What is transaction monitoring?

Don't get catfished by your customers - why you need transaction monitoring

In the age of dating apps, you have to sift through a lot of weird texts and bad first dates before you find your perfect match. If you're like me and have seen way too many episodes of MTV’s Catfish, the first thing you do when you come across someone you're interested in is make sure their profile belongs to a real person.

Then, you shoot some messages back and forth to get some preliminary information, see if there's chemistry, and confirm they aren't a total creep. A good first date is a promising sign, but you have to keep your eyes open for red flags as you get to know the person to protect yourself.

Oddly enough, fintech companies and banks follow a similar process when they onboard new customers and monitor their ongoing financial activity. First, they verify their customers' identities and evaluate whether they are a fraud risk. Then, they typically implement an ongoing monitoring solution to protect themselves from fraud risks. We’ve actually had requests come in to see if we could apply these same techniques to online dating, but sadly we aren’t there yet.

What is transaction monitoring?

Identity verification is a term most of us are at least somewhat familiar with, but what is transaction monitoring, and why should you care about it? Across the world, there are millions of financial transactions taking place every day. According to the United Nations Office on Drugs and Crime, the estimated amount of money laundered globally is $800 billion - $2 trillion USD, or 2% - 5% of global GDP.

To meet federal anti-money laundering compliance regulations and mitigate fraud, financial institutions and fintech companies need to monitor all these transactions and flag any suspicious activity.

Essentially, transaction monitoring is the process of looking at financial account activity — including customer transactions, money transfers, ATM withdrawals, etc. — against a set of rules to determine if the event or transaction should be approved, further investigated, reported, or denied. Transaction monitoring helps financial institutions prevent money laundering, fraud, terrorist financing, identity theft, drug trafficking, and other illegal activity.

Manually monitoring all financial activity would be impossible, so financial institutions often turn to automated transaction monitoring systems.

Transaction monitoring in AML

Many fintech startups have no idea where to begin in terms of AML compliance, so let's start with the basics. Anti-money laundering (AML) refers to the set of regulations, laws, and policies that prevent people from taking money earned from criminal activity and making it look like legal income. In the US, AML laws date back to the Bank Secrecy Act (BSA) of 1970, which requires financial institutions to keep records of financial transactions, flag any transactions over $10,000, and report suspicious activity to prevent money laundering, tax evasion, or other illegal acts.

After 9/11, President George W. Bush signed the Patriot Act into law in an attempt to strengthen anti-terrorism efforts. Article III of the Patriot Act focuses on anti-money laundering to prevent terrorists from obtaining funds, adding new AML regulations to the existing BSA requirements, and tightening Know Your Customer (KYC) laws. As a result, financial institutions are required to implement an AML transaction monitoring program that includes the development of internal controls tailored to their own business needs and customer base and enables them to file suspicious activity reports (SARs) on suspicious transactions.

Organizations that do not comply with AML requirements by setting up an AML monitoring solution can face serious consequences, ranging from damaging their reputation, incurring large fines, or being implicated in criminal proceedings.

Transaction monitoring to mitigate fraud

Aside from complying with AML regulations, the other main use case for transaction monitoring is to mitigate fraud. Most banks and fintech companies start with KYC and identity verification as a fraud prevention tactic as they onboard new customers. However, fraud does not stop the moment someone's identity is verified during onboarding. I mean, things may be going great with the person you've started dating, but if you're not careful, paying attention to warning signs, and trusting your gut, it could take you too long to find out they have been cheating on you.

Transaction monitoring is a crucial part of any anti-fraud strategy because it provides a complete picture of your customers by evaluating ongoing fraud risks. When done correctly, you can be more lenient and experimental during the onboarding process because you’re confident your transaction monitoring solution will catch any bad actors later.

In 2020, the fraud landscape saw more challenges than ever when the COVID-19 pandemic forced everything to move digital - whether you were ready or not. As a result, there was a significant increase in fraud, with mid/large digital financial firms seeing almost a 40% increase in successful fraud attacks since before the pandemic shutdown. The stakes are higher than ever now because fraud is not cheap. For every dollar lost due to fraud, financial services companies incur a cost of $3.78, up from $3.35 before the pandemic. A robust transaction monitoring solution can help you catch fraudulent activity and protect you from losing money.

Transaction monitoring solutions

Whether you are interested in a transaction monitoring solution for AML compliance reasons, fraud mitigation, or a combination of both, the best way to optimize your transaction monitoring process is to adopt an automated solution that flags suspicious activity and financial crimes in real time.

Traditionally, transaction monitoring is done manually and requires a lot of back-office support. A transaction monitoring solution automates this manual work and allows you to build a custom set of rules that all account activity runs through so that high-risk events and transactions are flagged immediately for review. In our dating analogy, think of this as your set of red flags - you know, like bad breath or someone who lives in their parents' basement.

To put it simply, your transaction monitoring solution helps you weed out customers who may not be a good fit for you... I bet you wish you had that for your dating life!