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Transaction Monitoring and its importance in the Banking and Fintech environment

“Transaction Monitoring” is a term, which in the financial/Fintech and banking sector, refers to various automated systems implemented as part of the company’s/institution’s infrastructure and a key element of their AML (Anti Money Laundering)/CFT (Counter-terrorism financing) methodology.

These systems are crucial for the on-going monitoring of the client’s activity, i.e. during its lifetime as a client, and after the initial KYC (Know you client) and onboarding process.

Where does Transaction Monitoring take place?

The systems are implemented on top of the companies’ business and transactional data systems, analyzing it and creating “Alerts” to be investigated by the companies’ Compliance departments, which are based on its client’s activity. The “Alerts” are based on various customizable rules chosen by the company based on its business and client profiles. These rules are the heart of transaction monitoring systems, and were created based on common money laundering practices identified worldwide.

An example

Example for such a rule will be when a company is offering a virtual bank account for collecting funds from paying customers and transferring them to another destination, it will choose rules that will identify a situation where the client is using his account as “mule” account, i.e the account is not used for an actual business purpose, but instead used a “storage place” for the funds in transition on their way an unknown (or undisclosed by the client).

Another good example would be a rule that identifies multiple transfers of funds at the same amount, in a way that appears as if the client is attempting to “guess” a certain threshold that will not trigger a review or inspection of his activity by the Compliance department (many fraudsters usually choose a bit below 10,000 Euros/Dollars as a benchmark, and split one large transfer to multiple 10K transfers, thinking this way they can evade being asked questions about the source of the funds).

After an alert is created for a client’s account and activity, it is then investigated by the company’s Compliance department which reviews the activity and also contacts the client for clarifications if needed, after which it will be decided if the client operated in an illegal or suspicious enough manner. The results of the investigation can be a dismissal of the alert, shutting down the client’s account, restricting it and in some cases even reported to the relevant Financial regulator overseeing the company’s activity, as per the local laws.

Transaction Monitoring pricing

The above mentioned systems are usually sold in an SAAS pricing model which requires licensing. This usually incurs an annual payment, with monthly payments added per extra functionality or licensing. The amounts financial institutions pay for licensing and implementations of these systems can accumulate to millions of dollars every year. With the hefty regulation surrounding the financial industry this is a mandatory expense for these institution, but also an important one as part of the Anti-Money Laundering and counter terrorist financing policies, which local regulators are scrutinizing and overseeing.

  • Barclays
  • Techstars
  • Nestholma
  • Nordea
  • Tekes
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