Transaction monitoring is mandatory for financial institutions, from retail banks to challenger banks. It’s also costly, resource-intensive, and prone to triggering false positives. Let’s see how to deploy better tools today.
What Is Transaction Monitoring Software?
Transaction monitoring software helps financial institutions automatically spot suspicious transactions, such as high-value cash deposits or unusual account activity. It is a key part of the AML – anti-money laundering – process, which is heavily regulated by government bodies.
How Does Transaction Monitoring Software Work?
Transaction monitoring software monitors every data point related to a transaction and feeds that data through risk rules.
The system then automatically flags or blocks suspicious actions such as:
- Unusual transactions or account activity.
- Transactions over a certain value.
- Domestic or international transfers over a certain value.
- Large cash deposits or withdrawals (also known as transaction velocity).
- Unknown source of inbound and outbound funds.
The data for these flagged transactions is usually compiled in a special file called a SAR.
Why Is Transaction Monitoring Software Important?
Financial institutions must comply with anti-money laundering regulations (AML). A key part of meeting these guidelines is to monitor and block suspicious transactions with transaction monitoring tools. Transaction monitoring software can help you do the following:
- avoid AML fines
- give confidence to regulators and banking partners
- reduce the operational cost of manual reviews
- manage customer accounts with a risk-based approach
The latter is particularly important to reduce friction and to balance security and ease of use. You can allow low-risk customers to perform more actions, and keep an eye on medium-risk to high-risk users.
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What Is a SAR (Suspicious Activity Report)?
When transaction monitoring software flags suspicious data, the information is compiled in a report called a SAR – or Suspicious Activity Report. It is formatted in a specific way so that financial analysts and regulators may review it.
While SARs are useful in the context of AML, authorities also rely on these reports for taxation or criminal investigation purposes.
The easiest way to submit a SAR is via a free online system – via the BSA E-Filing System in the US or the NCA website in the UK, for example. Some transaction monitoring software will also include a feature to automatically file them for you.
The Challenges of Deploying Transaction Monitoring Software
Transaction monitoring software is a legal requirement, but it tends to divide companies and risk management teams when it comes to its effectiveness. This is partly due to the following reasons:
- Added expense: Transaction monitoring tools can be either deployed on-premise or be outsourced. Either way, it is expensive to integrate, monitor and update.
- Resource-intensive: Software helps you process a lot more data as you scale, but you still need a fully-staffed risk management team to manually verify alerts and to produce reports.
- Time-consuming: The large number of alerts to monitor can require a tremendous amount of time and effort from the compliance department.
How to Deploy Better Transaction Monitoring Software
Transaction monitoring software can be part of your AML solution, a fully automated on-premise installation, or an outsourced third-party solution you deploy as part of a multi-layer approach to risk management.
Regardless of your approach, here are a few tips on the best practices.
Combine Transaction and Customer Monitoring
Transaction monitoring should look at the inbound and outbound data, but also at who is sending or receiving the money. That is to say, there is an overlap with customer due diligence (CDD) and know your customer (KYC).
You must be able to accurately verify identities and combine that information as part of your AML strategy. The more accurate identity verification is, the better you can spot discrepancies in account activity and, ultimately, improve your compliance at all levels.
Compare User Account Activities
Customer behavior varies a great deal depending on the kind of financial services you provide. Neobanks and challenger banks, for instance, need to pay extra attention to fraudsters, who use their accounts as “drops” to receive illegal money.
What you need to do for maximum efficiency is to build a good understanding of what your typical user behavior looks like by comparing data points from every user account.
The key is to understand your company’s risk prioritization and grouping. Ensure your transaction monitoring software allows you to create custom rules and to set your own risk labels. You should also be able to set up priority levels for your alerts based on how much risk you could be dealing with.
This is not just an additional feature, by the way. Experts and authorities – the Financial Action Task Force, for instance – recommend you adjust your AML response based on the risks your company faces.
Monitor Transaction Velocity
Your transaction monitoring software should include the option to set velocity rules. A velocity rule is designed to identify suspicious activity based on a rapid movement of funds. However, your limits need to take into account outliers or regular large deposits such as a paycheck.
You should also be able to look at total transaction volume in order to assess what is acceptable versus risky velocity.
International Bank Account Numbers, or IBANs, used to be a reliable way to link identities to banks. You can still go to a website like IBAN.com to check, validate and find bank information based on one of these numbers.
However, in the age of neobanks and challenger banks, IBAN monitoring may actually lead to false positives. This is because banks such as Wise, Revolut, or Monzo may rely on sponsor banks to issue their user accounts’ IBANs. It’s worth taking that discrepancy into consideration, especially as you automate monitoring with rules pertaining to geolocation and sanctioned countries.
Log Data for Retroactive Analysis
Documentation and record-keeping are imperative, and not just for real-time screening and reporting. Your transaction monitoring system should also give you access to past data, to reassess previous transactions based on new insight and information.
Ultimately, post-analysis can also be useful to feed data to an AI-driven system, which could update its algorithms in order to suggest more effective risk rules when assessing future transactions.
What’s the Difference Between Transaction Monitoring and AML Software?
Transaction monitoring is one key component of the AML process. However, there are other important features you will find in AML software, such as:
- KYC checks: Know your customer is a process designed to identify users with confidence.
- Holding periods: Involves holding deposits in an account for a designated number of days before they can be withdrawn.
- PEP, sanction lists, SIP/SIE checks: Checking users’ names against public lists of Politically Exposed Persons, sanctioned individuals, or Special Interest Persons/Entities.
Interested in a full AML solution? Check out our post on the best AML software.
How SEON Does Transaction Monitoring
At SEON, we’ve put together all the fraud prevention tools you need for identity verification, transaction monitoring, and user authentication.
Our powerful system focuses on helping you understand user behavior via customizable rules. You have complete control over customization to adapt the system to your risk appetite, whether it’s to create new rules or accept suggestions from our machine learning engine. See below an example of us in action:
Our goal? To give you access to an extra layer of hidden data to complete your AML compliance efforts, with complete control over the pricing.
Frequently Asked Questions
In banking, transaction monitoring is a key part of the AML (anti-money laundering) process. It is a legal requirement that forces financial institutions to monitor the flow of money.
Transaction monitoring helps block money-laundering attempts and other illegal activities. A financial institution that fails to meet AML requirements will have to pay hefty fines.
Companies can monitor their users’ transactions manually or build in-house tools. However, a growing number of companies choose transaction monitoring software. These third-party tools integrate with your system and monitor withdrawals, transactions and payments, including real-time alerts if they go over certain AML thresholds.
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