Transaction monitoring is one of the most important tools for ensuring the security and integrity of transactions. By closely scrutinising customers' transactions – deposits, withdrawals, and transfers – organisations can identify suspicious activities, such as money laundering.
But how does transaction monitoring work in the context of Fintech? We'll dive into the concept of transaction monitoring, its significance in the industry, and some real-world examples of its implementation.
Understanding transaction monitoring and screening
Transaction monitoring involves the continuous observation and analysis of customers' financial activities. This is regardless of whether the customer, sender, or recipient is based locally or internationally.
Its primary objective is to alert organisations when potentially suspicious transactions occur. This enables those organisations to take immediate action and mitigate the risks associated with facilitating criminal proceeds and to future-proof and improve their operations and processes.
By employing advanced monitoring techniques – segmentation, alert hibernation, threshold setting or tuning – companies can safeguard their platforms and maintain the integrity of their services.
Importance of transaction monitoring
Fundamentally, the core purpose of transaction monitoring is to combat financial crimes. Money laundering and terrorist financing can undermine the stability and security of any financial system, and put fintechs at risk of being blacklisted by third-party institutions.
The flagged transactions are subjected to additional scrutiny by compliance teams, who evaluate the customer's profile, transaction history, and the countries involved. This process helps ensure compliance with regulatory requirements, such as anti-money laundering (AML) and counter-terrorism financing (CTF) laws.
Monitoring cryptocurrency transactions
As the popularity of cryptocurrencies continues to grow, it becomes essential to extend transaction monitoring to encompass both fiat and crypto transactions. Any transaction involving fiat or crypto conversion, should be monitored.
However, due to the decentralised nature of crypto, it often isn't possible for financial institutions to monitor them in the same way. This turns crypto to crypto oversight into a highly complex, sometimes impossible task.
Examples of transaction monitoring
Now that you have a better understanding of the importance of the practice, we will explore a few common scenarios where transaction monitoring can effectively detect potential risks.
Unusual transaction volume
If a customer's transaction activity suddenly exceeds their historical average, for example, by a significant margin within a specific time period, it may raise a red flag. Setting rules in place, allows transaction monitoring algorithms to swiftly identify anomalies and alert organisations for further investigation.
Multiple international transactions
When a customer conducts a significant number of transactions involving multiple countries in a brief period, it can raise concerns about the nature of their activities. Such behaviour may suggest attempts to exploit international financial systems for illicit purposes, such as money laundering or sanctions evasion.
Cash deposits and withdrawals
The occurrence of significant cash deposits or frequent withdrawals within a compressed time frame can raise suspicions regarding the underlying intent of these transactions. Traditional banks already employ these measures by alerting customers when large purchases are made using credit cards – they will often require authentication by a human.
A sudden surge in refund requests within a condensed time frame can be a sign of fraudulent activity. This pattern may indicate attempts to exploit vulnerabilities in the refund process, such as submitting false claims or manipulating transactions for personal gain.
Transaction monitoring is an ongoing process
Financial security is a never-ending battle. Businesses face a critical challenge in protecting themselves and their customers from financial crimes, but as technology advances, so do the ways in which criminals find new ways to cheat the system.
By investing in strong monitoring practices, you can stay at least one step ahead, providing a safer economic environment for everyone.