Neobanks started with a promise: to innovate, disrupt, and improve upon the old ways of banking. They emerged as alternatives to traditional banks, offering speed, accessibility, and a user-centered approach that made the customer feel like they were at the heart of the financial experience. However, in this transformative journey where they evolved from being small disruptors to becoming serious players in the financial world, they have come under increased scrutiny by financial crime regulators.
No “newbie pass” for neobanks
Typically, neobanks are at the forefront of driving product and service innovations, a space where large banks have been slow to move. However, for some, there has been a lack of attention to compliance with financial crime regulations. Some are learning this the hard way as there is no “newbie pass” for neobanks.
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Recent penalties for “shockingly lax” financial crime controls make it evident that even the most promising and agile neobanks struggle when it comes to developing a robust compliance framework. The problem is that their approach to product innovation is in stark contrast to compliance. They tend to look for anti-money laundering (AML) solutions that provide ready-made options that are easy to implement and cover basic compliance requirements.
Neobanks struggle with vendor selection
While their vendor selection process aims to address regulatory requirements, the solutions they deploy tend to lack the depth needed to meet external audit expectations. Some neobanks also fall into the trap of selecting single orchestration platforms for end-to-end AML solutions that claim to do it all. These vendors often lack the experience needed to navigate the intricacies of AML compliance such as onboarding, due diligence, screening, and monitoring.
The fact is financial crime compliance is complex. It isn’t enough to tick a box and move on. Regulations are continually evolving, and it takes more than surface-level solutions to ensure they are truly secure and compliant. Neobanks need to do more than just meet the bare minimum; they need to have a comprehensive understanding of the regulations they must follow and the nuanced risks they face – across all geographies in which they operate.
In selecting an AML vendor, it’s crucial that neobanks avoid falling for the path of least resistance, and instead, look for a solution that meets the real-world demands of financial crime compliance. As such, there are key considerations to guide them, such as the vendor’s experience, the solution’s ability to integrate seamlessly and understand the data quality of existing systems, its adaptability to evolving regulations, and the level of transparency and auditability it provides – all of which are put to the test during internal and external regulatory inspections.
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By GlobalDataBeware vendors promising ‘all-in-one, easy solutions
Choosing the right AML solution is about more than just meeting the minimum regulatory requirements. It’s about understanding the risks, being able to respond quickly to new threats, and ensuring your compliance processes can withstand scrutiny from both internal and external auditors. A vendor might promise an all-in-one, easy solution, but without the depth of understanding and experience, that solution will likely fall short of what’s needed to keep the neobank safe from fines and reputation damage.
Traditional tier one banks, for all their shortcomings, have built robust compliance frameworks based on decades of experience. Their survival in a highly regulated industry has been a testament of their resilience and capability in mitigating risks. Neobanks can benefit from these foundational principles – taking a more comprehensive approach to compliance, investing in thorough risk assessments, and working with vendors that can genuinely support them in maintaining comprehensive and effective AML programmes. Essentially, it is about applying the same strategy they use for their product innovation: thoroughly understanding the underlying structure and innovating to deliver a better customer experience.
In today’s regulatory environment, there’s no room for error when it comes to financial crime compliance. Neobanks must recognise they are being judged by the same standards as the largest, most established banks in the world.
With regulations like the EU’s Payment Services Directive 3 (PSD3), there will be more innovation in banking and the delivery of financial products, but that should not come at the cost of security and trust. Neobanks have earned a good reputation by redefining what modern banking looks like and should not risk their progress through poor financial crime compliance. It is time for them to go beyond the checkbox approach and invest in the tools and expertise that will meet today’s challenges and those that will emerge as they scale to growth.
Mayank Sharma is Senior Product Marketing Manager at FinScan
