infrastructure replacement
• Overhaul of existing processes• Estimates at $ 4- $7 Billlion in
US• BBVA Compass spent $362
million on a new core banking system that supports real time payment processing
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Issues to consider when implementing real time payment systems
• Dependency on multiple actors
• Need to educate end users on changes
• Corporate inertia
• 24 hour back office support
• Real time escalation and resolution
• Real time reconciliation
• Real time reporting
• Well funded Fintechsdisrupting payments market
• Drives down existing margins
• Regulations in Europe (PSD2) driving open banking
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Issues to consider when implementing real time payment systems
AML Compliance
• Comply with existing regulations in real time environment• Harmonizing consumer protection laws with irrevocability of real time payments • Screening systems that are smarter in identifying true matches – reducing number
of false positive hits• Monitoring match rates on a real time basis• Resistance to moving to real time screening due to increased risks of fraud• Issues of liability after payments settled – issue of real time irrevocability• Detecting truly suspicious transactions (more on that later)
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Nigeria
Sender
Request
Blockchain
Bitcoin 10
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Sue wants to transfer 10 Bitcoins fromher digital wallet to John’s digital wallet
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A transfer request is sent to the blockchain network and nodes will validate the request
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A smart contract encapsulates the obligationto transfer funds with minimal fees
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John receives the funds in his digital wallet
Germany
Beneficiary
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adressRequest
Bitcoin 10
After approval, theBitcoins need to be mined
P2P without bank intervention
There is no need for banks since cryptocurrencies are an accepted payment currency and the technology to
Extreme fast settlement
Blockchain settlements take place within 15 minutes
Open system
The Blockchain system has no owner. Everyone can contribute to the system and community.
Low cost settlement
Since there are no financial institutions involved, there is no Fx needed and the settlement is extremely efficient, the cost price of a transfer is very low.
Transparant
Blockchain payments are traceable in the Blockchain. Historical payments data is open.
A possible future of real time cross border payments
Screening real time on a Blockchain may be easier
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Real time cross border payments using Blockchain is ramping up Commercial
launch end of Q2
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What real time payments means for AML Compliance
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Wire Ops and/or Compliance manually approve/reject hits
Overseas Branches/Correspondents Can Reject Payments
Repairs
Core Banking
Payment transaction
Payment transaction
Front End
Treasury System
Trade System
Payment transaction
Payment transaction
Matched Records
Possible errors-Incomplete or inaccurate Beneficiary bank data-Incomplete or inaccurate IBAN numbers (Euro payment)-Incomplete or inaccurate Intermediary bank SWIFT/BIC-Incomplete or inaccurate payment routing attributes
Overseas BranchOR
Correspondent OR
Beneficiary BankWatch List
Filtering
Payment transactions requires compliance checks
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Nigeria
Zenith BankImport/export
AML
KYC
Sender
Fx
Request
Germany
Deutsche BankImport/export
Beneficiary
United States
CITI Bank
AML
KYCAML
KYC
Fx
$50
₦ 31.500.000 $100.000
$50
$99.750$99.900
$50
€90.5302 days 2 days
Nostro Vostro relations Nostro Vostro relations
Swift messageSwift message
Sue wants totransfer $100K from her Nigerianbank account to a German bank account.
The sender bank needsto execute KYC and AML before the transfer canbe confirmed. Thosechecks will be done byall banks involved in thisuse case.
3
The money will betransfered in USD, so thelocal currency (Naira) need to be exchanged toUSD
A lifting fee willbe taken in eachbank-to-bank transfer
The cross border transfer is done on the Nostro-Vostro relationship between Zenith and CITI and then with CIT and Deutsche Bank
The funds are delivered tothe benficiary, who receivesthe money in Euros
The funds are exchanged from US Dollars to Euros, resulting in Fxcosts
Messaging flowsthrough the Swift network
Multiple AML/KYC checks challenge real time payment systems
1 day 1 day
AML/KYC checks
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https://www.buzzfeed.com/matthewzeitlin/be-careful-paying-for-cuban-food-on-venmo?utm_term=.jgLxnyDJ2#.kg6mwO2Bk
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The 3 legged stool to optimizing AML Compliance in a Real time payments world
People- 24/7 support- Training
Process• Establish SLAs• Segment payment types • Categorize customers• Set transaction limits• Instant escalation &
dispositioning
Technology• Include additional elements
to improve matching capability• Additional unique
identifiers• Improve data quality• Improved matching engine• Data analytics - Real time
learning algorithms that proactively reduce false positives
• Optimize false positive rules
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Understanding the Process issues involved
Establish SLAs• Identify the blockers• Determine acceptable
resolution times• Prioritize updates• Establish penalties for
violations of SLAs
Segment payment types • P2P, P2B, B2P, B2B• Identify processing requirements• Understand settlement obligations
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What type of payments are suitable for real time processing?
Swift white paper – “The Global adoption of Real-Time Retail Payment Systems
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Understanding the Process issues involved
Categorize customers• Service levels• Transaction values• Transaction limits
Escalation & Dispositioning• Ensure technology & staff
available to review suspect transactions
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Understanding the People issues
24/7 Support and Decisioning AML Compliance Training
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Understanding the Technology issues
Technology• Include additional elements
to improve matching capability• Additional unique
identifiers• Improve data quality• Improved matching engine• Data analytics - Real time
learning algorithms that proactively reduce false positives
• Optimize false positive rules
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Key Takeaways
1. Faster payments continues to make inroads
2. Market trends are driving the need for faster payments
3. Recognize that AML Compliance is a factor
4. Approaching AML Compliance requirements in a systematic way will allow Faster payments to be succesful
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Henry BalaniGlobal Head of Strategic Affairs
@hbalani
#AccuityHenry
Henry Balani
Thank you!