The use of mobile wallets, blockchain, and open banking APIs is driving the change in payment technology faster. Nonetheless, financial services, healthcare, and energy industries have peculiar compliance burdens regarding the introduction of new payment types.
The following article provides the primary compliance challenges associated with the innovative development of payment technology in sectors that are monitored on a regulatory level. The area is involved in data protection, cybersecurity, anti-money laundering (AML), identity verification, compliance costs, and regulatory approval. The post is for individuals in the technology, business, and startup sectors who should know the basic rules of payment systems.
Key Compliance Challenges In Payment Technology
Businesses that operate in regulated markets (like those that need a casino merchant account) should make sure that the innovative ideas they implement do not come at the cost of fighting fraud, data breaches, consumer protection, and financial crimes. Important compliance issues are:
Data Privacy And Security
This requires utmost data privacy and security because sensitive user data is being handled. All of this information is important: information on data collection, correct consents, data security, and prevention of breaches.
As an illustration, the GDPR requirement introduced by the EU requires rigorous measures to protect personal information. Failure to comply with the requirements may attract fines worth up to 4% of a company’s annual worldwide revenue.
Fraud Prevention And Identity Verification
These organizations have to identify their users and verify the legality of transactions to avoid fraud and money laundering. To meet KYC and AML regulations, firms must conduct adequate client due diligence.
As an illustration, the AML regulations oblige companies to screen transactions for suspicious activity, file reports on payments over $10,000, and verify the origin of funds. Compliance failure may lead to huge fines and regulators blacklisting.
Costs Of Compliance Technology
The reinforcement of compliance with AI, blockchain, biometrics, or cybersecurity is extremely costly. The cost of compliance with legal and compliance regulations is usually an obstacle that small fintechs and startups cannot meet.
Lining Up The Regulatory Approvals
The new services or products require a long time to obtain regulatory acceptance. In the United States, it took over four years before the SEC could grant an ETF focusing on Bitcoin clearance because of compliance issues. Similarly, the regulators put the Libra cryptocurrency project of Facebook on hold because of concerns relating to privacy, money laundering, and monetary sovereignty.
In most areas, most players find it hard to learn the rules about payments, banking, privacy, cybersecurity, and financial crimes. Such regulatory uncertainty creates huge gaps or impediments in the deployment of new payment technology.
Particular Compliance Challenges In Developing Payments Technologies
Beyond the basic issues, there are specialist technologies that present unique compliance challenges to regulated businesses: bitcoin, mobile payments, open banking APIs, and AI.
Cryptocurrency Compliance
Due to the increasing popularity of Bitcoin in many countries, regulators are rushing to deal with the associated risks.
- Anti-money laundering: The cross-border and anonymous nature of cryptocurrency transactions makes a hard to trace illegal fund flow.
- Volatility risk: highly volatile cryptocurrency values may lead to substantial losses to users and institutions.
- Reversibility of transactions: In case of theft or fraudulent use of cryptocurrency, there is almost no chance of tracking it down and recovering it.
- Unclear legal position: In numerous countries, there are still no crypto-specific regulations that would determine how taxation, accounting, payment permission, etc., are handled. This is getting better with countries like India set to introduce bills on cryptocurrency laws shortly.
In response, governments and central banks are changing the laws to digital currencies and crypto, including KYC, AML, investor eligibility, exchange licensing, and disclosures. The pressure on compliance is growing among institutions that handle cryptocurrency.
Compliance Mobile Payments
The number of payments carried out using mobile phones or mobile devices instead of cards and cash is on the rise across the world. New risks are, however, presented by mobility:
- Data security: The personal information in mobile devices is susceptible to hackers, viruses, and unlawful intrusion.
- Identity theft: The thieves may use the information of the users to make quick payments remotely.
- Tracking of the transactions: Certain mobile payment methods enable a less transparent relationship between payer and payee.
- Insecure authentication: Logins and payment authorizations could be secured with weak authentication when there are no physical cards or face-to-face monitoring.
Consequently, mobile payments necessitate a reliable solution to prevent cybercrime, fraud as well and money laundering.
APIs And Open Banking
Open banking involves the inclusion of financial institutions sharing data of their clients to third-party applications and services, only under the consent of the user. Consequently, the businesses can create novel payment, investment, loan as well and insurance products.
Regulators are, however, encouraging banks to employ high-level security, privacy, and reliable mechanisms in transferring data. The period of customer contracts should be restricted and cancellable. Banks need to do due diligence and oversight of all application providers who access open APIs.
AI Compliance
AI is useful in credit underwriting, processing insurance claims, financial consulting, transaction analysis, and regulatory compliance.
However, AI systems create regulatory problems:
- Data privacy: Banks should ensure that AI models trained over consumer data cannot leak information or be used in an unauthorized way.
- Explainable AI: Regulators are interested in having the decisions of AI models affecting individuals be explainable so as to build confidence that they are fair and help mitigate prejudice.
- AI model risk: Erroneous information or formulas can prejudice the AI model forecasts, leading to bad business decisions or customer suggestions.
As Artificial Intelligence is working on payment technology, it is important to make sure that there is responsible and transparent growth and governance to ensure people trust and use it more.
Case Example: Compliance Lessons Of The Equifax Breach
The Equifax data breach of 2017, which affected one of the largest credit bureaus in the world, demonstrated the severe consequences of the lack of compliance.
Due to a vulnerability on the Equifax dispute page, hackers were able to access and steal personal and financial details of more than 148 million users. They contained names, social security numbers, dates of birth, addresses, and driver’s licenses.
After the incident, Equifax had to bear the regulatory fines, class action lawsuits, executive resignations, and severe reputational damage on a global scale. Their share price dropped about 35%, destroying $6 billion of market value.
Key Compliance Takeaways From This Incident Include
It is essential to patch and upgrade software frequently to achieve compliance. The vulnerability was due to the breach that was caused by the failure to address a vulnerability, even when vendor updates were available.
- Restrict access to important data inside the company. A large number of unauthorized Equifax employees can access personal consumer information that they do not require.
- Equifax was not giving keen enough attention to the security protocols of the outsourced software support firms.
- Authenticate data at rest. The sensitive data was not encrypted and stored. Sorting, storing, and protecting data and controlling access to it are extremely important.
- Make sure that the breach is disclosed and consumers are notified in time. Equifax was subjected to huge fines due to its failure to inform of the theft much later.
The Equifax incident is a reminder that even a well-resourced company can be victimized by poor compliance. Due to the development of payment technology, the rules of data governance and cybersecurity are getting stricter.
Compliance Trends In Emerging Payment Technology
With the advancement in payment innovation, prudent legislation will enable safer adoption by balancing between advancement and risk containment. I see five large developments that will impact the best practice of compliance:
The number of global associations to ensure harmonized supervisory guidelines and criteria of payment technology in cryptocurrencies, open banking, and AI is increasing. The Financial Stability Board, the Financial Action Task Force, the Global Financial Innovation Network, and the Digital Currency Governance Consortium are some of them.
The rise of so-called RegulationTech, or RegTech, applies cloud, AI, blockchain, and other innovations to assist companies in complying with rules and regulations in a faster and more cost-efficient manner.
India, China, ASEAN countries, and other states should create rules to safeguard consumer information, and Europe has the GDPR to do the same to ensure the responsible use of data and technological development.
Greater cooperation between government agencies in various regions, police, regulatory, and financial institutions helps to quickly identify and stop payment fraud, cybercrime, money laundering, and other threats.
Banks, fintech companies, merchants, and consumers ought to collaborate and establish security standards on their own instead of expecting the government to do it.
Conclusion
Emerging payment types are useful to both customers and financial institutions throughout the globe since they are more efficient and offer quality experiences. Due to the regulation of these industries, they should be cautious of financial crimes, data breaches, and unethical utilization of modern payment methods.
As long as a corporation strategizes to be compliant, collaborates with law enforcers, builds strong governance, continuously screens fraud, and proves its safety by simulations, then it can safely use payment technology.
The partners in the payment industry, such as regulators, financial institutions, payment technology firms, merchants, and customers, should collaborate across the world to make the new-age payment systems safe and reliable.
