accuity.com

Keeping Pace with the Evolving Payments Processing Landscape

Henry Balani - AccuityAdam Schabes – BMO Financial Group

Focus areas

• Recognize the AML compliance challenges in a faster/real time payments environment

• Understand the shifting market dynamics driving the need for faster/real time payments

• How to address payment speed while maintaining compliance

Problem Statement

• Faster/real time payments places greater pressure on reviewing transactions that need to be reviewed for regulatory and compliance issues

• Current review processes are batch oriented that takes time to clear suspicious transactions

• In a real time clearing environment, review processes also need to be real time

Polling Time!

Poll Questions

1. When will your firm implement a faster/real time payments system?a. In next 12 monthsb. In next 6 monthsc. Already implementedd. Still considering whether to implement

Poll Questions

1. Do you anticipate making changes to your current compliance screening processes when implementing real time systems?a. Yes – significant changes will be neededb. Yes – only minor changes neededc. No – have not really thought about itd. No – will not need to make any changes

Current state of faster payments

Trends driving Real Time Payments

4) Changing economic balance

5) Changing demographics

6) Changing regulations

3) Change of traditional banking

models

1) Changingbuying patterns

2) Increasing mobility

How do Payment systems work?

Authorization of payment

Posting of payment and checking availability of funds

Settlement of outstanding obligations between banks

Notification for beneficiary and originator

4 hours to 2 days 4 hours to 2 days

Cross border payments can take up to 2 weeks to settle

Faster or real time payments

Immediate posting of payment and checking availability of funds

Instant settlement of outstanding obligations between banks

Instant notification for beneficiary and originator

Immediate communication

Electronic payment systems where funds are irrevocably transferred and confirmed between originator and beneficiary of payment within a minute

Authorization of payment

Benefits of Real time payments to Corporations

Faster settlement times Enhanced visibility Ability to track payment flows

Improved cash management Improved service levels Reduced risk exposure

Benefits of Real time payments to Consumers

Ease of use Spending oversight

Anytime/anywhereGreater choice of payment platforms

Recognizing the challenges of implementing faster payment systems

Poll Questions

3. Given the compliance challenges to screen real time payments, what type of payment transaction should be screened?a. Low value paymentsb. High value paymentsc. Domestic paymentsd. Cross border paymentse. All of the above

Poll Questions

4. What is your biggest concern about faster payments processing?a. Cost to my organization and/or clientsb. Same Day ACH is still not fast enough to meet

industry needsc. Compliance and operational risksd. The additional operational capacity needed to

take advantage of faster payments

The 3 legged stool to optimizing AML Compliance in a faster payments world

People- 24/7 support- Training

Process• Establish SLAs• Segment payment

types • Categorize customers• Set transaction limits• Instant escalation &

dispositioning

Technology• Include additional

elements to improve matching capability

• Additional unique identifiers

• Improve data quality• Improved matching engine• Data analytics - Real time

learning algorithms that proactively reduce false positives

• Optimize false positive rules

What faster payments means for AML Compliance

Wire Ops and/or Compliance manually approve/reject hits

Overseas Branches/Correspondents Can Reject Payments

Repairs

Core Banking

Payment transaction

Payment transaction

Front End

Treasury System

Trade System

Payment transaction

Payment transaction

Matched Records

Possible errors-Incomplete or inaccurate Beneficiary bank data-Incomplete or inaccurate IBAN numbers (Euro payment)-Incomplete or inaccurate Intermediary bank SWIFT/BIC-Incomplete or inaccurate payment routing attributes

Overseas BranchOR

Correspondent OR

Beneficiary BankWatch List

Filtering

Payment transactions requires compliance checks

Nigeria

Zenith BankImport/export

AMLKYC

Sender

Fx

Request

Germany

Deutsche Bank

Import/export

Beneficiary

United States

CITI Bank

AMLKYC AML

KYCFx

$50

₦ 31.500.000 $100.000

$50

$99.750$99.900

$50

€90.5302 days 2 days

Nostro Vostro relations Nostro Vostro relations

Swift messageSwift message

Sue wants totransfer $100K from her Nigerian bank account to a German bank account.

The sender bank needs to execute KYC and AML before thetransfer can beconfirmed. Thosechecks will be doneby all banks involvedin this use case.

3

The money will betransfered in USD, sothe local currency(Naira) need to beexchanged to USD

A lifting fee willbe taken in each bank-to-bank transfer

The cross border transfer is done on the Nostro-Vostro relationship between Zenith and CITI and then with CIT and Deutsche Bank

The funds are deliveredto the benficiary, whoreceives the money in Euros

The funds are exchanged fromUS Dollars to Euros, resulting in Fx costs

Messaging flowsthrough the Swift network

Multiple AML/KYC checks challenge real time payment systems

1 day 1 day

AML/KYC checks

Streamline process and automate workflowMaintain screening software currency

Train staff Leverage offshore support model

Improve tuning effectiveness and frequencyImplement technology automation (Robotics, Machine Learning and AI)

Considerations to address payment speed while maintaining compliance

Screening Payments Areas of Focus

Payment System

Screening Lists

Screening software

Payment Operations

AML Watchlist

Team

False Positive

True Match

Release

Reject

Hold/ EscalateIncrease tuning efforts

(industry avg 4-8%)

Leverage technology automation for alert assignment and triage• Robotics• Cognitive

Desktop Automation vs. Cognitive AutomationThere are two primary categories of Robotic Process Automation (RPA), desktop automation (which encompasses UI-based and back-end automation), and cognitive automation. Understanding the differences is key to executing successful process automation.

Deep Insights into Massive Data Sets

Cognitive Automation

Automate keystrokesUI Automation

Replicates user interaction at the UI level via mouse clicks,

keystrokes, and image recognition

Perfect Combination of Speed & Simplicity

Back-End Automation

Interacts directly with other programs via back-end

communication, independently of the UI

Desktop Automation

1

2

Simple vs Powerful

Centralized & Trackable Flexible

3

4

Quickly Deployable

RPA tools generally choose to emphasize either simplicity and flexibility, or processing power and scalability

RPA can automate almost any rules-based based

RPA tools are almost always much faster to build and deploy than traditional systems

All RPA tools focus on creating centralized governance, reporting and tracking tools

1

2

Cutting Edge Technology

Interactive & “Smart”

Able to analyze massive data sets to provide insights that humans cannot. Best suited for stable, high-volume processes

Relies on structured data and the existence of patterns. It is able to learn and improve its calculations based on iterative cycles of human feedback

Uses complex mathematics to determine whether there is a relationship between variables provided

by a user

Control Tower/AnalyticsMonitor business activities for

automationDerive insights about performance

Workflow Robotics ORC -Digitization

Cognitive (AI)

Worker Mgmt

Process-level

automation (vs. task

level)

Automate application

s using application

UI

Automateconversionof data to

digital form

Automatejudgment work on

unstructured data

Automate routing of

exceptions and quality

control

Software solutions bring together all of the capabilities an operations team needs to automate

and digitize a process(i.e. WorkFusion, Blueprism, Automation Anywhere, Pega)

Anatomy of Cognitive Automation

RPA/Cognitive Automation Platform

Understanding the Process issues involved

Establish SLAs• Identify the blockers• Determine acceptable

resolution times• Prioritize updates• Establish penalties for

violations of SLAs

Segment payment types • P2P, P2B, B2P, B2B• Identify processing requirements• Understand settlement obligations• Consider Compliance programs at

partner companies (may not need to screen the counterparty in a closed payment partnership)

Understanding the Process issues involved

Categorize customers• Service levels• Transaction values• Transaction limits

Escalation & Dispositioning• Ensure technology & staff

available to review suspect transactions

Understanding the People issues

24/7 Support and Decisioning• Consider outsourcing/offshore model

AML Compliance Training

Questions?

Henry Balani, DBAGlobal Head of Strategic AffairsAccuityHenry.Balani@Accuity.com

Adam SchabesManaging Director, AML TechnologyBMO Financial GroupAdam.Schabes@bmo.com