Why Banking-as-a-Service Sponsor Banks Are Unifying Fraud and AML

The financial technology sector is expanding rapidly, and banking-as-a-service (BaaS) has emerged as a transformative model for delivering financial products. By enabling companies to offer banking services without the traditional complexities of running a financial institution, BaaS is reshaping the industry. 

Sponsor banks play a critical role in this ecosystem as BaaS providers, offering the infrastructure, compliance, and regulatory oversight required for fintech companies to operate. 

However, as financial crimes grow more sophisticated, BaaS banks must adopt advanced strategies to protect themselves and their fintech partners. One such strategy is a comprehensive Financial Crimes Risk Management and Anti-Money Laundering (FRAML) approach, supported by innovative solutions such as those offered by DataVisor.

In this blog post, we’ll explore how FRAML can help sponsor banks and fintechs strengthen compliance, mitigate risks, and foster innovation in today’s evolving financial landscape.

What Is Banking as a Service?

Banking as a Service (BaaS) is a model that enables non-bank businesses, such as fintechs, e-commerce platforms, or retailers, to offer banking products and services directly to their customers by leveraging the infrastructure of licensed financial institutions. 

Through APIs and other integration technologies, BaaS allows companies to embed essential banking functions – payments, loans, or account management, for example – into their own platforms, creating a seamless customer experience. The BaaS model eliminates the complexities and regulatory challenges of operating as a partner bank while giving businesses the flexibility to tailor financial solutions to their specific audience. 

For sponsor banks, BaaS represents an opportunity to innovate and expand their reach; for end-users, it provides easy access to financial services in a way that is more integrated with their daily lives.

While BaaS offers unparalleled opportunities for businesses to embed financial services into their platforms and create seamless customer experiences, these opportunities come with significant responsibilities, particularly for sponsor banks. 

Navigating Complex Regulatory Expectations

As the foundational entities enabling BaaS, sponsor banks must navigate a labyrinth of regulatory requirements, ensuring compliance not only for their own operations but also for their fintech partners. This intersection of innovation and accountability highlights the need for robust frameworks to manage financial crime risks while adhering to anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. 

Sponsor banks must prioritize compliance to maintain their reputation and avoid the severe consequences of non-compliance, such as severe enforcement actions or sanctions. Regulatory bodies often issue consent orders or even cease and desist orders to institutions failing to meet compliance standards, which can disrupt operations and tarnish partnerships with fintechs. A robust risk assessment framework is essential to identify vulnerabilities and address potential compliance gaps proactively. 

Enter unified fraud & AML (FRAML) – a comprehensive strategy that equips sponsor banks to meet these challenges head-on, balancing the promise of BaaS with the demands of a complex regulatory landscape. A FRAML approach integrates financial crime risk management data with fraud data, creating a unified framework to address various types of financial crime. 

DataVisor’s solutions enhance this framework by offering advanced tools that help sponsor banks efficiently navigate the regulatory landscape. Our AI-driven platform identifies vulnerabilities in real-time, helping organizations comply with regulations and stay ahead of fraud and other financial crimes. Given the rising expectations of regulatory bodies for sponsor banks to have robust oversight of their fintech partnerships, these capabilities are crucial.

How DataVisor Provides Advanced Risk Management

In the BaaS model, sponsor banks must not only ensure robust fraud risk management within their operations but also extend these practices across their fintech ecosystem. DataVisor’s advanced fraud detection and risk management solutions are purpose-built to address these challenges.

DataVisor leverages machine learning and big data analytics to detect fraud and other financial crimes in real time. Unlike traditional rule-based systems, DataVisor’s technology can identify anomalies and patterns indicative of fraud, even before they manifest as known threats. This proactive approach empowers sponsor banks to mitigate risks across their fintech partnerships, reducing their exposure to costly compliance breaches or fraudulent activity.

For example, financial institutions using DataVisor have reported a 30% reduction in false positives and a significant improvement in their ability to detect emerging fraud schemes. These capabilities enable sponsor banks to allocate resources more effectively, focusing on high-risk areas while maintaining seamless operations.

Benefits of Implementing FRAML with DataVisor

FRAML strategies offer a holistic approach to combating financial crime while maintaining regulatory compliance. By uniting these disciplines, organizations can streamline operations, improve risk detection, and stay ahead of increasingly sophisticated threats – all while building trust with regulators, partners, and customers.

Let’s take a closer look at the benefits of taking a proactive FRAML approach.

1. Enhance Customer Due Diligence

Effective customer due diligence (CDD) and know your customer (KYC) processes during onboarding are necessary for AML compliance, but as financial criminals develop more sophisticated tactics, traditional practices may no longer suffice. DataVisor enhances these processes with tools that analyze vast datasets, including transaction histories and customer behavior, to provide partner banks with a comprehensive risk profile for each customer.

For example, say a fintech company offers peer-to-peer lending services with their bank partners. Traditional CDD processes might involve basic identity verification, such as checking government-issued IDs and cross-referencing customer information. However, financial criminals using stolen identities or synthetic IDs can circumvent these safeguards.

With DataVisor, the sponsor bank can analyze large volumes of data, such as transaction patterns, login behaviors, and geolocation inconsistencies, to build a detailed risk profile for each customer. For example, if a customer claims to reside in one country but consistently logs in from another location known for high financial crime activity, this would trigger a red flag. Similarly, using automation, unusual transaction behaviors such as rapid, high-value peer-to-peer transfers shortly after bank account creation can be identified and flagged for further investigation.

Using DataVisor’s advanced solutions, sponsor banks can identify high-risk accounts before they cause harm, ensuring compliance with AML requirements. This proactive approach helps to improve security and build trust with customers and regulators.

Continuous monitoring is another critical feature of DataVisor’s FRAML solutions. Instead of periodic checks, sponsor banks can conduct ongoing assessments of customer activity, to identify and address potential risks early. This capability is particularly valuable in today’s fast-paced financial environment, where delays in detecting suspicious activity can lead to significant losses or regulatory scrutiny.

2. Adapt to Emerging Threats

Financial criminals never sit on their laurels; they develop new ways to attack organizations all the time, leveraging sophisticated techniques and AI to do their dirty work. Sponsor banks must stay ahead of these threats to protect their operations and fintech partnerships from synthetic identity fraud, account takeovers and other types of fraud – some that may not even exist yet.

DataVisor’s AI-powered platform is designed to adapt to the ever-changing threat landscape. Its machine learning algorithms continuously evolve, learning from new data and patterns to identify previously unknown risks. This adaptability ensures that sponsor banks are prepared to counter new and emerging threats, and maintain a proactive stance in their risk management practices. DataVisor’s platform can monitor transactions in real time, flagging suspicious activity and providing actionable insights to mitigate risks before they escalate.

3. Strengthen Fintech Partner Relationships

A robust FRAML approach not only benefits sponsor banks but also strengthens their relationships with fintech partners. By providing advanced risk management tools and insights, sponsor banks can help fintechs enhance their fraud prevention and AML practices. This collaboration fosters transparency and trust, ensuring both parties are aligned in their commitment to combating financial crimes.

For fintechs, access to a sponsor bank’s FRAML framework and DataVisor’s technology can be a game-changer. It allows them to scale their operations while maintaining compliance, avoiding the pitfalls that can come with rapid growth in a highly regulated industry. Sponsor banks, in turn, benefit from a stronger, more secure partnership ecosystem.

4. Demonstrate Commitment to Compliance and Innovation

In the competitive financial services industry, reputation and trust are paramount. Sponsor banks must demonstrate their commitment to compliance and innovation to maintain the confidence of regulators, partners, and customers. Adopting a FRAML approach with DataVisor achieves this by showcasing a proactive stance in addressing financial crimes.

DataVisor’s state-of-the-art technology reflects a forward-thinking approach to risk management, enabling sponsor banks to stay ahead of regulatory requirements while fostering innovation. This dual focus on compliance and growth positions sponsor banks as industry leaders, enhancing their credibility and competitive edge.

Take a Proactive Approach to FRAML, with DataVisor

As the BaaS model continues to reshape financial services, sponsor bank providers will continue to face increasing pressure to manage risks and ensure compliance. FRAML offers a strategic advantage in this environment. By integrating financial crime risk management with AML practices leveraging DataVisor’s advanced solutions, sponsor banks can protect their own operations as well as their fintech partners’, and create a secure and compliant financial ecosystem that customers can trust.

DataVisor solutions empower sponsor banks to navigate the complexities of the financial crime landscape with confidence, while at the same time supporting growth and innovation. Learn more about our platform, or request a demo today.

About Brenda Banks

Brenda is VP of BaaS & BSA at DataVisor. She has more than a decade of experience in digital identity verification, compliance, disputes, fraud, sanctions screening, and crucially, sponsor bank program builds. This experience fuels her passion to help sponsor banks and their fintech partners gain compliance in fraud prevention.