4 AML takeaways from LATAM’s fintech scene 

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The Latin American payment fintech market is growing rapidly with new digital platforms fulfilling the needs of underserved financial consumers in the region.

The region is enjoying phenomenal growth, with the number of firms reaching nearly 2500 in 2021 from 700 five years ago, according to data from Finnovista. Brazil and Mexico alone host a combined 50% of new fintech, followed by Colombia and Argentina.

The opening of LATAM’s financial markets is a huge business opportunity. But it is also creating a challenge for regional and global regulators to ensure compliance with international AML standards.

Therefore, having the right AML solution is key to winning more business in a fast-growing market.

On a recent visit to the region, I met with new customers to discuss their transformation into significant players in the financial market using advanced AI-based AML solutions to succeed in the new fintech ecosystem.

Here are some takeaways from my discussions.

The growing volume of transactions is a challenge for rules-based systems.

As business grows in Latin America, FIs have seen exponential growth in the volume of transactions. When using rules-based legacy systems, the sheer quantity of false positives becomes an unbearable burden on compliance teams. Therefore, rules-based systems are practically a non-starter for fresh startups that will find quickly they cannot maintain these systems.

Instead, fintechs are now looking for more innovative systems based on AI that can efficiently and effectively detect financial crime by pinpointing true cases of abnormalities while allowing the free flow of customer business. Using AI-based machine learning solutions for AML increases coverage continuously to maintain a high standard on the positive detection rate while reducing noise/false positives and subsequent operational costs and efforts.

In addition, SaaS-based platforms offer the scalability and elasticity that can reduce future infrastructure costs, as well as ensure smooth performance and operations while maintaining optimal cost-benefit.

The complexity of payment types and destinations

Latam fintechs are handling a complete mix of cross-border B2B, remittances, and domestic transactions, with aggregation of payments in batches. In addition, AML requirements require real-time screening of both local payments or any mass/local payment that will originate a future cross-border consolidated transfer payment.

This complexity requires a transaction monitoring solution that has the ability to differentiate between transfer typologies and entities and connect the dots across complex paths. AI-based AML can connect the dots across complex paths and transactions. It can put together a proxy of a client’s identity for compliance teams based on behavior patterns, even when KYC information is missing.

In contrast to rules-based solutions, AI-based AML analyzes data dynamically without relying on predefined scenarios or models, a must today with the high prevalence of new and emerging money-laundering patterns and other schemes.

Getting a firm grip on managing risk

As fitechs in the region work to integrate into the global ecosystem, pressure from regulators is mounting. Foreign exchange and global payment remitters alike are under pressure to maintain a strong compliance hold of all transactions in the country, and even domestic payments that will be converted and aggregated to be remitted must undergo strong scrutiny by the mandate of the regulator body.

Maintaining the highest global compliance standards, as guided by the FATF, mandates a risk-based approach to AML to improve the speed, quality, and efficiency of AML measures.

Using unsupervised AI to analyze risk indicators associated with financial crimes can detect abnormal activity and effectively calculate and pinpoint transactions indicating suspicious activities. This risk-based AI approach can paint a clear picture in a timely manner of the truly suspicious cases for compliance teams.

A promising future

State-of-the-art AI powered by a risk-based approach can meet the needs and demands of the LATAM fintech market as it grows and becomes a key player in the financial system with its ability to introduce innovative new services at a lower cost.

Adopting the high standards offered by advanced AI technology effectively opens the door for financial partners that grows business and revenues.

To sum up, the power of AI-driven analysis is shaping up to be the go-to solution for new fintechs in LATAM looking for quick rollout and fast ROI.

Peter Reynolds
Written By:
Peter Reynolds, ThetaRay CRO
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