Three challenger bank employees struggling with knotted strings

Why It’s So Hard for Challenger Banks to Fight Financial Crime

Balancing Security with Customer Experience

Challenger banks put themselves under intense pressure to create a superior customer experience, and with good reason. With banking being an industry reliant on customers continuing to purchase additional products, it is important that customers who switch to these new banks stay for life. 

However, for challenger banks born in the digital era, customer experience expectations match those of other technology companies, not those of established banks. Because of this, customers are more likely to walk away over small things, like a poor mobile app UI. The CTO of Tandem Bank, Paul Clark, explained in an interview how quickly these customers can leave:

“There’s an expectation. If those other people’s apps are Uber or Facebook or Instagram or whatever your favorite apps are, then that’s the level of sophistication, of smoothness, of customer experience that your customers expect. And when they don’t get that, when they jar up against it, it’s very easy to drop one app and move to another.”

In other words, challenger banks must do everything possible to protect their customer experience. Yet, they also need to prevent fraud and be compliant. How can challenger banks protect their great customer experience from the negative impact of fraud? With a poor risk strategy, challenger banks run the risk of either increasing customer friction, by driving up false-positives, or decreasing customer trust through fraud occurrences like data breaches or account takeovers.

Unfortunately, many existing fraud prevention options aren’t a fit for challenger banks, as they negatively impact customer experience by increasing friction and costs, which the bank must eventually pass on to customers.

The Unique Challenges of Money Laundering

Money laundering is no small issue for any bank. In 2017 United Nations Office on Drugs and Crime (UNODC) estimated that roughly $800 billion to $2 trillion was laundered globally. While the range of the estimate varies significantly, even at the lowest end of the range, $800 billion annually, demonstrates the sheer magnitude of the problem.

The massive money laundering issue has led to pressure on banks of all sizes. With complex and region-specific rules and regulations, including sanction screenings and multiple variants of watch lists, even major banks, with well-developed compliance teams, have found themselves struggling to ensure compliance. Take for example the recent money laundering issues that a major Nordic bank has come under fire for as they failed to correctly monitor transactions through one of their international branches. They now face up to $630 million in fines as well as significant public scrutiny. The need for implementation of a proper AML solution is immediate. With major banks facing regulatory scrutiny, it isn’t long until challenger banks run into the same regulatory issues. 

Challenger banks are also no stranger to this problem. With the promise of frictionless customer onboarding and customer experience, challenger banks face a myriad of issues properly vetting customers during onboarding and continuously vetting their customers once they’re onboarded. Often, their onboarding strategies consist of tiering customers or limiting their spending ability based on the amount of due diligence that has been conducted. However, these solutions have a fatal flaw.

Many of the onboarding processes created by challenger banks are relatively hands-off, due to challenger banks relying heavily on technology rather than personnel. Because of this, challenger banks can inadvertently onboard malicious customers at low tiers. One of these malicious customers wouldn’t pose a significant threat to challenger banks since they would be limited to a transfer limit of (for argument’s sake) $5,000. However, a single criminal who opened 20 fake accounts by purchasing cheap social security numbers on the Dark Web could move $100,000 over the course of the month by disguising these payments and strategically transferring their entire $5,000 limit. They could do this while remaining under the required transfer reporting amount of $10,000. The problem grows exponentially. Just 50 of these criminals could move $5,000,000 overseas using this method, with many of the transactions avoiding detection entirely.

While simple rules could be implemented to address this type of recurring behavior, criminals would simply change tact and adopt a different strategy to avoid detection. An increase in customer due diligence at lower customer tiers would also pose problems for challenger banks, as they look to maintain their industry-leading frictionless customer experience. 

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