<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/10/AML-Banner-01-3.webp" alt="M2P Fintech" title="" width="100%" height="236"> Money laundering costs the world nearly 5% of its GDP. The losses are estimated to be over $2 trillion per year.&nbsp;&nbsp;For starters, money laundering is not some harmless misdemeanor. It’s a serious financial crime with significant economic and social consequences. As 90% of money laundered is off the radar, criminals and terrorist financiers find it very easy to fund and monetize illegal activities.&nbsp;<h2 class="heading-node" id="2opmmtuxc">What is money laundering?</h2>Money laundering is an illegal process that conceals the origin of ill-gotten funds and makes them appear as if they are from a legitimate source.&nbsp;&nbsp;Here’s an example.    &nbsp;A could have gotten paid for organized criminal activities such as drug trafficking, corruption, embezzlement, or gambling. Now, to spend the gains without drawing attention, A uses shell corporations, high-cash businesses, and other naive financial companies to illegally clean the dirty money and let it out in circulation. Now money laundering doesn’t affect just a particular set of businesses. Its dystopian effect surpasses industries and nationalities.&nbsp;<h2 class="heading-node" id="c9ru60ga0">How does&nbsp;money laundering&nbsp;happen?</h2>Money launderers&nbsp;traverse&nbsp;three stages to&nbsp;stealthily&nbsp;release&nbsp;illicit funds into the financial ecosystem.&nbsp;<h3 class="heading-node" id="4qgmrotqs">3 stages of money laundering</h3><h4 class="heading-node" id="qbxu15oy4">1 Placement&nbsp;</h4>Here the laundered funds are shifted from criminal associations to be placed and positioned as a legitimate source. Usual techniques to mask the identity include false&nbsp;invoices,&nbsp;moving money to heavy cash flow businesses, foreign bank accounts, and offshore companies.&nbsp;&nbsp;&nbsp;<h4 class="heading-node" id="atsxwq39d">2 Layering</h4>Otherwise called the ‘structuring phase,’ layering divides a large sum of money into small transactions to cover up money laundering. It blankets the international money movement, making it difficult for law enforcement to track down launderers. Ultimately, the laundered money circulates globally and is exchanged in foreign markets.&nbsp;<h4 class="heading-node" id="wv3wdgeq0">3 Integration</h4>Also called the ‘extraction phase,’ integration is the final stage of money laundering. In this phase, the laundered money returns to the criminals and integrates with the regular financial stream. Masked to be from a legitimate source, criminals can now legally recover their laundered money and use it for any purpose.&nbsp;<h2 class="heading-node" id="0oubbqivk">Need&nbsp;to combat money&nbsp;laundering&nbsp;</h2>The impact of money laundering is severe. It decays financial health, income distribution, and tax revenues, in addition to promoting crime and slowing down economic growth. Institutions specializing in money movement, including banks, NBFCs, and other financial institutions, are more likely to be impacted by money laundering. Hence, they need to be highly vigilant.The September 11 attacks, popularly known as the 9/11 terrorist attack, had an intense effect on money laundering regulations, mainly focused on the banking sector. After this, the Patriot Act was introduced, which offered the US government power to fight against terrorism. It also directed the financial institutions to expand their Anti-Money Laundering (AML) programs and intensify due diligence on foreign bank accounts. Title III strengthened banking rules by improving communication between law enforcement and financial institutions. This resulted in the US enforcing a stricter AML regime, followed by other countries. In India, RBI imposes stringent anti-money laundering regulations. Banks must follow strict customer identification processes for account opening and transaction monitoring. Anything suspicious must be reported immediately to the appropriate authority. Strong Anti-Money Laundering (AML) regulations and compliance are critical in today’s modern landscape, where criminals are getting more sophisticated by the hour. Monitoring, assessing, and reporting vulnerabilities and suspected money laundering is crucial for financial institutions.&nbsp;&nbsp;<h2 class="heading-node" id="wkbd6qylf">What is Anti-Money Laundering?&nbsp;&nbsp;</h2>Anti-Money Laundering (AML) regulations&nbsp;comprise&nbsp;laws nullifying&nbsp;money laundering or any associated fraudulent activities. It saves banks and other financial institutions from terrorism&nbsp;financing,&nbsp;drug rackets, and&nbsp;other organized crimes.  Comprehensive&nbsp;Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulations enable&nbsp;financial institutions to comply&nbsp;with legal requirements and report suspicious financial activities.&nbsp;Technology innovation&nbsp;in&nbsp;&nbsp;<a class="link" href="https://m2pfintech.com/blog/how-is-ai-changing-the-financial-industry-top-6-use-cases-in-fintech-and-banking/">Artificial Intelligence (AI)</a>&nbsp;and Machine Learning (ML)&nbsp;prevents&nbsp;fraudulent activities without hindering&nbsp;customer experience. &nbsp;<h2 class="heading-node" id="3i7d0d4gq">4 Pillars of AML  &nbsp;</h2>For efficient anti-money laundering, businesses need to get the following pillars strong. &nbsp;<h3 class="heading-node" id="epyq8nxhc">Know Your Customer   &nbsp;</h3><a class="link" href="https://m2pfintech.com/blog/crack-the-kyc-jigsaw-ease-onboarding-compliance/">Know Your Customer (KYC)</a>&nbsp;is a critical process for financial institutions. It is a legal requirement for AML laws as it establishes and verifies identity, assesses risk factors, and monitors suspicious activities. &nbsp;<a class="link" href="https://m2pfintech.com/blog/know-your-customer-kyc-the-need-for-authentication/">KYC</a>&nbsp;helps banks and financial institutions understand their customers and their financial dealings to serve them better and manage risks prudently. In India, RBI has enunciated KYC guidelines in the context of recommendations made by the Financial Action Task Force (FATF) on AML.  FIs need to get KYC information, not just at the time of opening a new account.  They obtain additional data from time to time in accordance with account conduct or at periodic refresh cycles based on risk categorization.<h3 class="heading-node" id="6ykiuco81">Customer Due Diligence   &nbsp;</h3>Customer Due Diligence (CDD) is the control process where all the relevant information of the customers is collected and processed for any potential terrorist financing risks. CDD helps identify risks and provides a risk assessment to new customers&nbsp;(via online databases), politically exposed persons (PEPs), government records, watchlists, and sanctions screening.  CDD is an essential step in KYC that requires ongoing monitoring of money laundering risks posed by each customer. This&nbsp;<a class="link" href="https://m2pfintech.com/blog/why-is-risk-based-authentication-rba-critical-for-banks/">risk-based approach</a>&nbsp;will conduct a more profound due diligence process for those with higher non-compliance risks by identifying customers added to sanctions and other AML lists.  Customer due diligence detects money laundering techniques that include layering and structuring. Also known as smurfing, that is breaking up a huge sum of money into smaller transactions to evade reporting limits and avoid perusal. <h3 class="heading-node" id="i2h716qd4">Customer and Transaction Screening   &nbsp;</h3> Banks and other financial institutions are the leading players in the financial landscape with broad customer portfolios. They need to monitor and control the money transfers that&nbsp;take place. As transactions involve several other banks and entities, an average-sized bank mediates thousands of daily&nbsp;<a class="link" href="https://m2pfintech.com/blog/tale-of-money-transfers-from-hawala-to-one-click-remittances/">money transfers.</a>&nbsp;So even a minor crime can bring significant consequences and lead to severe administrative collapses, hefty fines, and loss of credibility. Hence screening of all customer deposits and other transactions must be treated seriously.<h3 class="heading-node" id="fabe0ux9m">Suspicious Activity Reporting   &nbsp;</h3> Examining bank records for any unusual behavior or irregularity is a common procedure for law enforcement organizations investigating money laundering. To aid law enforcement in locating perpetrators in the current regulatory framework, thorough records are kept on every single financial transaction. Banks must have an unchangeable audit trail that regulators can rely on. However, it’s also crucial that compliance experts at financial institutions rapidly and effectively examine issues and close them.<h2 class="heading-node" id="gu7wuxkmw">How do you respond to money laundering suspicions?</h2>Simple. Ask the client for more information. Then you can quickly determine if there is any chance of money laundering or not.And remember to tick off this checklist to avoid the risk of money laundering.&nbsp;<h3 class="heading-node" id="jddlhozk9">Tick off the&nbsp;AML checklist&nbsp;</h3>✅&nbsp;Ensure you run a deep check on your new clients. Revisit the purpose of the business partnership and try to understand why they chose your firm. Customer Due Diligence (CDD) helps in identifying the clients and helps assess/reduce the risk posed by them.&nbsp;&nbsp; ✅&nbsp;Keep track of the unusual transactions that take place at the client’s end.&nbsp;&nbsp;✅&nbsp;Unusual sources of funds are another crucial warning that you must consider. Regulation 28 of the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLR 2017) helps in analyzing transactions if they are processed with the knowledge of the clients. In some cases, asking for any documentary evidence like bank statements, recently filed business accounts, or any documents that confirm the source of funds will help identify any trace of money laundering.&nbsp;&nbsp; ✅&nbsp;Consider the purpose of funds coming from third parties. It may seem like a regular feature, but it may act as criminal property sometimes. So, it is better to run a check on the funds from third parties and their source.✅&nbsp;If there is any change of instructions without prior warning from the client, ask for a reasonable explanation.✅&nbsp;Money launderers are most likely to misuse trust, company formation, operation of a client account, and so on. To avoid these risks, you must comply with anti-money laundering guidance for the legal sector and apply for appropriate levels of CDD and enhanced due diligence before providing these services.✅&nbsp;Pay attention to cash transactions, strictly follow your company’s cash policy, and don’t accept cash payments above the specified limit. There is always a high risk posed by cash.<h2 class="heading-node" id="4nrz33gno">Challenges in implementing AML  &nbsp;</h2>AML compliance is indispensable. But effective implementation is the key challenge for banks and financial institutions.  Increased governance, lack of skilled resources, requisite tools, technology, and in-depth knowledge are a few bottlenecks that impact AML deployments.Let’s take a brief look at some of the challenges below.Increased governance -&nbsp;These financial institutions and banks face difficulties managing cross-border and multi-jurisdictional AML compliance and customer due diligence requirements. The major challenge they face is identifying beneficial ownership and initiating remedial measures to address the prevailing AML gaps uncovered by regulatory reviews.  Lack of skilled personnel -&nbsp;Fetching professional resources with in-depth knowledge of AML is a tough challenge. Other issues include high onboarding timelines and costs, and attrition. With evolving regulatory requirements, organizations must invest considerable time and effort in keeping pace right.Complicated processes and technology -&nbsp;AML compliance requires banks to put in place a multiplicity of processes and technology solutions that will consolidate KYC data and systems in a single repository. They also need to create infrastructure for cross-channel detection of suspicious activities, improve data quality, and standardize data to enable a centralized analysis of fraud and financial crimes. The risk level assigned during onboarding varies according to the transactions undertaken by the customer. Banks must assess the risks dynamically for each customer and change risk levels accordingly to prevent false positives. This necessitates continual transaction monitoring for each customer, which is a daunting task.<h2 class="heading-node" id="9x7kxfrw4">In conclusion&nbsp;</h2>If you are a business looking to combat money laundering, you must invest in a robust AML platform focusing on the four critical aspects.&nbsp; Research and Technology&nbsp;– With state-of-the-art technologies like artificial intelligence, you can detect false positives and conduct in-depth research to eliminate wrongdoings.&nbsp;Constant Communication&nbsp;– Regular communication should be between the parties involved, including law enforcement, government, regulatory bodies, etc. Communication will keep all parties informed, analyze suspicions, and identify possible networks to tackle money launderers.&nbsp;&nbsp;Leverage Data Analytics&nbsp;– Analytics arms you with data and insights to identify and detect patterns concerning money laundering.&nbsp;&nbsp; System Standardization&nbsp;– Proper standardization helps to communicate and process data that hinder fraud detection.&nbsp;&nbsp; Want to know more about AML deployment?&nbsp;Write to us at <a class="link Hyperlink SCXW36320282 BCX8" href="mailto:business@m2pfintech.com" target="_blank" rel="noreferrer noopener">business@m2pfintech.com</a>.<a class="link" href="https://m2pfintech.com/newsletter/">Subscribe</a>&nbsp;to our newsletter and get the latest fintech news, views, and insights, directly to your inbox.Follow us on&nbsp;<a class="link" href="https://www.linkedin.com/company/m2pfintech/mycompany/">LinkedIn</a>&nbsp;and&nbsp;<a class="link" href="https://twitter.com/m2pfintech">Twitter</a>&nbsp;for insightful fintech tales curated for curious minds like you.

How to Combat Money Laundering?

<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/07/July-Blog-Banner-V3_1_Main-Banner.webp" alt="M2P Fintech" title="" width="100%" height="253">Artificial Intelligence (AI) has transformed the physics of financial services. It has altered centers of gravity, isolated vulnerable bonds, and changed traits that are imperative to building a successful business. The ability to leverage data to drive process and talent optimization, product performance, and personalized interactions is now considered critical to driving value and efficiency.By combining technology and robust data, AI delivers insight-driven decisions to resolve challenges. Financial services companies are becoming future-ready by harnessing the power of AI and Machine Learning (ML) to enhance operational efficiency, mitigate risk exposure, and customize product development, distribution, and customer experience.<blockquote class="block-node" id="ll5niu0xi">According to PWC reports, AI will boost global GDP up to $15.7 trillion by 2030 and 45% of total economic gains will arise from AI-driven product enhancements that stimulate consumer demand.</blockquote><h2 class="heading-node" id="fec6" style="text-align: justify">Growth Potential of AI in Finance</h2>Artificial Intelligence in the global financial technology market is expected to grow at <a class="link" href="https://www.prnewswire.com/news-releases/ai-in-fintech-global-market-to-reach-24-17-billion-by-2026--301615420.html">27.6% CAGR and reach $24.17 billion in 2026</a>. The growth projection is attributed to its ability to increase security and efficiency, personalize customer experience, automate services, and unlock several other growth opportunities.91% of financial services companies reported driving critical business outcomes by leveraging AI investments (Source: <a class="link" href="https://www.nvidia.com/content/dam/en-zz/Solutions/industries/finance/ai-financial-services-report-2022/fsi-survey-report-2022-web-1.pdf">Nvidia Report</a>). Here are the benefits they realized.<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/07/July-Blog-Banner-V3_1_Benefits-of-AI-Chart.webp" alt="M2P Fintech" title="" width="100%" height="253">AI-led data analysis and reporting surpass human intelligence to cut costs, accelerate revenue, and optimize service quality and product efficiency. It creates operational efficiency, predicts customer preference, detects fraud, and plans market expansions. Although some industry voices expect AI to replace 9% of all jobs by 2030, fintech companies are optimistic that AI will expand their workforce by 19%.<h2 class="heading-node" id="21fd" style="text-align: justify">How AI Transforms Banking &amp; Fintech</h2>Millennial and Gen Z customers prefer newer and faster technology over traditional systems. AI-based products and services enable FIs to meet the demands of today’s digital-age customers. It helps them enhance user experience through customized products and services.Listed below are sample AI-enabled services that global banks use to enhance customer experience.· Smile-to-pay facial scanning to initiate transaction· Micro-expression analysis with virtual loan officers· Conversational bots for basic servicing requests· Humanoid robots in branches to serve customers· <a class="link" href="https://m2pfintech.com/blog/5-reasons-why-banks-need-behavioral-biometrics/">Biometrics </a>to authenticate and authorize· Machine vision and natural language processing to scan and process documents· Machine learning to identify risk patterns and cybersecurity incidents· Real-time transaction analysis for risk monitoringAI technologies augment the overall customer experience by offering personalized recommendations, insights, and suggestions. In short, AI powers banks, insurers, asset managers, and fintechs to outperform peers, boost customer lifetime value, and increase market share.<h2 class="heading-node" id="fb07" style="text-align: justify">Top 6 Use Cases of AI in Fintech and Banking</h2>Over 75% of businesses use high-performance computing (HPC), machine learning, and deep learning for AI applications. While retail banking and capital markets benefit from deep learning, fintech firms rely on machine learning for the use cases below.<ol class="list-node" id="mglp0g4e6"><li>Transaction Fraud Detection</li><li>Conversational Chatbots</li><li>Robo-Advisors — Portfolio Optimization</li><li>Regulatory Intelligence</li><li>Credit Decisioning</li><li>Algorithmic Trading</li></ol>Transaction fraud detectionFinancial firms leverage AI and ML to identify, investigate, and mitigate transaction fraud, <a class="link" href="https://m2pfintech.com/blog/how-to-combat-money-laundering-2/">money laundering</a>, and <a class="link" href="https://m2pfintech.com/blog/crack-the-kyc-jigsaw-ease-onboarding-compliance/">KYC</a> discrepancies efficiently. Analyzing large datasets and user behavior, AI can decode risk factors and help reduce chargebacks, fake accounts, spam, account takeovers, and any other <a class="link" href="https://m2pfintech.com/blog/prevent-cnp-frauds-with-pci-3ds/">CNP</a> frauds in real-time. The fraud detection use case is critical in banking, card transactions, insurance, and lending platforms, to name a few.Conversational chatbotsChatbots and virtual agents fall under the conversational AI use case. They are quite different from conventional chatbots. By leveraging Natural Language Processing (NLP) and Machine Learning (ML) processes, they can understand customer intent, troubleshoot issues, and make small talk based on context. In financial companies, they can be used to collect customer information, deliver support, resolve queries, and redirect escalations to customer service representatives. These chatbots can be used across multiple channels and can deliver support via audio, video, and text.Robo-advisors — portfolio optimizationBuilding a strong financial portfolio is critical to maximizing returns on investments. Optimizing the portfolio helps balance the risk-to-reward ratio. AI-enabled Robo-advisors use predictive analysis to foresee future returns by analyzing the trends in the financial market. Investment companies can use this feature to make data-driven decisions that increase sales, optimize resource utilization, and improve operational capabilities. Robo-advisors are less priced options than conventional financial advisors. Even novices can drive value from investments with the help of Robo-advisors.Regulatory intelligenceThe banking and fintech sector must constantly update operations to stay compliant with governments and regulators. Using AI-led automation, compliance obligations are simplified, streamlined, and automated. The personalized, role-based dashboards provide regulatory intelligence for data-driven decisions at a lesser cost and time. Finance companies can stay up to date on compliance status and keep abreast with the latest regulations.Credit decisioning engineAI-based credit scoring can help expedite the assessment of creditworthiness and lending decisions. AI-led credit scoring models analyze real-time indicators such as current income, employment opportunities, and potential ability to earn, in addition to credit history, transaction patterns, work experience, and online behavior. This enables a sensitized and customized credit score assessment and inclusive lending decisions.Algorithmic tradingTrading is all about making profitable transaction decisions. AI-driven algorithmic trading uses pre-trade analytics and trading strategies to make lucrative transactions and groom efficient traders. Assimilating its own data using machine learning methods, AI-based algorithmic trading delivers real-time forecasts based on the analysis of price change patterns, currency values, global indices, raw materials, and other macro/micro indicators. It is super accurate in detecting market anomalies and helps reduce operational and trading risks.Now, these are not all. Apart from the use cases discussed above, AI can also help automate and expedite <a class="link" href="https://m2pfintech.com/blog/steps-in-credit-underwriting-why-using-an-alternative-source-of-data-and-behavior-metrics-will-be-of-help/">underwriting</a>, customer acquisition, and marketing optimization.To know more about the use of AI in banking and fintech, write to us at&nbsp;<a class="link au nr" href="mailto:business@m2pfintech.com" target="_blank" rel="noopener ugc nofollow">business@m2pfintech.com</a><a class="link" href="https://m2pfintech.com/newsletter/">Subscribe</a>&nbsp;to our newsletter and get the latest fintech news, views, and insights, directly to your inbox.Follow us on&nbsp;<a class="link" href="https://www.linkedin.com/company/m2pfintech/mycompany/">LinkedIn</a>&nbsp;and&nbsp;<a class="link" href="https://twitter.com/m2pfintech">Twitter</a>&nbsp;for insightful fintech tales curated for curious minds like you.

How is AI Changing the Financial Industry? Top 6 Use Cases in Fintech and Banking

<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/06/Blog-Banner_02_WordPress-1.webp" alt="M2P Fintech" title="" width="100%" height="661">Imagine you own a digital wallet. Its primary function is to let you spend viz., shop with partner merchants, make payments, and transfer money to other wallets and bank accounts. Then the same wallet offers a card (any authorized card network Visa, MasterCard, RuPay) to facilitate card-based in-store and online payments. Further, the wallet also comes with a UPI virtual ID to allow payments via QR codes and <a class="link" href="https://m2pfintech.com/blog/upi-the-driver-of-economic-growth-and-inclusion/">UPI</a>.This is payments interoperability making life easy for you.<h2 class="heading-node" id="abd3">What is Payments Interoperability?</h2>Now, there are several definitions for interoperability. But at its core, it is the basic ability of multiple digital systems, applications, and databases to connect and communicate with each other.Payment platforms leverage financial technology to connect and share data among ecosystem partners, viz., banks, payment gateways, payment processors, merchants, and consumers. This integration helps carry out transactions between payment service providers, third-party processors, and other networks without hassles. The interoperability occurs at the origination point, at the network level, or through an intermediary, both in national and international payment systems.Here are a few common attributes of interoperability.<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/06/Interoperability_BlogBanner_02_wordpress.webp" alt="M2P Fintech" title="" id="7ruk1ov0f" width="100%" height="661">Payment system interoperability can be at domestic (national) and international levels.<h2 class="heading-node" id="558a">National Payments Interoperability</h2>National payment interoperability is limited to payment systems within a single country. National interoperability usually involves the same type of accounts. It happens between:<ul class="list-node" id="sk8vndtl8"><li>Deposit accounts issued by various banks</li><li>e-money transaction accounts offered by mobile network operators</li></ul>National interoperability is ensured through bilateral agreements between Payment Service Providers (PSP) and Payment Systems Infrastructures (PSIs). Or through a centralized interoperability solution, with standardized regulatory measures stipulated by the central bank.<h2 class="heading-node" id="2998">RBI’s Mandate for Domestic PPI Interoperability</h2>Governments and Central Banks are giving interoperability a significant push to accelerate cashless ecosystems. <a class="link" href="https://m2pfintech.com/blog/rbis-new-guidelines-for-ppis-how-will-it-impact-the-fintech-industry/">RBI</a> aims to make interoperability mandatory for all full-<a class="link" href="https://m2pfintech.com/blog/know-your-customer-kyc-the-need-for-authentication/">KYC</a> <a class="link" href="https://m2pfintech.com/blog/how-to-implement-the-best-prepaid-payment-instrument-ppi-for-your-business/">Prepaid Payment Instruments (PPIs</a>) and acceptance infrastructure by 31 June 2022. The move is to drive inclusion in <a class="link" href="https://m2pfintech.com/blog/ready-to-sneak-peek-into-global-cashless-societies/">cashless payments</a>, and optimally utilize payment instruments like cards and wallets, given the constraint of scarce acceptance infrastructures like point-of-sale (POS) devices, ATMs, QR codes, and bill-payment touch points. Any user who signs up for a wallet, <a class="link" href="https://m2pfintech.com/blog/prepaid-cards-101-a-definitive-guide-for-growth-and-profitability/">prepaid card</a>, or UPI on PPI rails should be able to make digital payments via any network.LivQuik is the first PPI issuer in India to achieve full interoperability as mandated by the RBI. This feat enables customers to enjoy optimized card and UPI payments across wallets. Similarly, initiatives like <a class="link" href="https://m2pfintech.com/blog/central-bank-digital-currency-cbdc-101-a-primer/">Central Bank Digital Currencies (CBDC)</a> will further drive interoperability, inclusion, and innovation.<h2 class="heading-node" id="d3b9">Need for Interoperable Cross-Border Payments</h2>Interoperability in <a class="link" href="https://m2pfintech.com/blog/cross-border-payments-a-swift-money-flow-across-borders/">cross-border payments</a> is critical to making financial services accessible, affordable, and reliable. It involves coordination between multiple stakeholders, including central banks and regulators. It encompasses technical, regulatory, and usage interoperability to enable quick, convenient, secure, and seamless transactions regardless of the Financial Services Provider (FSP) network.According to a recent Visa survey, only 50% of merchants have a cross-border trade-compatible payment processing infrastructure. Without globally interoperable payment systems, small and medium-sized merchants cannot tap into international trade and markets. Interoperability levels the playing field and eliminates the inefficiencies of a closed-loop payment systems, i.e., payments between users of only one payment provider.An end-to-end interoperable platform delivers access to cross-border payment services through an integrated gateway. It enhances the user experience through its ease-of-use customer onboarding and <a class="link" href="https://m2pfintech.com/blog/crack-the-kyc-jigsaw-ease-onboarding-compliance/">digital KYC.</a>A centralized interoperability platform calls for stringent global regulatory compliance and data security standards for utmost security. It enables faster reconciliations with real-time reporting and data-driven insights into payment patterns and customer behavior. Moreover, an automated platform saves time, reduces human error, and cuts costs. It enables infrastructure and data sharing which helps tech-driven payment ecosystems reach economies of scale.While international interoperability comes with a few challenges, it can be overcome with the support of the regulators, the global schemes, and a compatible business model across international borders and technology.<h2 class="heading-node" id="9178">Global Partnerships with Payment Networks</h2>A clear example of an interoperable <a class="link" href="https://m2pfintech.com/blog/cross-border-payments-a-swift-money-flow-across-borders/">cross-border payments</a> partnership is that between India’s <a class="link" href="https://m2pfintech.com/blog/upi-the-driver-of-economic-growth-and-inclusion/">UPI</a> and Singapore’s PayNow. The need for faster cross-border payments and <a class="link" href="https://m2pfintech.com/blog/fintech-a-catalyst-for-financial-inclusion/">financial inclusion</a> has been a catalyst in establishing the link between India and Singapore. The interoperable link between UPI and PayNow, enables instantaneous, cost-effective, and transparent payments across borders.Now for those new to UPI, it is India’s real-time payment system with a Virtual Payment Address (VPA). It is completely mobile-based and supports person-to-person (P2P) and person-to-merchant (P2M) payments and funds transfers.And PayNow is Singapore’s real-time payment system available to all participating banks and non-bank financial institutions. It is also a mobile-based system and enables peer-to-peer funds transfer using mobile numbers, VPA, or Singapore NRIC/ FIN. The UPI-PayNow partnership is only the beginning and is established to foster faster and smoother transactions between India and Singapore.India also holds strategic partnerships with the following payments networks and banks to enable seamless, interoperable transactions on our payments rails.<ul class="list-node" id="tpyzch3q0"><li>Discover Financial Services (DFS), US</li><li>Japan Credit Bureau (JCB), Japan</li><li>Union Pay International (UPI), China</li><li>Royal Monetary Authority (RMA), Bhutan</li><li>Mashreq Bank, UAE</li><li>Lycra Network, France (in the pipeline)</li></ul><h2 class="heading-node" id="1f35">Benefits of Payments Interoperability</h2>Interoperability benefits the entire payment ecosystem, including customers, merchants, end-users, and businesses. In addition to enhancing user experience and helping mitigate security risks, it delivers the advantages below.<ul class="list-node" id="ol9tnl3en"><li>Payment flexibility:&nbsp;The ability to accept all forms of payments is a game-changer. Universal payment acceptance helps customer retention and increases customer reach. Though there are several digital payment systems and digital offerings from payment system providers, customers are not required to sign into multiple systems and complete their <a class="link" href="https://m2pfintech.com/blog/know-your-customer-kyc-the-need-for-authentication/">KYC</a> many times. Interoperability brings issuers and acquirers together to undertake, clear, and settle payment transactions across payment systems, ensuring universal payments and consumer retention.</li><li>Faster payment system: Electronic transactions are the key to reconciling and collecting payments, unlike cash-based systems. Advanced technology and fast internet connectivity make it easier to increase the speed of transactions.</li><li>Secure payment and POS integration: Integration pushes the transaction directly to the payment terminal and eliminates manual entries, thereby enhancing security.</li><li>Low operational costs:&nbsp;Integrated payment platforms reduce operating costs and seamlessly communicate with multiple devices across different financial service providers. It helps save money on adding new payment terminals.</li></ul><h2 class="heading-node" id="0b67">Addressing Challenges — Getting it Right</h2>Getting interoperability right through open <a class="link" href="https://m2pfintech.com/blog/api-the-power-that-drives-new-age-banking-ecosystems/">API</a>-based platforms is a start toward harnessing and expanding the payments ecosystem. Interoperability can be tricky when dealing with legacy systems. Technical challenges usually comprise systems that use different technical standards, communication protocols, and related software and hardware infrastructure. Another common challenge relates to data and semantics. Payment systems may use different languages and need to be translated. Inadequate translation leads to corrupted or lost data.It is crucial to address the regulatory, technical, and business challenges of interoperability to make cross-border payments affordable, faster, transparent, and inclusive. Strategic partnerships with fintech firms, banks, exchange houses, and Money Transfer Operators (MTOs) with a focus on regulatory compliance and technology innovation will pave the way to overcome challenges and enable frictionless international transactions.<h2 class="heading-node" id="99d4">Need of the Hour for Today’s Generation</h2>Payments interoperability is the linchpin of today’s digitized economy. When done right, it can lead to greater convenience, speed, reliability, security, and seamlessness. It is the need of the hour today, as it enables people from all walks of life to benefit from the convenience that the cashless economy offers. It can increase service offerings, reduce costs, empower the end-user and help improve payment systems. Thus, interoperability is a strong facilitator for financial inclusion.By leveraging <a class="link" href="https://m2pfintech.com/blog/api-the-power-that-drives-new-age-banking-ecosystems/">API</a>-based <a class="link" href="https://m2pfintech.com/blog/cross-border-payments-a-swift-money-flow-across-borders/">cross-border payment platforms</a> with simple integrations across domestic switches, bank accounts, mobile wallets/e-wallets, MTO transfers, and forex card solutions, we can enable financial inclusion and seamless payments across APAC and MENA regions. With India to start with and then extended globally.Along these lines, M2P is proud to partner with LivQuik for <a class="link" href="https://m2pfintech.com/blog/upi-the-driver-of-economic-growth-and-inclusion/">UPI</a> services on exiting <a class="link" href="https://m2pfintech.com/blog/how-to-implement-the-best-prepaid-payment-instrument-ppi-for-your-business/">PPI</a> offerings like cards, wallets, gift certificates, and other products. Thereby enabling interoperable payments on the LivQuik platform.Want to know more about building interoperable payment systems?Write to us at business@m2pfintech.com.<a class="link au ly" href="https://forms.gle/kJgVoD29t2vcxtbp9" target="_blank" rel="noopener ugc nofollow">Subscribe</a>&nbsp;to our newsletter and get the latest fintech news, views, and insights, directly to your inbox.Follow us on&nbsp;<a class="link au ly" href="https://www.linkedin.com/company/m2pfintech/mycompany/" target="_blank" rel="noopener ugc nofollow">LinkedIn</a>&nbsp;and&nbsp;<a class="link au ly" href="https://twitter.com/m2pfintech" target="_blank" rel="noopener ugc nofollow">Twitter</a>&nbsp;for insightful fintech tales curated for curious minds like you.

Why Payments Interoperability is a Must for Today’s Generation?

<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/06/Artboard-1-1.webp" alt="M2P Fintech" title="" width="100%" height="253">Stumped with KYC implementation?You are not alone. Several Financial Institutions (FIs) are working out their way through KYC puzzle to oust financial crimes and ensure compliance.Now, KYC is critical for any financial institution. It is indeed the first step when you choose to use a financial product or service in India.So, what is KYC?For starters, Know Your Customer (KYC) is the process to confirm a customer’s identity while onboarding a financial institution. RBI has ensured the implementation of a robust KYC system to helps financial institutions understand their customers better while ensuring their legitimacy. Click&nbsp;<a class="link au lg" href="https://m2pfintech.com/blog/know-your-customer-kyc-the-need-for-authentication/" rel="noopener">here</a>&nbsp;to know more about KYC in India.<h2 class="heading-node" id="453f" style="text-align: justify">Digital Avatar</h2>With the rise in paperless onboarding, KYC has taken a digital avatar. The&nbsp;<a class="link" href="https://m2pfintech.com/blog/know-your-customer-kyc-the-need-for-authentication/">digital KYC&nbsp;</a>saves a lot of time and effort involved in the process and helps tackle onboarding issues in a quick and seamless manner. It also prevents money launderers/fraudsters from masking their true identities and manipulating stolen information for their personal gains.Though the benefits of the process are immense, implementing digital KYC is not simple. Financial institutions such as banks and fintechs need to overcome significant challenges in deployment.<h2 class="heading-node" id="22ab" style="text-align: justify">Key KYC Challenges</h2>The upswing in the recent money laundering, fraud, and tax evasion cases has brought KYC into a new light. Accordingly, RBI has enforced strict laws concerning non-compliance with the KYC directives. However, financial institutions are grappling to keep up with the legal framework for KYC compliance.Experience Vs ComplianceRight from onboarding and screening to monitoring customer data, they face complex challenges every step of the way. This puts banks and fintechs in a tricky spot because customers seek seamless experience and quick onboarding with minimal documentation, and FIs cannot compromise on the verification process. Ensuring compliance without compromising customer experience is a huge challenge for FIs.Connected Risk IdentificationKYC involves extensive paperwork and supporting documents. Often, customer data files are incomplete or lack critical pieces of information or documentation. This heightens the risk of fraud and lays down a cosmic emphasis on monitoring and screening individuals and entities against Politically Exposed Persons (PEPs), watchlists/sanctions, and other regulatory and law enforcement lists.In addition, the rise of new criminal typologies has inflicted the compliance team to assess an overarching list of compliance and fraud risks. This calls for an all-inclusive, connected risk identification approach for analyzing financial fraud activities, money laundering, and other offenses.Volatile Risk AppetiteFinancial institutions and customers exhibit dynamic risk appetite. For example, a customer might have a different risk profile or status during onboarding and drift into another risk profile over time. On the other hand, KYC regulations are updated periodically, which implies the regulations, risk indicators, and other indices used to determine the risk tolerance score will vary. Hence the outdated records become an impending hindrance to the customer due diligence process. The repercussions of such instances are far-reaching as there is only a fine line between a medium and high-risk customer but a momentous difference in due diligence efforts.Lack of TransparencyOne of the biggest challenges of KYC is the retrieval of corporate ownership documents from registries located across the globe. Successful KYC depends on several sources such as annual reports, financial statements, stock exchange information, third-party data, and regulator websites. However, due to the lack of transparency, KYC analysts bank on limited information on the directors, stakeholders, controllers, and beneficiaries. Additionally, there is a significant cost associated with accessing specific vital documents while others are available for free.<h2 class="heading-node" id="6f0c" style="text-align: justify">How Financial Institutions can crack KYC challenges</h2>Here’s our take on how financial institutions can tackle KYC challenges effectively.<ul class="list-node" id="bakrf8m7x"><li>Integrate with credit bureaus for seamless customer verification</li><li>Use data deduplication techniques to recognize and eliminate identical records. This is also known as Dedupe check-in.</li><li>Validate customer data against the regulation records to identify unscrupulous individuals/organizations prohibited from making business transactions.</li><li>Conduct rational checks to keep a tab on anonymous bank accounts or those opened with fictitious names.</li><li>Facilitate video KYC for quick onboarding and exceptional customer experience.</li><li>Use algorithms and techniques to categorize customers as low, medium, and high-risk categories, based on the assessment and risk perception.</li><li>Take necessary precautions with customers who come under high-risk segment.</li><li>Monitor customer transactions in a routine manner to keep an eye on any suspicious activities.</li><li>Partner with authorized 3rd party service providers for quick e-KYC checks and video KYC onboarding.</li></ul><h2 class="heading-node" id="4cad" style="text-align: justify">Is third-party KYC partnership a viable approach?</h2>Although KYC is kept in-house traditionally, experts believe it is time to team up with third-party KYC-service providers.Why?First off, it is cost and time effective.Secondly, for high efficiency and accuracy.From dedicated subject matter expertise to cutting-edge technology access to faster go-to-market speed, third-party partners can provide all-inclusive services within an optimum budget.These partnerships can enable FIs to invest more effort and time in their core business, rather than focusing on the KYC procedures. Financial institutions that keep KYC in-house could end up with extensive duplication and redundancy across businesses and markets.On the other hand, third-party partners employ devoted professionals to carry out KYC procedures and documentation. This leaves no room for error, ensuring a smoother onboarding process and regulatory compliance, without compromising customer experience.With that being said, third-party service providers are the gateway to exceptional customer experience and successful KYC solutions. They enable financial organizations to improve speed and operational performance, minimize operational risks and boost efficiency by consolidating and centralizing functions.Financial institutions should take apposite measures to understand the complexities that could arise from digital transformation. They must embrace strategic partnerships to develop pioneering approaches to assess customer risks and monitor transactions.So, do you need solutions to any particular KYC issue? Or want to know more about implementing KYC?Write to us at&nbsp;<a class="link au lg" href="mailto:business@m2pfintech.com" target="_blank" rel="noopener ugc nofollow">business@m2pfintech.com</a>.<a class="link" href="https://m2pfintech.com/newsletter/">Subscribe</a>&nbsp;to our newsletter and get the latest fintech news, views, and insights, directly to your inbox.Follow us on&nbsp;<a class="link" href="https://www.linkedin.com/company/m2pfintech/mycompany/">LinkedIn</a>&nbsp;and&nbsp;<a class="link" href="https://twitter.com/m2pfintech">Twitter</a>&nbsp;for insightful fintech tales curated for curious minds like you.

Crack the KYC Jigsaw. Ease Onboarding Compliance

Central Bank Digital Currency (CBDC) 101- A Primer

<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/04/banner-1251-1.webp" alt="Account Aggregator" title="" id="9hxp4jacw" width="100%" height="479">Data is a gold mine that drives insights and efficiencies across industries. Gartner predicts that by 2023, companies that actively leverage shared data will outperform their peers in crucial metrics. With 180+ zettabytes of data estimated to be created by 2025, businesses across industries need to devise strategies to gain access to relevant consumer information. Such access will drive insight-driven decisions to boost revenue, <a class="link" href="https://m2pfintech.com/blog/why-is-risk-based-authentication-rba-critical-for-banks/">mitigate risks</a>, and reduce costs.<h2 class="heading-node" id="134f" style="text-align: justify">Consent-based digital access to data</h2>Account aggregators or financial data aggregators play a significant role in enabling data access to financial institutions, businesses, and individuals. Prioritizing fiduciary consumer relationships, account aggregators share digitally signed and encrypted data upon explicit consumer consent.<h2 class="heading-node" id="160d" style="text-align: justify">Financial data aggregation in India</h2>India launched its Account Aggregator (AA) network in September 2021, as the first step towards open banking. Built on the Data Empowerment and Protection Architecture (DEPA), the account aggregator framework is the world’s leading consensual data-sharing infrastructure.This digital data access structure serves as a substantial digital enablement initiative after the launch of public infrastructure for digital identification (Aadhaar) and <a class="link" href="https://m2pfintech.com/blog/the-rise-of-digital-payments/" target="">digital payments</a> (UPI). Millions of customers can now digitally access and share their financial data in a compliant manner.<h2 class="heading-node" id="019c" style="text-align: justify">Potential to transform efficiencies</h2>The AA framework holds the potential to transform the efficiencies and profitability of financial institutions and businesses in India. Banks, fintechs, and NBFCs can use consumer data to widen target-base, personalize services, lower risks, enhance customer experience, and future-proof their product portfolio. Collecting, cleansing, and synthesizing pertinent data helps enhance insight-driven decisions and executions.Democratization of data access via account aggregator networks has brought in a win-win scenario for businesses, consumers, and <a class="link" href="https://m2pfintech.com/blog/digital-lending-open-credit-enablement-network/">new-age digital lenders</a> with advanced underwriting algorithms and a larger risk appetite. They have broken the data monopoly of digital and financial services firms by transferring data sharing power to individuals.<h2 class="heading-node" id="a06c" style="text-align: justify">So, who are account aggregators in India?</h2>Account aggregators are NBFC-AA licensed entities that are regulated by the RBI. Contrary to the name, they cannot ‘aggregate’ data. They only enable consensual data sharing and access between consumers and financial institutions in the network. Account aggregators cannot read or resell data. They can carry data from one financial institution to another based on individual consent and direction. Consumers also have the choice to revoke data already shared.<h2 class="heading-node" id="b934" style="text-align: justify">How account aggregation happens?</h2>Data gathering, collation, and dissemination are enabled through open <a class="link" href="https://m2pfintech.com/blog/api-the-power-that-drives-new-age-banking-ecosystems/">Application Programming Interface (API</a>) connections.<h2 class="heading-node" id="e756" style="text-align: justify">Do account aggregators benefit individuals?</h2>The answer is yes.Account aggregators help consumers get rid of laborious paperwork, effort, and security issues involved in notarizing, stamping, signing and scanning physical copies of bank statements. Users need not have to expose themselves to vulnerabilities of sharing login credentials and financial history to a third party.With mobile-based digital data access and sharing process, account aggregators eliminate the conventional hassles of data access and sharing. People across demographics will get access to experiential, preference-based financial services and products. While the affluent will experience value through customized investment and insurance options, the popular masses will enjoy greater inclusiveness through friction-free access to formal credit.<h2 class="heading-node" id="0dd3" style="text-align: justify">Participants in the AA network</h2>While individuals and small businesses form the epicentre, the AA network comprises the three participants listed below.1. Financial Information Providers (FIP)&nbsp;— Data sources like banks, tax platforms &amp; insurance providers.2. Financial Information Users (FIU)&nbsp;— Data recipients such as banks, NBFCs, and <a class="link" href="https://m2pfintech.com/blog/fintech-a-catalyst-for-financial-inclusion/">fintech</a> firms.3. Account Aggregators (AA)&nbsp;— RBI-regulated entities that facilitate real-time data sharing.<img src="https://miro.medium.com/max/1400/1*UnkSCGfGWZf-YpOqny9J7w.jpeg" alt="M2P Fintech" title="" width="100%" height="384">Source: PIB Delhi<h2 class="heading-node" id="72d9" style="text-align: justify">Banks in the AA network</h2>The top eight banks (listed below) that cater to over 300 million consumers have joined the AA network.1. Axis Bank2. ICICI Bank3. IndusInd Bank4. HDFC Bank5. Kotak Mahindra Bank6. IDFC First Bank7. Federal Bank8. State Bank of India<h2 class="heading-node" id="d405" style="text-align: justify">What kind of data does AAs share? How are they different from Aadhar eKYC, credit bureau, and CKYC?</h2>Central Know Your Customer (<a class="link" href="https://m2pfintech.com/blog/know-your-customer-kyc-the-need-for-authentication/">CKYC</a>) registry and paperless Aadhar Electronic Know Your Customer (<a class="link" href="https://m2pfintech.com/blog/know-your-customer-kyc-the-need-for-authentication/">EKYC</a>) capture identity verification and only shares data such as name, address, and gender. And credit bureaus reveal only the credit score, loan, and repayment history of consumers.On the other hand, account aggregators facilitate transaction data sharing from savings, <a class="link" href="https://m2pfintech.com/blog/how-can-banks-and-nbfcs-leverage-the-potential-of-digital-fds/">deposits</a>, or current accounts. They share data pertaining to consumer bank transactions, tax, pension, securities, insurance, and much more.<h2 class="heading-node" id="5e7e" style="text-align: justify">Is data sharing via AA network secure?</h2>Data shared on the account aggregator network is completely secure. It is encrypted by the sender and can be decrypted only by the intended recipient. End-to-end encryptions and digital signatures remove vulnerabilities and secure the process.<h2 class="heading-node" id="42b2" style="text-align: justify">What if consumers choose not to share data?</h2>By all means, a consumer can choose not to share any data. Joining the AA network or registering for data sharing is completely voluntary. They can link the account of their choice, enable or revoke data access at any point in time.<h2 class="heading-node" id="b9c4" style="text-align: justify">Use cases for account aggregator network</h2>Here are use cases in which account aggregators can drive efficiencies and add value to consumers and financial institutions.Personal finance management&nbsp;— Consumers can analyze personal spends across accounts, which will help generate recommendations to streamline expenditure. This process will enable better personal finance goals and budgetary adherence for consumers.Cashflow-based lending&nbsp;— Consuming data from FIPs, FIUs can get better visibility into the cash flow of applicants. Cashflow-based lending will accelerate mainstream lending, especially in SME and MSME credit space.Alternate data for credit assessment&nbsp;— Evaluating a consumer’s creditworthiness is a true challenge if there is inadequate data on his income or payment history. If credit applicants who do not have formal credit access could share their telecom bill payment to the lender, this will generate an alternate data set to assess creditworthiness.Loan monitoring for predictive default analysis&nbsp;— Every lender will want visibility into the borrower’s financial behavior to ensure discipline in repayments. The income and outflow from a person’s bank account could reveal his financial behavior. And this could help lenders predict default patterns.Selling customized financial products&nbsp;— Accessing data concerning consumer behavior with financial products will help financial institutions involved in wealth management and insurance customize their products.Wealth management&nbsp;— Imagine a customer has invested in insurance from A, mutual fund from B, Gold deposits from C, and savings account from D. An account aggregator can unify all this data and help wealth managers handle customers' portfolios more efficiently.Accounts reconciliation for small businesses&nbsp;— With account aggregators, SMEs and MSMEs would not require to manually feed in Tally/ QuickBooks for their daily invoices. They can simply consent to platforms to consume data from FIPs and derisk manual errors.Unified nomination register&nbsp;— Nominations in financial products today are decentralized, hence have to be managed individually. A joint collaboration between the account aggregator and the unified nomination register can solve this.Now, these are not all. We have just scratched the surface of the use cases that account aggregators could have. When more pipelines get enabled on AA network, the use cases will grow exponentially. Then they will have to address concerns surrounding platform stability, data privacy, and grievance redressal mechanisms.M2P believes in democratizing credit by empowering lenders with alternate data/ surrogate channels. Should you be looking for a partner who could help you look beyond conventional credit applicants' data, write to us at&nbsp;<a class="link" href="mailto:business@m2pfintech.com">business@m2pfintech.com</a><a class="link" href="https://m2pfintech.com/newsletter/">Subscribe</a>&nbsp;to our newsletter and get the latest fintech news, views, and insights, directly to your inbox.Follow us on&nbsp;<a class="link" href="https://www.linkedin.com/company/m2pfintech/mycompany/">LinkedIn</a>&nbsp;and&nbsp;<a class="link" href="https://twitter.com/m2pfintech">Twitter</a>&nbsp;for insightful fintech tales curated for curious minds like you.

Account Aggregator 101- Democratizing data access and sharing

<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/05/Artboard-1-copy-8-3-1.webp" alt="M2P Fintech" title="" width="100%" height="358">Did you know it takes just 6 seconds to hack any credit or debit card?As the number of Card-Not-Present (CNP) transaction increases, so do the associated risk factors. The 6-second hacking window is quite scary, especially when you are a bank or a card issuer.Even though the end-consumer faces losses, card issuers and banks are the ones who will have to bear the major brunt, including refunding the customer, dealing with chargeback fees/fines, and investigation charges which often lead to reputation loss.<h2 class="heading-node" id="cae2" style="text-align: justify">Modus operandi of fraudsters</h2>Card payment fraud happens in both card-present and card-not-present scenarios. Usually, the customer gets unsolicited calls, text messages, emails, or unauthorized software update requests under the pretense of KYC updates, or gift offers.Scamsters pretend to be genuine in these communications and ask consumers to share personal information, card credentials, PIN, or OTP details. Phishing, skimming, and mail intercepting are among the key modus operandi that criminals use to defraud consumers of their money, data, and identity.Other usual scenarios include:Stolen or lost card fraud-&nbsp;In this situation, the card either slips out of the cardholder’s hands or is stolen. The fraudsters then use the card to go on a shopping spree and then discard the card.Account takeover-&nbsp;One of the rising crime scenarios today is complete account takeover. Here the fraudsters shoulder surf or steal card details and get in touch with the card-issuing company. Pretending to be the cardholder, they would falsely report a stolen card and ask for a replacement with modified address details. The genuine cardholder will know about this scam only when the card is used.Page Jacking-&nbsp;Here, the scamster redirects an e-commerce store page and takes the user to their malicious portal. This page would contain links with the potential to crack network security.Now, this is only the tip of the iceberg. Each day, fraudsters develop more sophisticated methods to commit card payment fraud.<h2 class="heading-node" id="75ac" style="text-align: justify">Signs banks need to look out for to identify fraudulent activity</h2>Card issuing banks need to be vigilant and check for signs to nip card scams in the bud. They need to design systems to proactively identify suspected fraudulent activity in real-time and decline these attempts before the cardholder is affected.Suppose a bank notices anomalous spending patterns, erratic location changes, or unexplainable large ticket transfers, they need to notify the cardholder and investigate the matter immediately.<h2 class="heading-node" id="4a4f" style="text-align: justify">What can banks do?</h2>Delivering secure, smooth, and customer-friendly online payments is critical for banks and card issuing companies. Otherwise, customers will leave in hoards, shifting their loyalty to competitors. Choosing a suitable authentication method is crucial to eliminate security risks in card payments.Gone are the days when binary authentication such as static passwords and usernames were unbreakable. Today cyber criminals use advanced technology that can decode these credentials in seconds. Hence, banks need to adapt to a more robust, scalable form of authentication that can be adjusted according to different risk levels.<h2 class="heading-node" id="9cf8" style="text-align: justify">The solution: Risk-Based Authentication (RBA)</h2>When it comes to the standard credential-based authentication process, the user will have to undergo two-factor authentication (2FA) or Multi-Factor Authentication (MFA), which is a One-Time Password (OTP) or password every time a transaction happens.But with risk-based authentication, it is not necessary that the transaction must go through 2FA. Instead, every single transaction is monitored and assessed for risk. And a risk score is assigned to evaluate if the transaction can occur securely.In conjunction with a few other parameters, including business rules/logic, this risk score effectively decides if a transaction requires a challenge or if it can be allowed to go through frictionless (without an explicit 2FA).Case studies from different markets suggest that ~90% of transactions tend to be low risk and can thus be allowed to go through frictionless. Around 8% may require some form of 2FA, and ~2% tend to be high risk and can be declined.Risk-based authentication helps banks cut fraud losses, reduces transaction drop-offs, and ensures regulatory compliance. It plays a critical role in boosting e-commerce by balancing customer experience and controlling fraud. Dynamic RBA systems power card issuers to identify optimal risk levels and deliver quick, secure, and seamless payments.More info…Risk-based authentication is a real-time process that assesses underlying risks and applies appropriate levels of controls. Also known as adaptive authentication, the identification happens based on the user’s risk profile when they try to authenticate who they claim to be.An increase in the user’s risk profile leads to stricter and more restrictive methods of authentication. Risk-based authentication uses behavioral profiling to assess risk and protect customer data.Risk-based authentication ensures a protective guard against complex security breaches and hacking attempts. The authentication uses various parameters such as the user’s transaction history, merchant profile, IP &amp; location, device usage history, and other critical parameters to assess risk.Based on the evaluation, the Access Control Server (ACS) decides if the user can complete the transaction without any additional factor of authentication or if there is a need for an additional factor of authentication such as the following.<ul class="list-node" id="kzbf8joyr"><li>One time passcode</li><li>Permanent or temporary PIN</li><li>Security question (knowledge-based authentication)</li><li>Biometric data, such as a fingerprint</li><li>Mobile phone-based authentication such as Swipe to Pay</li></ul><h2 class="heading-node" id="39bb" style="text-align: justify">Setting up an RBA system</h2>Designing and deploying a quality risk-based authentication system involves implementing&nbsp;<a class="link au mv" href="https://m2pfintech.com/blog/3d-secure-your-barrier-against-cyber-attacks/" rel="noopener">3D Secure (3DS)</a>. Now, 3D Secure is a payments security protocol that adds a strong layer of security to CNP transactions by tying payment authorization to the online authentication process.To authenticate the cardholder, the transaction needs to be redirected to the Access Control Server (ACS). Issuers can define their risk profile and set up the ACS to control the customer authentication experience based on the risk analysis. After the customer completes the authentication, the response is sent back to the merchant and processing bank.<h2 class="heading-node" id="46cd" style="text-align: justify">What is the ACS?</h2>Access Control Server (ACS) is the server that enables bank customers to authenticate themselves and complete card-based online transactions securely. The ACS is built on the 3-D Secure rails defined and certified by global card networks, including Visa and Mastercard.While the initial version of the 3DS protocol (3DS 1.0) was designed to boost customer confidence, it did not provide the most optimal transaction experience and resulted in a high percentage of online drop-offs and cart abandonments in quite a few markets.The updated protocol version, EMV 3DS or 3DS 2.0, is designed by EMV, the consortium of global card networks. This protocol is optimized to support in-app payments, facilitate risk-based authentication via the exchange of richer data parameters, and encourage the use of dynamic out-of-band authentication techniques such as biometrics.<h2 class="heading-node" id="89f6" style="text-align: justify">Features of our ACS system</h2>Our ACS system guarantees top-class customer security while ensuring a seamless transaction journey. It is easily configurable and provides issuers the flexibility to design a custom authentication experience for their customers.Some of the key features of our ACS<ul class="list-node" id="tpiux2p6i"><li>3DS 2.0 certified with support for Visa, Mastercard</li><li>Cloud-ready system with the platform set up in India and the UAE</li><li>Highly scalable and configurable platform</li><li>Best-in-class success rates and performance</li><li>24*7 application monitoring and production/operations support</li><li>Support variety of issuer integration options — real-time API fetch, batch file upload via SFTP, and push API</li><li>Comprehensive risk-based authentication system with scope for advanced rule design using an external data feed</li><li>Multiple modes of step-up, including OTP (SMS/email), swipe to pay (push notification), biometrics, soft tokens, etc.</li><li>Role-defined access to comprehensive reports and dashboards</li></ul>Now, this is Risk-Based Authentication in a nutshell for you.Got questions on how to implement a dynamic ACS system? Ask us at&nbsp;<a class="link au mv" href="mailto:business@m2pfintech.com" target="_blank" rel="noopener ugc nofollow">business@m2pfintech.com</a>.<a class="link" href="https://m2pfintech.com/newsletter/">Subscribe</a>&nbsp;to our newsletter and get the latest fintech news, views, and insights, directly to your inbox. Follow us on&nbsp;<a class="link" href="https://www.linkedin.com/company/m2pfintech/mycompany/">LinkedIn</a>&nbsp;and&nbsp;<a class="link" href="https://twitter.com/m2pfintech">Twitter</a>&nbsp;for insightful fintech tales curated for curious minds like you.

Why is Risk-Based Authentication (RBA) critical for banks?

3D Secure: Your Barrier against Cyber Attacks

<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/05/Wordpress-main-.webp" alt="M2P Fintech" title="" width="100%" height="356">Know Your Customer/Know Your Client (KYC) is a mandatory process that verifies and authenticates a customer’s identity. All legal and financial institutions must validate their customers to prevent any illegal or fraudulent activities as per Reserve Bank of India’s norms.&nbsp; Under the guidance of the Prevention of Money Laundering Act, 2002 (PMLA), the RBI mandates that all banks and financial institutions implement KYC procedures.&nbsp; KYC starts with verifying Proof of Identity (POI) and the Proof of Address (POA) and by which banks, insurance companies, and other organizations obtain information and better understand their customers. It is applicable for both new and existing customers and is the first step in account creation or even to allow a transaction.&nbsp;<h2 class="heading-node" id="9083">Why is KYC mandatory?</h2>As per the Reserve Bank of India’s mandatory regulation, KYC came into legal effect in 2002. The RBI mandates that all financial and legal institutions should assess their customers.&nbsp; KYC’s objective is to help banks and other financial institutions to assess and validate their customers. An effective KYC alleviates and combats all illicit activities. A financial institution can identify potential threats, criminal, and other illegal activities while verifying the KYC required documents. In a nutshell, a financial institution or a business/corporate uses KYC for,&nbsp;<ul class="list-node" id="32oq3a921"><li>Building and Verifying a Customer’s Identity&nbsp;</li><li>Understanding Customer’s Activities&nbsp;</li><li>Evaluating the risks involved with the Customer’s Activities</li></ul><h2 class="heading-node" id="2ff5">How does KYC work?</h2>The KYC process is carried out seamlessly with the following simple steps:&nbsp;<ul class="list-node" id="pce88galo"><li>First, the applicant’s PAN/ AADHAR details are collected and validated.&nbsp;</li><li>The applicant further supports the information provided by entering the required details on the website.&nbsp;</li><li>The applicant’s document goes through various checks and authentication processes by the financial entity.&nbsp;</li><li>Once the documents are verified, and once named eligible, then the applicants are onboarded.&nbsp;&nbsp;</li></ul><h2 class="heading-node" id="23fe">Evolution of KYC</h2>Back in 2002, the Reserve Bank of India (RBI) made KYC a legal and mandatory procedure for all financial institutions, preventing misuse of the sensitive information held by banks and restricting money laundering activities. Evolving from a Paper-based physical attestation method to video adoption, KYC has come a long way. The paper-based KYC demands more physical input because of various document requirements. In contrast, the e-KYC makes the verification procedure less complicated by reducing the physical work of businesses and clients where the data is stored and verified entirely online.&nbsp;&nbsp; The e-KYC or paperless KYC verification procedure became more preferred by customers once the internet boomed. Now doing e-KYC is made even more accessible as the Government of India has launched Digi Locker under its Digital India initiative. It is a digital document wallet that helps its users to store authentic documents virtually and is highly secured by Aadhaar/OTP authentication.<h2 class="heading-node" id="5fbe">Types of KYC</h2><img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/05/Wordpress-03.webp" alt="M2P Fintech" title="" width="100%" height="284"><h3 class="heading-node" id="ympukq7zn">1. Aadhaar-based KYC</h3>Aadhaar-based KYC verification follows the regulations of The Unique Identification Authority of India (UIDAI) and verifies proof of identity and residence through one’s Aadhaar number. In addition, the UIDAI provides information to service providers to activate customer services such as bank accounts, mobile connections, etc.&nbsp; Every Aadhaar cardholder can quickly and easily complete their KYC process. Aadhaar based KYC is an efficient, paperless process that adheres with government standards.&nbsp; The Aadhaar based KYC authenticates data in two different ways:&nbsp; OTP-based  - The financial institution verifies the customers’ identity by triggering an OTP to their Aadhaar linked mobile number.&nbsp;&nbsp; Biometric-based  - For Identification and Verification, the financial institution uses the biometrics of the customer by using UIDAI (Unique Identification Authority of India) approved scanners.<h3 class="heading-node" id="ebxjgryx3">2. In-Person Verification (IPV) KYC</h3>The In-person KYC procedure was used by the Security and Exchange Board of India (SEBI) for mutual fund investors. Unlike the other prevalent methods, in-person verification requires the individual to undergo the process offline in an institution, KYC kiosk, or at an AMC. IPV has now upgraded their process via OTP mechanism.<h3 class="heading-node" id="31fd">3. Digital KYC</h3>It is a paperless process where a live photo of the client and their Aadhaar is verified and processed online. It also involves submitting the Official Valid Documents (OVD’s) such as Aadhaar, Pan Card, Passport or a Driver’s license.&nbsp; The digital KYC techniques have many advantages such as,&nbsp;<ul class="list-node" id="pewatsdgk"><li>The customer’s identity verification happens in real-time,&nbsp;</li><li>The process is flexible because the customer can use any of the OVDs,&nbsp;</li><li>The process is highly secure and efficient due to privacy laws and the usage of AI technology.&nbsp;</li></ul><h3 class="heading-node" id="0da4">4. Video KYC</h3>RBI allowed the usage of Video KYC in 2020 due to the pandemic constraints. Video KYC is a procedure that verifies details of the client in a video-based process. This process involves an auditor and an agent for authentication and audit. Before establishing an account-based relationship, the agent collects the details using video-audio features and AI technology. The process is smoothened by usage of a number placard that helps authenticating the customer.&nbsp;&nbsp; Video KYC is available as:&nbsp;<ul class="list-node" id="dd9lh3yyz"><li>VCIP - Video-based Customer Identification Process&nbsp;</li><li>VIPV - Video-based In-Person Verification&nbsp;</li><li>VBIP - Video-based Identification Process&nbsp;</li></ul>&nbsp;It employs a trained individual’s audio-video interaction and automated verification methods such as geo-tagging and facial matching.&nbsp;<h3 class="heading-node" id="4d8e">5.&nbsp;Central KYC (CKYC)</h3>CKYC is a customer or financial institution submitting a Central KYC form and proof of identity and proof of address that relies on the central repository of customer records for CERSAI (Central Registry of Securitization Asset Reconstruction and Security Interest of India). The process detects any duplicate accounts and mitigates other risks.&nbsp; The C-KYC identifier is a 14-digit unique identifier assigned to a client when they upload their details for KYC. When a client opens an account without C-KYC, it may require them to repeat the whole process. But this 14-digit identifier removes that need, and the customer can use this number to update their information throughout all their accounts uniformly.<h3 class="heading-node" id="4feb">6. In-app KYC&nbsp;</h3>This KYC process brings out easy and hassle-free experiences to the customers. All the verification process happens with the help of a smartphone, where the clients can conveniently carry out bank transactions, open bank accounts, and other banking operations.&nbsp; The clients need to use their smartphones to verify their IDs or passport and begin the KYC process. The KYC also involves real-time scanning of IDs to prevent identity forgeries. It is highly secure due to the deployment of secure technologies.<h3 class="heading-node" id="a37c">7. Offline KYC</h3>Offline KYC requires the submission of all the necessary physical documents for verification. It requires filling in all the required details like Aadhaar and PAN. After this, the client must visit a nearby KRA to complete the process and receive an official application number to identify and continue the verification process. Or an agent is sent to the customer’s place to collect documents for KYC verification.<h2 class="heading-node" id="649c">So, what is KRA?</h2>KRAs are KYC Registration Agencies that maintain the SEBI (Security and Exchange Board of India) registered companies records under the KYC regulations Act, 2011. To bring uniformity and avoid duplicate KYC processes, this KRAs help regulate the KYC process that allows a company to authenticate its clients and offer better customer service.&nbsp; Five different agencies that work as KRAs in India are:&nbsp;&nbsp;<ul class="list-node" id="83rt2nv4f"><li>CVL KRA&nbsp;</li><li>CAMS KRA (Computer Age Management Services Pvt Ltd.)&nbsp;</li><li>NSDL KRA (National Securities Depository Ltd)&nbsp;</li><li>Karvy KRA (Karvy Data Management Services)&nbsp;</li><li>NSE KRA (National Stock Exchange)&nbsp;</li></ul>To conclude, KYC has evolved over the years from physical forms to real-time AI technology verification methods. KYC satisfies and provides a hassle-free experience to the customers and helps financial service providers establish a smooth relationship. If you wish to implement a robust KYC system, check out our blog on <a class="link" href="https://m2pfintech.com/blog/crack-the-kyc-jigsaw-ease-onboarding-compliance/">How to Crack the KYC Implementation.</a><a class="link" href="https://m2pfintech.com/newsletter/">Subscribe</a>&nbsp;to our newsletter and get the latest fintech news, views, and insights, directly to your inbox. Follow us on&nbsp;<a class="link" href="https://www.linkedin.com/company/m2pfintech/mycompany/">LinkedIn</a>&nbsp;and&nbsp;<a class="link" href="https://twitter.com/m2pfintech">Twitter</a>&nbsp;for insightful fintech tales curated for curious minds like you.

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