Tobias Bumm/ September 28, 2020/ Uncategorized

We live an increasingly global and digital lifestyle. Therefore, it is not surprising that Peer-to-Peer (P2P)  payments with simple sign-on procedures, instant transactions, low fees and easy cross-border or cross-currency transactions are gaining popularity. P2P payments are just a perfect match for our new easy and instant lifestyle. But the simplicity, speed, and low cost as well as global reach also attracts financial crime.

In traditional transactions, banks are responsible for customer due diligence, risk analysis, ongoing transaction monitoring, and so on. But who bears the risk when financial services organizations or nonbank financial institutions (NBFI) are mediating those payments?

Who bears the risk for P2P payments?

Some P2P payment services are only mediating between customer and bank solely to facilitate payments using established banking networks. Others provide additional services, like stored-value accounts and credit or direct payment processing, in effect becoming digital banks themselves.

Sometimes regulators assign responsibility to the payment intermediary. In other cases, the bank covers the risk. But all too often the responsibilities are split among the two financial service providers, especially when the digital payment company offers bank-like services to its customers. This is when things get especially vague and banks are right to be concerned about residual risk.

For that reason, intermediaries should be transparent and compliant, or they will risk their connections to the established payments architecture that traditional banks provide.

Balancing risk with ease-of-use

Unfortunately, ease of use is offset by compliance with anti-money laundering regulatory restrictions. Therefore, key aspects of digital payments must be balanced with compliance regulations:

  • Simple sign-on: Initial account setup is fast, easy, and exclusively online making identity verification more difficult. (link to digital identity blog)
  • Instant transactions: Fast, nearly instant transactions challenge existing anti-money laundering (AML) and counter-financing of terrorism (CFT) programs.
  • Innovation: Innovative start-ups and technologies opening new avenues for criminals.

Keeping up with the criminals

The ever-expanding digital world opens new ways for criminal activities. But the new technology also provides new tools to counteract them. Big data analytics and AI, for example, are used by monitoring software to find connections between transactions and parties through internal and external third-party data sources. The aim is to put each transaction in a broader context. However, banks and payment intermediaries are under constant pressure to improve. Not just to keep up with the criminals, but also to keep up with regulators requiring the implementation of new measures and efficient compliance solutions to mitigate the risk of financial crimes. Thereby, maintaining high compliance standards is not only important to avoid fines and penalties, but also to maintain an organization’s reputation. Peer to Peer payments are only bound to increase in the future. Therefore, having users to put their trust on such apps is crucial for its success.


 More about the topic: