BaaS focus is on managing financial crime risks

If you follow the news of the current year, Banking-as-a-Service (BaaS) has been criticized.

The situation surrounding the Synapse bankruptcy And the limited ripple effect it had on some of its partner banks and sponsor banks the entire business model under a bright light. At this point in the year, it is safe to say that what could have become a larger crisis is under control.

The focus is now back on BaaS as an asset for banks and FinTechs, providing a technological infrastructure that promotes growth in an increasingly digital economy.

However, one must be aware of the risks that these partnerships entail.

“Bank-FinTech arrangements can offer benefits, but the experience of regulators has highlighted a number of potential risks of these bank-FinTech arrangements,” says a Information request from the Office of the Comptroller of the Currency (OCC), the The US Federal Reserve and the Federal Deposit Insurance Corp. The Federal Drug Administration (FDIC) was established in 1998. It has an annual tax refund of 1.0

The document requires information on “effective risk management practices in relation to bank-FinTech arrangements and the impact of such arrangements, including whether improvements to existing supervisory policies be helpful in coping risks associated with these agreements.”

But what are these risks and what are their possible consequences? How can all Stakeholders in the How do banking and BaaS partnerships manage financial crime risks?

The topic was the important The topic was addressed in a panel discussion organized by PYMNTS with two experts: Alena RobertsonBaaS Manager at New York Citys Locust Banka customer-focused digital bank for small businesses, startups And investors; And Chris CaruanaVice President of Strategy at hawka provider of artificial intelligence-enabled anti-money laundering (AML) and fraud detection technology.

Both experts discussed how banks can implement appropriate practices for third-party lifecycle management with effectiveadvanced technology to combat financial crime.

The Fast Track

The appeal of BaaS partnerships is clearThey offer banks a fast track to technological innovation and market expansion. But as Caruana pointed out, these relationships are not without pitfalls.

“There has always been this regulatory structure and obligation for regulated entities to ensure that they have appropriate third-party risk management processes in place,” he said.

However, things get complicated when it comes to BaaS providers, especially when they may not be regulated institutions themselves.

Robertson agreed with this opinion and stressed that “there are different aspects of risk all throughout the entire partnership.”

These risks range from inadequate Know your customer (KYC) procedures to potential gaps in AML protocolsshe said. The challenge is to ensure compliance with legal regulations while taking advantage of innovative opportunities. the BaaS providers bring.

There is a lot at stake for banks entering into BaaS relationships. Consent orders from regulators such as the OCC, the Federal Reserve And The FDIC has highlighted the potential consequences of poorly managed partnerships.

“There are no mystical regulations from regulators about what work be done,” said Caruana. “We tend to see the same issues over and over again.”

These issues often revolve around a lack of supervision and unclear delineation of responsibilities. Banks that fail to properly manage their BaaS relationships could face regulatory measures and fines And Reputational damage. The message from regulators is clear: innovation is welcome, but not at the expense of sound risk management.

The AI ​​advantage

Although the risks are considerable, they are not insurmountable. Robertson and Caruana stressed the role this technologyparticularly AI, can play a role in managing the risk of financial crime in BaaS partnerships.

“Technology is only as good a tool as you make it,” Robertson said.

She suggested using the technology as a “junior analyst” to do the groundwork, whether for quality control or automating legal obligations.

Caruana added that AI “can improve your ability to manage and monitor some of these risks.”

Hawk’s AI-powered solutions can, for example, help banks monitor transactions in Real timeto identify potential problems before they escalate.

With the development of the BaaS landscape to Strategies for managing the associated risks. One A new trend is the standardization of risk assessment processes for these partnershipssaid Caruana.

“We are now joining forces,” he said. “We are getting closer to our goal. InfoSecurity teams.”

This collaborative approach united traditionally isolated departments – Compliance, IT And Risk management – ​​to create a more holistic view of potential threats.

Robertson added that there is a growing awareness of the need to support the “innovation economy” while doing it right. The includes the use of new technologies such as AIbut also Ensuring that all stakeholders – banks, BaaS providers And Regulatory authorities – have a uniform approach to risk management.

When it comes to When selecting a technology for financial crime risk management, both experts emphasized the importance of tailoring it to a bank's specific needs and risk appetite.

“I would suggest for every bank To “Look at the different providers and find what works best for you,” Robertson said.

She warned against a one-size-fits-all approach, pointing out that what works for one institution may not be suitable for another.

According to Robertson and Caruana, the following key factors should be considered when evaluating technologies:

• Alignment with risk appetite and business model

“Think about your risk appetite, think to what you impose on yourself,” Robertson said.

The technology should adapt to the bank’s specific risk tolerance and the particular risks associated with its BaaS partnerships.

• Integration and scalability

The technology chosen should integrate seamlessly into existing systems and be scalable to accommodate growth in digital banking and BaaS partnerships.

• Customizability and real-time features

Robertson said the ability to customize rules and monitor transactions Real time is critical to managing the specific risks associated with each bank’s individual BaaS relationships.

The way forward: balancing innovation and risk

As the digital transformation of banking progresses, partnerships between traditional banks and BaaS providers are likely even more often. The key to success in this new landscape lies in the right balance between Innovation and risk management.

“People want to support the innovation economy, so let’s do it, but let’s do it right,” Robertson said.

The means the use of modern technologies such as AI, but also Maintaining a strong Basis of the principles of risk management.

Caruana added one final warning: “Technology is the front of the house, the sexy part of the equation, right? But the good old-fashioned way of rolling up your sleeves, Only have some a kind Support in the back of the house is also crucial.”

The future of banking may be digital, but the fundamentals of sound risk management remain the same important as ever. Through innovation and vigilance, banks can realize the full potential of BaaS partnerships while keeping financial crime at bay.