Amid the rapid evolution of banking, digital-first banks like Starling and Metro Bank are facing increased regulatory scrutiny, particularly around AML controls.
According to Corlytics, these challenger banks, known for their innovation and customer-focused services, are transforming the industry by filling service gaps left by traditional banks. They attract underserved demographics with features such as real-time payments and seamless app integrations, significantly increasing their market share in recent years.
European neobanks such as Revolut and N26 have notably expanded their customer base, with Revolut serving over 45m users and N26 more than 8m by November 2024. This surge in digital banking has not gone unnoticed by regulators who are keen to ensure that these disruptive models adhere to stringent compliance standards akin to those of traditional banks.
However, the regulatory landscape has toughened significantly, with financial watchdogs imposing hefty fines on several institutions for lapses in financial crime controls. For instance, in May 2024, the US Consumer Financial Protection Bureau levied a $3.25m penalty against Chime Financial for delays in consumer refunds. Similarly, in July, DBS Bank was fined HK$10m by the Hong Kong Monetary Authority for failing to monitor high-risk customers effectively.
The UK’s Financial Conduct Authority has been particularly vigilant, fining Starling Bank £29m for significant deficiencies in its AML processes, and Metro Bank faced a £16.7m penalty for issues in its transaction monitoring system. These actions underscore the increasing demands for robust financial crime controls among challenger banks, which have previously enjoyed a “honeymoon” period of leniency from regulators.
“Robust compliance frameworks often lag when rapid expansion and lean business strategies are primary focuses. Many of these challenges were initially tempered by a kind of grace period from regulators. Now, we are witnessing a dramatic shift in how regulators approach these institutions, and we can see that the early days of leniency are over. Meeting heightened regulatory standards isn’t just a matter of scaling operations. For challenger banks, it is now about fundamentally rethinking processes to be able to withstand the same level of rigorous scrutiny as applied to traditional banks,” Mike O’Keeffe, general manager EMEA at Corlytics, commented.
Digital banks often face greater difficulty handling regulatory fines due to their limited resources, which can severely impact their financial health. Despite these challenges, their inherent agility allows them to swiftly adopt advanced compliance technologies and adapt more quickly than traditional banks to regulatory changes.
As the regulatory environment tightens, digital banks have the unique opportunity to lead the way in compliance innovation. “For digital banks, compliance has become as central as customer experience. This shift happening now marks a transformative moment, moving digital banks from disruptive upstarts to trusted pillars of the financial ecosystem. Those that embrace regulatory standards with the same enthusiasm as innovation will thrive and redefine the future of banking,” Mike O’Keeffe observed.
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