Revolut’s Compliance Bots Won’t Stop the Smurfs

(Bloomberg Opinion) -- The founder of fintech startup Revolut, Nikolay Storonsky, used to scorn banks’ compliance departments as overstuffed and out-of-date. “We can do as much as an army of compliance professionals with one good data scientist,” he told website eFinancialCareers last year.

Even that algorithmic ninja may be feeling the strain now that Revolut has doubled its number of customers to 2 million in less than a year. But a few months ago, the startup uncovered suspected money laundering activity on its digital payments system and reported it to the authorities, according to the Financial Times, which questioned whether Revolut can both grow fast and protect itself against financial crime.

This is an issue not just for Revolut, but for the broader fintech industry, as well as big banks and regulators which are itching to loosen the human’s grip over this business.

There’s no reason to think this juggling act can’t be done. But one thing is for sure: Claiming that swish technology is innately superior at catching crooks isn’t going to work. People and boring compliance processes are a feature, not a bug.

Fintech firms are under pressure to spend cash on acquiring customers, boosting their brand and delivering a smooth, fast experience for users. You can see why investing more than the minimum on compliance might be a drag. This is an industry where startups are duking it out to get a customer base in the hundreds of thousands, while big banks with deeper pockets and entrenched market share rest relatively easy. Any extra security check or clunky compliance process is a serious barrier.

The very factors that make a payment app popular — near-instant account openings or seamless transactions — can make it vulnerable to “smurfing,” or multiple low-level transactions expressly designed to avoid detection. Finding the dodgy needle in a haystack of mundane payments is hard, even with the most sophisticated technology. Criminals have proven adept at getting ahead of algorithms.

As firms add more customers, they have another reason to invest more in their human capital: A big compliance failure could be fatal.

Startups have also done themselves few favors by embracing high-risk products like cryptocurrency trading. Here, the “fail fast” culture of Silicon Valley appears to be winning out over traditional risk management. Bitcoin trading may offer the promise of a gold rush — but adopting it as a product ignores the risk of a consumer or regulatory backlash. Cryptocurrencies have been a magnet for money launderers, and regulators are cracking down.

It would be unfair to tar the entire industry with the same brush, or to suggest it’s inherently riskier than others. Big banks, too, are vulnerable to high-level tax evasion or multinational illicit flows, even those with bulky compliance departments. Human error exists, as does a tendency to fall into lazy box-checking.

But technology is far off being able to provide a panacea for regulation and compliance. If fintechs want to avoid the pitfalls of their elder rivals, more staff would be a help, not a hindrance.

Lionel Laurent is a Bloomberg Opinion columnist covering finance and markets. He previously worked at Reuters and Forbes.

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