Transaction Monitoring in Banking: How It’s Used to Fight Fraud

Transaction monitoring is a key part of the AML process.

But beyond compliance, it can also help weed out fraudsters who have taken control of bank and neobank accounts and are looking to defraud you and your customers.

Why Is Transaction Monitoring Important in Banking?

Transaction monitoring is one of the best tools banks have to remain compliant under AML/CFT regulations. Anti-Money Laundering and Combating the Financing of Terrorism are strictly regulated processes, and banks are under heavy scrutiny from government bodies.

To show they are cooperating to prevent financial crime, they must monitor:

• the volume and frequency of customer transactions
• the identities of the recipients and senders
• the geographical origins of inbound and outbound transactions
• and more…

More importantly, failing to monitor transactions properly will put banks at the mercy of regulators who will then:

• audit the banks vigorously
• issue punishing fines if the AML process isn’t respected
• in extreme cases of repeated offenses, even pull back bank licenses

In turn, these fines will damage the bank’s reputation and hurt its bottom line, not to mention waste a tremendous amount of time and resources for the compliance team, executive team, and sometimes stakeholders. 

How to Deploy Transaction Monitoring in Banking

There are two ways for banks of all types to monitor transactions:

• Proactively: You will need to set up rules to feed the transaction data through, which will then trigger an alert to let you know whether something is risky or not.
  
• Reactively: By using filters and data science techniques on transaction reports, you can identify risky transactions that may have escaped your attention. 

Both techniques require the deployment of data monitoring and logging technology. Data scientists, compliance officers, or risk managers can then either manually sift through the data or, more often, rely on third-party transaction monitoring software to spot risk.

When it comes to transaction monitoring rules, these may range from the simple (static if/then logic) to the sophisticated (how many times something happened, even while another thing was also happening).

The latter is often referred to as velocity rules, or velocity checks, which look at factors happening within a certain timeframe. 

This brings us to an important point about transaction monitoring: the kinds of alerts it might trigger. While some banks will want to instantly block a transaction, others with a greater risk appetite will simply mark it as suspicious and allow it to go through. 

Some banks and financial institutions will even automate the SAR process, to file Suspicious Activity Reports as soon as an alert goes off. 

Last but not least, many compliance officers struggle to combine transaction monitoring with other compliance tools, such as KYC software. While there are overlaps in the KYC and AML process, the fragmentation of specialist tools can make it a challenge to avoid data silos and information black holes – which may backfire when it comes to compliance audits.

3 Key Transaction Monitoring Rules for Banks

Let’s now examine three concrete examples of risk rules your bank or neobank could deploy today with SEON to monitor transactions.

#1: Customer Transaction Over the AML Threshold

The AML thresholds, when you have to legally monitor a transaction, vary from one country to the next. This is a key part of the anti-money laundering process and, luckily, an extremely easy rule to set up.

In the dashboard screenshot below, you can clearly see how we have set the threshold at $3000. The transaction data is sent via API and you receive the results in real-time, which allows you to automatically send the transaction for review.

Of course, you can also automatically decline the transaction (or even allow it and choose to increase the risk score).

This is what the rule looks like when it’s been triggered in your dashboard – look at the last row on the right hand side:

#2: Customer Increased Transactions by a Suspicious Amount 

One of the most challenging processes for banking compliance is understanding user behavior. Short of actively monitoring a customer’s every action on your site, your next bet is to deploy velocity rules.

In this example, we have set up an AML rule which monitors the amount sent in one transaction and compares it to the customer’s historical volume.

As you can see, we’re looking to flag an increase of 200% or more within a 24-hour time period. 

Note that the same type of rule can also be deployed to monitor how regularly a customer deposits or withdraws money.

Banking compliance officers will be well aware that the most sophisticated money launderers know how to hide under the guise of good customer behavior. When it comes to money laundering, spotting regularity can be just as valuable as spotting irregularities. 

#3 New Account Receiving a High Number of Deposits 

Speaking of irregularities, let’s consider what can be suspicious for brand new accounts.

Below, we have created a velocity rule that adds +1 to the risk score whenever an account is:

• less than 24 hours old and
• receives more than 10 deposits and
• these are by a credit or debit card and
• these all take place within the last hour

The way this is defined on SEON’s platform is through easy to explain and adjust rules.

Here, for example, you can add more requirements, or remove some (e.g. apply the rule to all accounts, not just new ones, or to accounts less than a week old). You just need to edit the corresponding part of the rule.

In this case, you shouldn’t block the customer, just add slightly to their risk score.

After all, it could be legitimate use, whereby they were waiting to open an account to receive funds from several sources. But it should nonetheless raise some red flags. It is equally easy to set this rule to modify the score by more than +1, if you wish, or even always send such an instance for manual review. 

Looking at new customer accounts is a great way to weed out potential money laundering risks right after they successfully pass your initial KYC and AML onboarding checks.

How SEON Helps Banks with Transaction Monitoring and Fraud

As a full end-to-end fraud prevention company, SEON strives to help banks, neobanks and fintechs of all types get as much data as possible to remain compliant, avoid fraud, and onboard more customers with less risk.

It’s why banking leaders such as Wise and Revolut have chosen us, to help with:

• real-time data enrichment for KYC processes
• dynamic fraud scoring to mitigate risk
• granular transaction monitoring and streamlining of AML
• full reporting and logging options to improve compliance
• complete customizability, easily flagging anything deemed suspicious by your organization

At the same time, SEON’s APIs also work to reduce fraud by protecting customer accounts, fighting loan fraud, and generally getting better insights into your risk challenges.

Related Articles for Transaction Monitoring

• Transaction Monitoring Software: How It Works and Tips on Deploying It
• What Is AML Transaction Monitoring & How to Set It Up

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