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“Braver banks” are driving innovative crime prevention

But U.S. institutions need more bravery to catch up with others in the financial industry by embracing cutting-edge innovations with less fear.

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A number of factors are hampering the financial services industry and the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) in their pursuit of combating financial crime, including to some extent its own frameworks.

In places like the U.K. and Singapore, regulators put forth the parameters and mechanisms in which banks are allowed to innovate. However, in the U.S., the government provides some guidelines but little regulation to push financial institutions in the right direction. Given the strong belief that competition drives the market, business needs mandate that banks stay up to date on certain things, such as instant payments. But, for the most part, U.S. banks innovate more slowly than their fintech competitors, and they tend to move as a pack.

By nature, banks are cautious, and rightfully so. They must always operate within their individual risk tolerances and be compliant with regulation. This leads to a “braver banks” phenomenon when it comes to innovation.

What is the “braver banks” phenomenon?

When it comes to change, banks don’t want to be last, but they also don’t want to be first. For this reason, banks are fast followers, meaning they are quick to adopt something when they have observed it being successful for another organization. This keeps their risk relatively low, while also allowing them to innovate and adopt new technology safely. It is much easier to learn from the experiences of others than to expose yourself trying to be at the cutting edge.

For example, digital wallets and P2P payments are relatively new to mainstream adoption among U.S. banks because in their infant stages, there were questions regarding security risks. However, once challenger banks and fintechs started demonstrating the safety and value to customers, it was quickly picked up elsewhere in the industry.

Because no one wants to be the first lamb to the slaughter, the challenge becomes getting that first bank to adopt an innovative approach while expanding their current risk tolerances for the benefit of their business and the industry. U.S. banks have little mandate nor clear incentive to innovate, so this process can take a while. And the sheer scale of technology modernization for banks, combined with many being burned historically by complex projects that never delivered a return on investment, makes undertaking these programs a risky decision in of itself.

While digital fraud and financial crime has increased exponentially in recent times, banks are struggling to keep up because of this fear of being the first to adopt new technologies.

On a positive note, most banks are in a transformational period in which they are coming to the realization that they have to be more forward-thinking in the way they manage risk in this ever-evolving market. They must begin the process of considering how to become more effective as they catch up with innovation in one sense, but also get back to basics and refocuses efforts. In the meantime, this lag in innovation has hampered the industry and FinCEN in their pursuit to combat financial crime more effectively and efficiently with artificial intelligence and machine learning.

What can be done?

The answer is not to push through more regulations. The problem lies within the gap between actual requirements versus guidance, and how to interpret and implement that guidance.

As innovations like AI and machine learning continue to advance fraud prevention and anti-money laundering, FinCEN and other federal regulators can help by providing clearer direction when it comes to how banks should innovate and at what rate. When looking to modernize essential programs, like the Bank Secrecy Act and AML regulations, FinCEN should look closer at how explainability, model governance, open data and structured data can help banks better understand the innovation arena and leverage machine learning to combat organized crime.

Banks need huge investments to make changes and adopt new technologies, so they want to know it will be compliant before they commit the money. To innovatively leverage the opportunity that new technology brings, banks have to understand and manage the risks and more importantly, not be afraid of them.

Risk-conscious banks shouldn’t be expected to charge into battle without a plan. So really, it’s a question of reframing bravery through defining frameworks for innovation and strengthening opportunities for collaboration.

Todd Raque is a financial crimes compliance & AML executive at Featurespace.

The 2022 BAI Global Innovation Awards are now accepting entries. Banks and credit unions, solutions providers and more are eligible for the industry’s leading program recognizing innovative breakthroughs.