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Innovation and compliance: building the right foundation
It’s clear that innovation in the financial sector must go hand-in-hand with compliance. Financial regulators across Europe and beyond are increasing their scrutiny of digital banks, focusing on areas like AML, know your customer (KYC) and sanctions controls. For neobanks, the key is to ensure that compliance is embedded into the fabric of their operations from the beginning, rather than being seen as a regulatory box to tick later.
The challenge, of course, is that many neobanks are designed to operate lean, technology-driven models. While this offers efficiencies, it can sometimes result in a lack of investment in the compliance infrastructure needed to support rapid growth. Neobanks can capitalize on their tech leadership by embracing tools such as AI-driven transaction monitoring and automated sanctions screening. These systems must be capable of scaling as the bank grows, ensuring that compliance doesn’t fall behind customer acquisition.
Responsibility across regulations
A robust AML and sanctions framework is the cornerstone of any responsible financial institution, particularly for neobanks that operate in a fast-paced, high-growth environment. Neobanks often serve a younger, more tech-savvy audience that expects ease of use and efficiency. But with this ease of access comes increased risks of financial crime. Ensuring that there are strong processes for identifying, monitoring and reporting suspicious activities isn’t just about meeting regulatory requirements—it’s about safeguarding the integrity of the entire banking system.
An effective AML framework must include real-time transaction monitoring, dynamic sanctions screening, and comprehensive customer due diligence that continues throughout the customer relationship. A common issue seen in recent regulatory actions was the failure of neobanks to adequately screen customers or update their AML processes as their customer bases grew. Without this dynamic approach, financial institutions risk becoming attractive targets for illicit activities.
One of the primary reasons for regulatory penalties has been inadequate sanctions screening, where institutions failed to update their lists in line with geopolitical changes or ignored high-risk customers. A sanctions framework needs to be adaptive and continually updated, particularly in light of changing global political conditions.
A proactive approach to AML
Taking a proactive approach to AML compliance is not just about avoiding regulatory penalties; it’s also about fostering long-term trust and stability. A neobank that invests in comprehensive compliance systems demonstrates its commitment to security and financial integrity, which can become a key differentiator in a crowded market.
A key lesson from recent penalties in Europe is that compliance frameworks must be dynamic. For example, sanctions lists are constantly evolving, particularly in the context of global political events. Neobanks must ensure their systems are not only robust but also regularly updated to reflect the latest regulations and risks. An ongoing commitment to customer due diligence and transaction monitoring is essential, as regulatory bodies have shown a willingness to penalize those that fail to meet these standards.
Practical steps for neobanks to strengthen compliance
To avoid the pitfalls seen in other markets, neobanks should consider the following steps: