Many payment providers are seeking possible leading indicators for financial merchant risk. This is challenging, as relevant financial data is generally not readily available for smaller and medium sized companies. Increasingly, however, social media, consumer complaints platforms, and other news sources may act as indicators of whether all is well with this merchant, particularly when these show sharp quantitative changes.
In 1546, the English writer John Heywood introduced the phrase “out of sight, out of mind.” In the context of doing business in a globalized world, organizations can’t let anything be out of sight. Otherwise, they would face increased financial, compliance, and reputational risk.
However, for payment service providers with portfolios of thousands of merchants, making millions of transactions per day, ensuring continuous monitoring is complicated, due to the inability of manual research to timely pick up signals about relevant micro-level activity and suspicious behavior.
Automated adverse news screening is the latest addition to the set of tools payment service providers can use to manage financial crime risk and effectively address standard procedures like entity monitoring, counterparty reviews, and more.
In 2020, over $32b was lost due to payment fraud. To bring that number down, authorities are introducing stricter regulations. Starting this year, payment service providers within the EU will have to comply with the Sixth Money Laundering Directive (6AMLD). The extended scope of the regulation requires from organizations to ensure that employees at all levels are aware of their responsibilities towards the transaction monitoring process. Should an offense take place, all persons responsible for it will also be legally culpable.
From now on, regulators will not only tolerate but may also request from organizations to adopt adverse media screening controlling functions to identify breaking news stories. Payment service providers with extensive global merchant portfolios would have to apply this control among all countries and languages relevant to their supply chain.
To master the process, McKinsey advises organizations to choose an NLP-powered solution with extensive coverage that timely picks up signals from diverse sources and systemizes data by country, language, and customer.
Regulatory requirements aside, the inability or hesitation in tracking negative news can also result in hefty financial losses.
“Bankruptcy risk has by far the most direct impact. With travel agencies, this can have an immediate snowballing effect. If a client goes out of business, you will start receiving the chargebacks. While they will be piling up as a result of the losses, the deposit funds will quickly be depleted,” shares Erik Stelwagen, Senior Investigation Manager at Worldline, Europe’s largest payment service provider. “Thanks to Owlin, we have a good control of these processes and the ability to intervene in time,” he adds.
Even if adverse news monitoring helps a company avoid just a single loss per year, it will generate a substantial ROI and prove invaluable.
“While in the final stages with a leading client, Owlin alerted us about news of financial difficulties that would have likely resulted in chargebacks. It is difficult to estimate how many losses we would have potentially incurred,” points out Mr. Stelwagen.
Loss estimation is always better to remain on paper. To get a sense of the potential implications, just look at Thomas Cook’s bankruptcy and the consequences that rippled through its supply chain. Many payment service providers were late to mitigate their financial exposure and suffered millions of losses due to chargebacks.
Recently, D-Reizen went bankrupt. Its director projects the default to affect the whole Dutch travel industry chain.
According to PwC, a dollar invested in fraud prevention today is worth twice as much when a fraud hits.
“We had a risk exposure on a merchant, but thanks to Owlin, we found out there were tons of user complaints ongoing. We took immediate action and recovered a part of the loss which we would have otherwise faced.”
- Barry Landegent, Head of Merchant Potential Liability Risk at Adyen
For payment service providers, automated adverse news monitoring also comes in handy for mitigating reputational risk. While financial crimes happen in the shadows, their effect is public. Considering that markets have a long memory, any step in the wrong direction that gets media exposure can negatively affect long-term growth opportunities and client retention.
Adverse news screening, in the way it had been applied to date, has its flaws. So far, payment service providers’ research teams handled the process manually by looking for negative news on Google. Considering that due diligence should be ensured when onboarding new clients and on an ongoing basis, this process becomes exceptionally exhausting for companies with extensive client portfolios. Furthermore, manual research is prone to missing critical pieces of information. And with 6AMLD’s 22 additional offenses and all the permutations between them, the task becomes nearly impossible if not automated.
Performing in-depth analysis with Owlin means signals are delivered straight into the dashboard, solving research teams' problem of navigating endless news streams. The real-time ranking and prioritization capabilities allow fraud analysts and investigative departments to identify the outliers and bad actors within their portfolios timely.
“With Owlin, adverse news monitoring takes no more than an hour per day for the whole portfolio. If we had to do this manually, we would need a whole day and still not be able to cover all clients.”
- Erik Stelwagen, Senior Investigation Manager at Worldline
The clock for the current model has run out. Payment service providers can no longer afford navigating a niche of increased financial, compliance, and reputational risks relying on legacy manual mechanisms. Instead, they should enhance their adverse news monitoring procedures with the proper automation tools.
With Owlin’s early-warning capabilities on their side, organizations ensure they are in a pole position for detecting the “unknown knows” around their merchant portfolios and future-proof their compliance and risk-management departments.
The Q2-2021 issue of the Payments and FinTech magazine is here! This edition provides you with insights on the hottest trends and developments in 2021 for FinTech. You can read about: Open Banking by Tink, Adverse News Monitoring by Owlin, the FinTech Outlook by G+D, SaaS by Mambu, Card Issuing by Enfuce, our hottest FinTech jobs, and don’t miss a special announcement about Season 2 of the Voices In Payments Podcast Series!
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