Cross Border Payments
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ThetaRay: Building Trust With Banks – The Payments Fintech Dilemma

Many legacy companies in the financial sector are using outdated technology to complete various tasks, including validating payments. Through coopetition (an amalgamation of competition and cooperation) with fintechs, incumbents can improve their risk management that previously hindered the processing of payments, especially cross border ones. 

These are the views of Shaun Smith-Taylor, senior director: global head of solutions for ThetaRay. Having worked his way up within a tier one UK bank and international fintech, Smith-Taylor has found a passion for transformation and scaling businesses by product leadership. He has more than 15 years of experience and a passion for developing the next generation of product people and has co-founded myproductpath to create a marketplace for product engagement, growth and learning.

Speaking to The Fintech Times, Smith-Taylor addresses how banks and fintechs can build trust with one another to solve the risk management payments problem: 

Shaun Smith-Taylor, senior director: global head of solutions for ThetaRay
Shaun Smith-Taylor, senior director: global head of solutions for ThetaRay

The payments fintech space is on fire, with hundreds of new start-ups launching and venture capital funding hitting a record high of $31.9billion in 2021. And it’s no wonder: the global digital payment market size was estimated at $69.9billion in 2021, and is expected to reach $176.21billion by 2026.

However, even though payments fintechs position themselves as an alternative to slow-moving, high-fee banks, the dirty little secret is that they can’t process foreign remittances or other cross-border transactions without going through the global banking system for currency clearing. And some are learning this the hard way, getting blocked or banned by banks due to money laundering risk.

On the bright side, new technologies exist that can help payments fintechs build trust and connections with the global banks they rely on.

Cross-border payments friction

While cross-border payments are obviously crucial to the global economy, there’s friction. One of the biggest headaches involves the processes, controls and systems that banks use to review payments from an anti-money laundering (AML) risk perspective. If a payment is stopped, it delays the end customer from receiving the value of the payment. Unfortunately, many regulated institutions use last-generation, rules-based risk management frameworks, where massive numbers of payments are stopped simply because the tools aren’t fit for their purposes. Then a large team of people has to review those payments, and that equals high cost for the bank. With rules based controls a high percentage of these delayed payments are stopped unnecessarily due to rules based controls having a very broad and unintelligent application.

This challenge is exacerbated by the fact that many regions are considered ‘high-risk’ for money laundering, so banks are increasingly reluctant to serve them. Regulators globally have been hitting the banks hard, whether it’s for sending money to people to whom they shouldn’t, or for using non-compliant processes to do so. They’ve been fined billions. And this makes them retract from markets they deem higher-risk.

De-risking has been a huge problem around the world, preventing innocent people and small businesses from connecting to the global financial system. But I would argue that the only reason any region needs to be dubbed ‘high-risk’ is because the banks are using antiquated AML controls.

Today, we are now seeing better standardisation in terms of compliance controls, but there has been slow adoption in terms of using the latest technology. If you look at other sectors, you won’t see this reluctance; for example, the anti-fraud industry embraced next-generation AI technology years ago. But the anti-money laundering sector has been slow to adapt to that. And this is due to both banks and regulatory authorities being reluctant to adopt artificial intelligence until a few years ago.

What does this mean for payments fintechs?

Fundamentally, banks hold the control over where we send money. But the problem is that in general they have poor risk management controls.

This is where payments fintechs can save the day. By investing in AI-based detection systems, PSPs and fintechs can and are helping protect the banks that provide them the accounts, while also demonstrating that they better understand how customers should be served in a modern climate. This type of partnership gives banks a competitive advantage.

Non-bank financial institutions (NBFIs) and fintechs have helped underserved regions tremendously by demonstrating that there is money to be made in what were previously deemed high-risk corridors. So some forward-looking banks have started thinking, “How can we actually serve these markets and feel comfortable?” And the way they’ve done it is by enhancing their risk controls. This means that either they have to massively increase their payroll, which isn’t financially feasible in the current environment, or they switch to technology that is smarter and detects the risks more accurately.

Building collaborative trust with AI

Thanks to the influence of payments fintechs, some of the biggest banks in the world are now ripping out the rules frameworks that large companies have provided for decades, and replacing them with AI. And now they’re able to get signoff from the board to either keep relationships that maybe were going to be deemed too risky to carry on, or alternatively provide accounts to some of the fintechs to go into markets they used to see as higher-risk. The fact that the fintechs themselves understand technology and are moving towards AI-controlled risk frameworks allows the banks to have comfort and peace of mind.

The further acceptance of AI will only help payments fintechs and the banking industry become more collaborative. Once they mutually understand the need for coexistence, legacy banks and NBFIs are more likely to flourish amid the rapidly changing competitive landscape. Working together is possible, and if they can overcome the obstacles that have kept them apart until now, the financial services industry as a whole will prosper.

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