Regtech

New Study Reveals the True Cost of Financial Crime Compliance

Digitalization has brought about tremendous opportunities for growth and innovation within the financial sector. However, this evolution has also led to a new era of financial crimes, new data released by LexisNexis Risk Solutions, a global data and analytics company providing fraud and risk prevention solutions, show.

These findings, shared in the True Cost of Financial Crime Compliance Report – 2023, draw on results of a 2023 survey of more than 1,100 global decision-makers that sought to examine how financial institutions are navigating the expenses and challenges ties to evolving financial crime compliance requirements.

Results of the study found that the shift to digital banking has amplified institutions’ exposure to sophisticated financial crimes, especially via digital payments, cryptocurrencies, and artificial intelligence (AI) technologies, indicating that while digitalization has been a catalyst for progress, it has also given rise to more sophisticated crime tactics.

A striking number of respondents reported a surge in financial crimes facilitated by digital payments (59%), cryptocurrencies (58%) and AI technologies (56%). These attacks exploit vulnerabilities in digital payment systems by using sophisticated techniques to impersonate users, conduct phishing scams, or manipulate transactions.

In North America and Latin America, financial institutions reported a strong uptake in financial crime involving cryptocurrencies, while in Asia-Pacific (APAC), institutions reported being particularly vulnerable to financial crime involving digital payments (65%) and AI (60%), stating that they’ve observed a stronger uptake than any other region.

Increased exposure to criminal activities, Source: True Cost of Financial Crime Compliance Study 2023, LexisNexis Risk Solutions

Financial institutions embrace data analytics

The ever-evolving technological and economic environment has transformed the compliance landscape for financial institutions and pushed costs further up. 98% of the institutions polled this year by LexisNexis Risk Solutions reported an increase in financial crime compliance spending, which reached a total annual cost of US$206 billion, the study found.

The total cost of financial crime compliance, Source: True Cost of Financial Crime Compliance Study 2023, LexisNexis Risk Solutions

The increased compliance burden is prompting financial institutions to reevaluate their processes and seek improvements to data quality, know your customer (KYC), internal compliance, anti-money laundering (AML), and transaction monitoring to improve efficiency.

Of the financial institutions surveyed, 83% of respondents revealed that they are prioritizing harnessing enriched payment data to fight complex financial crimes. These institutions are looking to leverage these data to enable faster processing times, fewer payment rejections, and better risk management, the study found. Enriched payment data also allows institutions to improve the customer experience while reducing the risk of non-compliance and exposure to financial crime.

Results also show that institutions are working on future-proofing themselves against unpredictable macroeconomic event. This is evidenced by the large proportion of respondents who indicated seeking to increase their operational resilience (80%) as well as those focusing on optimizing their compliance costs (80%) to improve profitability.

Priority initiatives for financial institutions over the next 12 months, Source: True Cost of Financial Crime Compliance Study 2023, LexisNexis Risk Solutions

The rise of digital payments

Over the past two decades, the payment services industry has seen significant growth. In 2022, global payments revenues reached an all-time high of US$2.2 trillion, up 11% from the previous year, data from McKinsey’s 2023 Global Payments Report show.

This growth has been partly driven by increased adoption of payment services by individuals and e-commerce merchants, with electronic payments and online commerce, in particular, expanding rapidly.

In emerging markets, where digital payment usage has picked up at a fast pace, fraud attempts leveraging new payment methods are growing in prevalence. A 2022 study by LexisNexis Risk Solutions found that digital wallet payment scams, QR code fraud and crypto fraud witnessed among the strongest uptakes that year, with about 40% of respondents indicating having detected more of these fraud types over the prior 12 months.

80% of respondents across the emerging markets studied expect that fraud risk will increase over the next 24 months as businesses continue to embrace more payment options and as real-time payment become the norm.

Types of online fraud that witnessed the strongest uptake in 2022, Source: Digital Payment Fraud in High Growth Markets Study, LexisNexis Risk Solutions, Oct 2022

Digital payments have risen to prominence in APAC. Across the region, the use of digital wallets more than doubled their share of e-commerce transaction value in the last five years, according to a 2023 report by fintech solution provider FIS. Similarly, digital wallets’ share of payment transaction value at point-of-sale (POS) grew sixfold during the period.

While digital wallets are already the leading payment method in APAC for both e-commerce purchases and POS transactions, the firm projects that by 2026 their share of APAC transaction value will continue to soar, reaching 59% for POS transactions and 73% for e-commerce.