Open banking is a set of regulatory standards that govern the sharing of financial data between banks and third parties, enabling customers to pay online for products and services.
Revolutionising the commercial payment landscape, open banking has led to an explosion in the popularity of online apps and services. In the EU alone, the value of the payment services market has risen dramatically in the past few years, from $184.2 trillion in 2017 to $240 trillion in 2021. However, the rise of open banking has also led to concerns about the safety of customers’ financial and personal data. To allay those concerns, governments around the world have moved to regulate open banking to ensure that customer data remains safe and secure without stifling the potential of fintech innovation.
The most significant open banking regulatory framework in the EU is the Payment Services Directive (PSD), which originally came into effect in 2007, and its update, the Payment Services Directive 2 (PSD2), which came into effect in late 2020. Other examples of global open banking regulations that facilitate financial data sharing with third parties include the UK’s Open Banking Regulatory Technical Standards (which transposed PSD2 into UK law), Australia’s Consumer Data Right (CDR), the Hong Kong Open API Framework, and Singapore’s proposed Open Finance Framework.
The Next Phase of Open Banking: UK Regulations
PSD2 is the backbone of the EU’s internal electronic payments infrastructure, but the fintech landscape moves fast, and as innovations emerge, so do new risks. In June 2023, the EU set out its proposal for PSD3, which will “further improve consumer protection and competition in electronic payments” while maintaining the safety and security of customers in the digital landscape.
The next phase of open banking has seen proposals for new regulation around the world. To keep pace with the evolving payments landscape, the UK government’s Joint Regulatory Oversight Committee (JROC), part of the Financial Conduct Authority (FCA), has also published its vision for the next phase of open banking. The report sets out a range of challenges and opportunities for firms managing current and emerging financial crime risks associated with online payments – not least the need for effective anti-money laundering (AML) measures such as customer and transaction screening technology.
JROC characterised its vision as a plan for developing UK open banking regulations in a “safe, scalable, and economically sustainable way”, and focused part of its report on “mitigating the risks of financial crime”.
With new UK open banking regulations on the horizon, along with PSD3 and other global regulatory efforts, let’s take a look at some of the challenges (and potential opportunities) that firms can expect as open banking evolves over the next decade.
Regulatory Challenges for Open Banking
Data Sharing
JROC research suggests that there is currently only partial information on the levels of financial crime in open banking. The issue is made more complex by the frequency and footprint of online payments, which take in multiple independent service providers, across different jurisdictions. The next phase of open banking must focus on enhancing data-sharing between financial institutions and third-party service providers.
As the amount of data transiting open banking infrastructure will increase, it is possible that banks and payment providers could harness that data’s potential. Combined with strong cyber-security measures, open banking data-sharing protocols could improve protections for customers and broaden institutional understanding of criminal methodologies, without degrading the quality of the products and services.
Risk Indicators
As open banking changes the payments landscape, new criminal risks will emerge, and institutions must be ready to adapt their compliance response to keep pace. However, financial compliance should be a proactive, rather than reactive, effort. Institutions must find ways of detecting AML/CFT threats before they cause damage, which means developing new risk indicators.
Open banking has the potential to improve responses to financial crime with tools that address specific risks (such as money laundering, terrorism financing, and fraud). Practically, this means automating data-heavy processes like customer due diligence (CDD), and customer screening, and leaning in to innovations such as artificial intelligence and machine learning software as a way to improve risk detection.
Regulatory Disparity
Open banking has expanded the commercial landscape for businesses around the world, but cross-border payments carry higher levels of criminal risk and make it harder to establish the identities, and to track, parties involved in transactions.
New open banking regulations will increase the CDD compliance burden on service providers, along with the need for firms to maintain suitable records of transactions. The regulatory disparity between different jurisdictions may also create problems – the EU, for example, is focusing strongly on harmonising its AML/CFT regulatory ecosystem and will likely emphasise this in the next iteration of the PSD.
Data Privacy
The more data collection requirements that open banking regulations mandate, the more likely it is that firms will encounter data privacy challenges. Jurisdictional disparity may play a part in the data privacy challenge: some third party firms may employ ‘screen scraping’ tools as a way of harvesting data – a practice which is restricted in a lot of jurisdictions, including the EU.
As open banking regulations meet existing data privacy regulations, banks and third party providers will need to increase their focus on ongoing compliance, and consistently review their cyber-security protections to ensure customer data remains protected.
Know Your Customer
The anonymity and speed associated with online payments means that financial institutions must improve the quality of their know your customer (KYC) processes, so that they can understand the true risk that certain payments present.
To tackle the specific KYC challenges of open banking, firms must enhance the application of CDD, and screen for criminal risks more intensively. Those factors inevitably slow down onboarding, lead to an increase in the cost of products and services, and create negative experiences for customers. To address this challenge, firms should lean in to KYC innovations, including the use of biometric and dual factor authentication, or the integration of advanced screening strategies such as global adverse media searches.
Next Generation Screening Solutions
The open banking landscape will evolve dramatically in the coming years, and firms will need to be proactive in their approach to compliance, staying ahead of potential penalties by understanding their risk environment as completely as possible. Customer screening will be critical to that challenge: firms that understand the true risks that they face will be able to make faster, stronger decisions that help them address threats and capitalise on opportunities.
With that goal in mind, firms must integrate screening solutions that match the speed and demands of the open banking risk landscape. This means they must be able to screen with global scope, across multiple languages, and capture up-to-date information as quickly as possible.
Powered by next-generation machine learning technology, Ripjar’s Labyrinth Screening platform offers the flexibility, efficiency, and accuracy that firms need to meet open banking screening challenges. Labyrinth Screening enables customer name searches in over 25 foreign languages, taking in thousands of adverse media sources, government watchlists, and sanctions lists.
Labyrinth also offers a new screening advantage in the form of AI Risk Profiles, which allows firms to identify and pull the most relevant risk data from their searches, and build out in-depth profiles for each entity they deal with. AI Risk Profiles can help firms take on the data-intensive demands of new open banking regulations, resolving risk factors quickly and clearly, and facilitating effective decision making.
Contact us to discuss how Ripjar can support your open banking compliance
There is nothing modern about slavery. For as long as there has been a distinction between the powerful and the powerless, people have sought to take advantage of human labour, setting up the systematic exploitation of entire ethnic groups and vulnerable people. Despite hundreds of years of formalised abolition all over the world, slavery persists. It has adapted and evolved to survive – if not thrive – in the modern day. Today, organised criminal networks profit between $50-150Bn a year from the indentured labour of as many as 50 million victims worldwide.
This crime is closer than you think. In the UK, some estimates put the number of victims at 100,000 or more. These victims, trafficked into wealthier countries from overseas, often find themselves deep in our daily supply chain – in our factories and farms, or for luxury items like flowers or fashion. As the current healthcare crisis evolves into an economic crisis, criminals are already seeking to take advantage and find new victims.
To profit from this flagrant abuse of basic human rights, criminal gangs use an array of psychological, financial, and physical techniques to maintain a tight control on those in their employ. Preying on often vulnerable groups including homeless or substance-dependent individuals often means victims are not even always aware of their own victimhood – their captors seen as simply helping them find work and shelter.
Trafficking individuals from overseas further traps victims to financial debt to the gangs, or by a language barrier, not able to communicate effectively with those around them at work or to the police. Finally, an ever-present threat of physical violence against victims and their families is used to ensure compliance.
Modern Slavery: a board-level issue
This all makes detecting and disrupting this type of crime extremely difficult. Cases reported to the Police (5,144 in 2019) and the National Referral Mechanism (6,985 in 2018) are rising, but perhaps more than 90% of this type of crime goes undetected.
This is not just a matter for the police. Businesses, financial institutions, and government bodies must all work together to spot the red flags that might hint to an underlying concern of exploitation. Legislation such as the The Modern Slavery Act (2015) and the EU’s upcoming 6th Anti-Money Laundering Directive have all made this crime a board-level issue, but questions remain on the implementation, and who ultimately is responsible for its detection. Complex supply chains must be understood better, and organisations that inadvertently enable exploitation must all do their part if we are to hope to eradicate this type of crime for good.
Bold leadership, social policies and control frameworks will all be required to catch criminals and stop victims falling into the trap of modern slavery. A key enabler is being able to see the entire picture of a supply chain from all available data sources, but legacy technology and institutional stovepipes persist. The evidential trail of modern slavery, the data that could allow an elaborate international network to be completely unravelled often sits over many organisational boundaries. Enterprise analytics built to detect large scale money laundering and international sanctions evasion may not alert on the subtle, low-value payments made to a dozen migrant workers all sharing the same address. Fortunately, technology can now provide some vital support to companies, banks and governments in these areas.
The vital role of AI – 4 key areas
Artificial Intelligence is a breakthrough technology to help respond to the growing criminal threat. Advanced data analytics are now helping organisations automatically detect risk in their supply chain and customer base. It can scale their understanding of available data, joining the dots automatically to detect and prevent human trafficking and modern slavery. We are now seeing a step change in how entity resolution and natural language processing (NLP) are helping partners across the entire supply chain ecosystem make significant leaps forward in the detection of this pernicious and abhorrent crime.
We are seeing four key areas where our technology is now being deployed on the front lines of the fight against modern slavery:
Enhancing Due Diligence – Modern slavery relies on significant deception in acquiring legitimate enabling assets such as bank accounts, national insurance numbers and tax details. These allow money to be deposited, extracted and laundered, and having these legitimate identifiers avoids scrutiny by law enforcement and employers. Crucially, it enables criminals to place victims in well-paying jobs in the supply chain. Victims, who may not even speak the local language often lack the basic details that banks would be collected at on-boarding such as proof of residence address, phone number, email and other infrastructure – details which criminal gangs are happy to provide on their behalf and open accounts which they are in control of. Using analytics that can spot hidden connections between otherwise seemingly disconnected individuals means that next generation KYC checks can more reliably flag the signs of deception and exploitation and escalate to law enforcement if necessary.
Employment Vetting – placing vulnerable workers within legitimate employment is a key step in the modern slavery crime; the perception that victims are mostly paid cash or off-the-books is largely false. With legitimate assets and tax codes, victims can unknowingly earn tens of thousands of pounds a year while only receiving a few pounds per week on top of their food and shelter. Employment agencies and supply chain partners such as factories and warehouses are now employing their own due diligence based on the details provided by workers. Entity resolution – AI that can uniquely identify individuals from ambiguous and sparse datasets can detect the tell-tale red flags of exploitation such as unusual numbers of employees sharing the same address or bank details.
Follow the money – The desire for wealth drives criminal behaviour. Money paid to victims needs to be interdicted by the gangs, extracted and then laundered so they can spend it on lavish lifestyles of cars, mansions and luxury goods. Transaction analysis within banks designed to catch money laundering often misses the small flows of money, taken from bank accounts in the victim’s name, often just with repeat visits to a local ATM. Banks provide the infrastructure from which modern slavery thrives. Behavioural analytics are now able to look across the network of accounts and their activities; combining contextual risk factors with transaction data to more easily spot these crime typologies and flag suspicious activity to law enforcement.
Complex Investigations – police forces and other law enforcement agencies face an uphill struggle in piecing together data from a multitude of sources to identify suspects, victims and the infrastructure used in the trafficking and exploitation of victims. Data fusion technology, driven by platforms like Ripjar, are now allowing resource-constrained teams of intelligence analysts to more easily exploit data from any source – whether structured or unstructured. Natural language processing (NLP) and entity resolution combined with flexible link-analysis software mean investigators are able to build up a single, centralised knowledge graph for a case or network of criminal gangs – connecting the dots automatically between victims, suspects phone numbers, bank accounts, transactions, flight records or any other evidence collected during an investigation.
Conclusion
The application of AI is a key development in the fight against modern slavery. It can automatically identify risks at any point in the client or employee lifecycle and help the entire ecosystem of employers, agencies, financial institutions and police forces understand the tell-tale signs of human trafficking and exploitation. Entity resolution, automatic prioritisation, natural language processing and data fusion all play a role in ensuring that relevant data is not missed and the links that criminals go to great lengths to hide are much more rapidly uncovered by compliance, risk and law enforcement analysts. Within a single platform, such as Ripjar, means these breakthroughs can all be harnessed while retaining full audit and accountability – bringing about a step-change in the way that modern slavery is detected and prevented.