“While [neobanks’] vendor selection process aims to address regulatory requirements, the solutions they deploy tend to lack the depth needed to meet external audit expectations.”
Retail Banker International
Neobanks are a fast-growing segment of financial services. However, this growth is paired with attention from regulators, especially around Anti-money laundering (AML) and Know Your Customer (KYC) rules, as well as third-party (BaaS) relationships, consumer data rights, and cross-border transaction controls. Can your risk and compliance capabilities survive this additional scrutiny?
Conversations with neobank customers suggest that the answer is probably a nervous shrug or an outright “no.” That’s because the very nature of neobanks can exacerbate their susceptibility to compliance failures. They’re built for speed and efficiency. However, they must adhere to time- and resource-intensive regulatory processes aimed at legacy banks. They often rely on partnerships for critical functions like cards, payments, lending, and credit. This leaves them vulnerable to vendors’ compliance transgressions. In addition, some neobanks do not have their own banking licenses, relying instead on partner banks, exposing them to additional regulatory complexity and third-party risk.
What regulators want
U.S. and European regulators are paying increasing attention to neobanks. Enforcement and enforcement guidance are trending up. A few of the headwinds aimed at the industry include:
- The U.S. Financial Crimes Enforcement Network (FinCEN) regulators are tightening expectations for AML programs to be effective and risk-based—a direct ask for better analytics and obligations coverage, as well as demonstrable governance.
- The European revised Payment Services Directive (PSD2) requires stronger third-party payment security.
- Open banking and GDPR regulations continue to require strong controls around consent, API security, and data privacy — especially for cross-border operations.
These impact neobanks through:
- Heightened AML and KYC scrutiny, with evolving typologies like crypto of particular interest
- Demand for clear accountability across third-party partners
- Strict guidelines on data sharing, customer consent, and cross-border data
- Increased scrutiny on digital assets, including crypto and the use of AI
Horizon scanning keeps your finger on the pulse
With their ‘move fast and break things’ digital-first ethos, neobanks often chafe at traditional compliance processes, which remain slow, manual, and labor-intensive. However, regulatory hurdles are among the leading reasons for neobank fines and failures. Forbes noted one such instance:
“Chime was recently fined millions of dollars over delays in returning funds to customers whose accounts were closed. They attributed the delays to “configuration error with a third-party vendor.” This highlights the operational risks associated with digital banking. Additionally, the company faced scrutiny from regulators over its handling of consumer complaints, leading to a settlement with the California Department of Financial Protection and Innovation. These incidents underscore the regulatory and operational hurdles neobanks must navigate in the market.”
There are basic requirements for financial industry regulatory compliance that also apply to neobanks. The first requirement is horizon scanning, which pores through voluminous amounts of regulatory content to identify new or updated material. Unfortunately, many horizon scanning tools leave it to you to do the heavy lifting—poring over the new and updated information to determine if it’s relevant to your business.
AscentAI delivers only regulatory content that impacts your business, including news, guidance, enforcement actions, rules, and amendments. AscentAI horizon scanning automates the manual task of identifying relevance, while also providing:
- Worldwide coverage that powers informed decision-making on a global scale
- Continuous monitoring of global regulatory sources
- Automated alerts on relevant regulatory updates and rule changes that impact your business
- Powerful filters that deliver information tailored to specific needs and interests, eliminating irrelevant content
- Granular search within documents enables users to find key details quickly
- Automatic document linking to uncover connections between regulations that cannot be identified by manual searches to ensure users have a total perspective
- Workflow tools and templates for efficient task management
- Built-in reporting for complete workflow history
Power regulatory change management with AI
Regulatory change management is one of the greatest challenges for any financial institution. When a rule is updated or a new one issued, how does the change impact your business, your workflows, your policies and controls?
AscentAI delivers a new paradigm in regulatory change management. It doesn’t just deliver a list of documents containing changes, leaving you to determine your new obligations thereunder and how those changes impact you. AscentAI automates that.
Unlike organizations that use amended horizon scanning tools to manage regulatory change, AscentAI takes an obligation-based approach—treating your specific obligations as digital objects that can be automatically updated.
The process begins with creation of a highly accurate, rock-solid register of your obligations. We work with you to create this a bulletproof obligations inventory—an organization-wide source of regulatory truth. With your specific obligations as digital objects, your obligations inventory becomes a contextual foundation against which any new rule or rule change is compared. When regulators amend a rule and the obligations thereunder, AscentAI can automatically track each of those changes and apply them as versions of the original obligation. You don’t just gain real-time monitoring and automatic identification of relevant changes, you also gain:
- Automated obligation change summaries – Generative AI summarizes each obligation change, helping you quickly and easily understand what’s new.
- Side-by-side comparison of old and updated rules – Shows comparisons for each obligation update in straightforward side-by-side format, with highlighted text to quickly understand the scope and nature of changes.
- Policy and control impact notifications – When integrated with your GRC, AscentFocus notifies policy and control owners of an obligation change that impacts downstream elements for remediation.
- Audit trails – Automatically log all changes to provide defensible proof of compliance during internal and external exams.
Along with tools that bring an unprecedented level of intelligent automation to financial regulatory compliance, AscentAI provides the expertise to guide neobanks through the thicket of financial regulations that apply to their specific offerings, regions, and practices.
Learn more about how AscentAI tools and expertise cost-effectively reduce the time and costs of regulatory compliance through smart automation that’s very much in keeping with the lean, fast, and effective neobank ethos.
