The financial services landscape is shifting, and with it, the spectrum of risks. New trends and innovations like embedded finance, open banking, and instant payments present great opportunities for growth. They offer more seamless and faster customer journeys, but also an increasing potential for new vulnerabilities.

Traditional risks stemming from credit, liquidity, interest rates, and operations remain relevant, of course. This was demonstrated by the recent stress in US and European banking markets. But financial crime is a large, growing threat. It is estimated that the annual cost of financial crime, combining both losses from fraudulent activity and non-compliance fines, runs as high as $3.5tn. 

With financial services CEOs citing economic volatility (34%), cyber security (33%) and inflation (30%) as their top risks over the next five years, according to PwC’s 26th Annual Global CEO Survey, banks and other financial institutions need to expand their risk awareness and management toolset to balance innovation with the management of risks, both new and old.

Open banking and its risks

Open banking allows third parties to access financial data to offer additional applications and services. While this enhances customer experience, it also introduces potential risks. Electronic verification methods, like selfies and third-party data, speed up onboarding but can also create new opportunities for bad actors.

And with more third parties involved in the ecosystem, banks have less visibility into transactions than they used to, making it harder to spot suspicious behaviour. It also means handing off data to non-banking partners who might not share the same level of data security.

Even a basic transaction involving a customer, their bank, and a third party exposes several risks: potential data misuse by the third party, inadequate process controls, fraudulent third-party access, untraceable customer data usage, ambiguity in accountability, and potential security lapses across devices.

Moreover, with a more interconnected system comes a greater risk of platform failure. A single technological glitch or delay can have ripple effects throughout the ecosystem, damaging both partner relationships and customer trust. Open banking platforms and tooling must consistently deliver high performance to guarantee seamless customer experiences. How can organisations prepare for these challenges?

Banks and financial institutions must foster innovation in regulatory technology, like anti-financial crime tooling. This technology should be adaptive, work in real-time, and address scenarios in a predictive way. By proactively embedding robust risk management practices within your open banking offerings, you can build a robust ecosystem and deliver frictionless customer experiences. This allows for both innovation and effective management of risks in a way that does not unsustainably increase risk management and compliance costs year over year.

Instant payment and its risks

Instant payments, while providing speed and convenience to users, also bring a fresh set of challenges.

The transaction speed and immediate fund availability can make fast payment systems a magnet for fraudsters, who can make quick withdrawals before they are detected. There’s also a heightened credit risk. Not between the payer and payee, but between their payment service providers (PSPs). In the case of deferred settlements, for example, credit risk arises between the PSP of the payee and the PSP of the payer. And a unique challenge with instant payment is the typically irreversible nature of transactions. This makes it much harder to block or recover funds. This is particularly the case where the payee has immediately used them for other transactions.

Instant payments also demand real-time processing and swift, precise security checks, presenting a challenge to existing tech infrastructure. And some checks inevitably require further investigation. This causes delays that disrupt the user experience, tarnishes brand reputation, and potentially leads to losses to both the customer and the bank. Banks and other financial institutions must think carefully about the systems and strategies they need in place when transitioning to instant payments. Automation and AI components are essential in addressing these new risks.

Implementing AI can both help combat financial crime more effectively and mitigate the risks associated with instant transactions by automating sanction screenings and anti-money laundering measures, promptly spotting fraud, and reducing false positive interruptions.

Deploying explainable AI – which provides a rationale for its conclusion in each response – enables better insight into each transaction and maintains a clear, automated audit trail. This not only enhances risk management capabilities but also ensures that the decision-making process is transparent and understandable. This is crucial for compliance and building trust with regulators and stakeholders.

Ready for part 2? Read it here: Embedded finance and a new world of risk management.


Stay in the know

Never miss a Fioneer story - sign up for our newsletter.