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Compliance Challenges with Instant Cross-Border Payments.

December 15, 2023

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Real-time cross-border payments offer speed and efficiency for businesses and individuals, but they also pose regulatory challenges due to the different rules and standards across countries. Here’s a quick guide to understand the complex maze of real-time cross-border payments.

The demand for cross-border payments for both the B2B and B2C domains is apparent from the expectation that this market would reach a value of $361.9 trillion by 2032, expanding at a CAGR of 8.3% from 2023 to 2032. Apart from the rise in globalization, the exponential growth of the e-commerce sector and technology innovations that make new payment methods available are likely to drive the cross-border payments market.

However, enabling real-time cross-border payments comes with its own challenges, of which the most complex is compliance across jurisdictions. Regulators worldwide are increasingly tightening their oversight of the payment chain to curb financial crime. And regulatory requirements vary greatly between countries, making compliance almost a nightmare. In this article, we look at the most pressing compliance challenges in enabling instant cross-border payments.

Source: World Economic Forum

Why is Compliance Important?

Real-time cross-border payments are transforming the way transactions are conducted, allowing businesses and individuals faster, more efficient solutions to send and receive funds over great distances within seconds. However, this rise of instant payments across nations and the rapid evolution of technology to facilitate real-time payments has led to the regulatory landscape undergoing major changes. The main aim is to ensure that transactions are conducted within legal and ethical parameters while protecting businesses and individuals against money laundering and fraud.

Compliance is crucial not just for financial institutions and third-party payment providers but for any business that wishes to facilitate cross-border payments for its customers. Non-compliance can lead to various adverse consequences, such as:

  • Loss of Customer Trust: Digital payments means the collection, transmission, and storage of sensitive data online. Even the slightest breach can lead to loss of customer trust and reputational damage, which can be irreversible. So, the burden of trust is higher than ever for financial institutions and payment providers.
  • Regulatory Penalties: Non-compliance can lead to hefty fines and penalties, as well as damage to the brand image. The good news is that technology support to automate compliance is leading to a decline in such penalties, with the first half of 2023 recording a steep 88% drop in fines globally, compared to the same period in 2022.

US financial institutions lead in regulatory fines, accounting for 83% of the total penalty dollars, despite being held responsible for only 10% of the regulatory violations globally.

  • Revenue Losses: Apart from fines, non-compliance can damage the bottom line by impacting customer churn, customer payouts, or system upgrades. As of 2023, the average cost of data breach for the global financial industry stands at $5.9 million.

What Makes Compliance Difficult?

According to the latest True Cost of Financial Crime Compliance Report from LexisNexis Risk Solutions, financial institutions worldwide bear financial compliance costs of a whopping $206.1 billion. Despite this huge investment of money and effort, 41% of financial institutions are still considered “inadequate or severely inadequate” in meeting AML and sanctions compliance requirements. Several factors make compliance challenging in real-time cross-border payments.

Regulatory Variations Across Jurisdictions

Every country has its own set of regulations and guidelines governing KYC/AML, data protection, environmental standards, etc. To provide payment solutions across jurisdictions, financial institutions, and payment providers need to comply with legal frameworks across regions. This is not just complex but also time- and effort-intensive. Plus, regulatory requirements are constantly evolving, with new laws being introduced and older ones being amended regularly. Staying on top of the latest regulatory updates is a huge task on its own.

Data Protection and Privacy

Data privacy regulations also differ from one jurisdiction to another. Since cross-border payments require collecting, transmitting, and storing sensitive personal information, stringent data protection practices are crucial. However, what is considered best practice in one region might not ensure compliance in another geography.

Outdated Technology

The rapid pace of technological evolution means that today’s cutting-edge technology might become obsolete tomorrow. Unfortunately, the financial sector is infamous for its legacy technology infrastructure, which not only comes in the way of facilitating quick, secure, and efficient cross-border transactions but might also not be powerful enough to detect and prevent financial crimes, such as money laundering and online fraud. Outdated technology leads to several bottlenecks in scaling with the rising transaction volumes due to:

  • Dependence on manual processes
  • Lack of automation
  • Vast quantities of alerts
  • False positives
  • Detection of suspicious transactions

Did you know that 31%-60% of KYC review tasks are still being completed manually by more than 50% of financial institutions?

Source: Fenergo

Cultural and Language Differences

Dealing with cultural differences and language barriers is central to expanding globally. The problem is that translating compliance and legal documents and adapting compliance initiatives to the local cultural practices are often challenges. However, doing so is essential to ensuring compliance.

Cost Management

With legacy infrastructure, new customer acquisition and onboarding in compliance with regional laws add to the operational costs. In fact, compliance budgets rose 22% from 2019 to 2022. For larger banks that onboard thousands of customers annually, KYC processes alone could cost millions of dollars.

Overcome Compliance Challenges with the Right Technology Partner

The right technology tools can ease navigating the complex global compliance landscape . This can also lower compliance costs that eat into profit margins while enhancing customer experience. An experienced and skilled technology partner can ensure proactive approaches to streamline operations while meeting compliance requirements for cross-border payments across jurisdictions.

Opus Technologies has been serving the financial sector for more than 26 years. We are committed to technological innovation to simplify payment and operations modernization. Our proven multi-channel payment technologies enable banks and payment processors to offer next-gen cross-border payment solutions and memorable customer experiences. We have an unparalleled track record of serving leading financial institutions, issuers, acquirers, PSPs, and FinTechs with a robust payment platform, scalable infrastructure, and simplified switch migration solutions.

Talk to our experts to learn how we can ease cross-border compliance for your organization.

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