AML transaction monitoring software comparison: Build or buy?

When it comes to choosing anti-money laundering (AML) transaction monitoring solutions, companies often face the dilemma of whether to build an in-house system or purchase a pre-existing one. This decision is crucial because it directly impacts firms’ risk management, compliance, and operational efficiency.

In today’s world, where typologies and regulatory expectations are constantly evolving, more and more companies are turning to automated solutions to monitor risk effectively and maintain regulatory compliance. While some companies prefer to build their own solution, often to replace inadequate internal systems, others find that purchasing a ready-made solution offers greater cost-effectiveness and operational efficiency in the long run.

Ultimately, the decision between building and buying depends on each business’s specific needs and priorities. This article takes a closer look at the advantages and disadvantages of both options to help companies make the right decision.

The difference between in-house and outsourced transaction monitoring software

In-house transaction monitoring

In-house transaction monitoring refers to the process of developing and implementing a system within a company that is designed to keep track of financial transactions. This system is meant to analyze the transactions to detect any suspicious activity or compliance violations. Building the monitoring infrastructure internally involves designing algorithms, processing data, and creating reporting mechanisms tailored to meet the specific requirements and needs of the business.

In-house transaction monitoring pros

1. Firms have full control over the fine-tuning of monitoring rules to suit their specific needs.
2. In-house systems can be tailored to integrate seamlessly with existing infrastructure and processes, enhancing efficiency.

In-house transaction monitoring cons

1. Building and maintaining an in-house monitoring system requires significant resources, including time, expertise, and ongoing investment.
2. Internal teams may lack the specialized expertise needed to develop and optimize sophisticated monitoring algorithms, leading to suboptimal performance.
3. Developing and deploying new monitoring rules or updates may take longer with in-house systems, limiting agility and responsiveness to changing requirements.
4. In-house solutions may struggle to keep pace with evolving regulatory requirements, exposing the company to compliance risks and potential penalties.

Outsourced transaction monitoring

Outsourced transaction monitoring involves utilizing a solution developed by a third-party AML provider to oversee financial transactions for suspicious activity. However, it’s crucial to understand that while the third party provides the infrastructure and data, the company remains responsible for utilizing the tool effectively. This distinction underscores the importance of forming a strong partnership with an AML solution provider, as they offer guidance and assistance in implementing and optimizing the monitoring system. Essentially, the third party doesn’t screen on behalf of the company; instead, they equip firms with the necessary tools and data, sparing them the task of building a solution or gathering data independently. This collaborative approach ensures comprehensive transaction monitoring while relieving the company of developing and maintaining an in-house solution.

Outsourced transaction monitoring pros

1. Outsourcing allows companies to take advantage of third-party providers’ specialized expertise and experience in developing transaction monitoring solutions.
2. Third-party solutions often offer cost-effective pricing models, reducing upfront investment and ongoing maintenance costs compared to in-house development.
3. Quicker implementation can allow companies to deploy effective monitoring capabilities with minimal delay.
4. These solutions are often scalable, allowing companies to adapt to changing business needs and volume requirements more easily.

Outsourced transaction monitoring cons

1. Integrating outsourced solutions with existing infrastructure and processes may present technical challenges and require additional effort – depending on the support and flexibility of the vendor.
2. Outsourced transaction monitoring solutions may rely on external data sources that are not proprietary to the company, potentially leading to incomplete or outdated information. This could result in missed opportunities to detect suspicious activity in real-time. 

Top 10 reasons firms opt for outsourced transaction monitoring solutions

With these pros and cons in mind, here’s why firms often decide to outsource their transaction monitoring solutions:

1. Streamlined case management and robust audit trails

Ensuring effective case management and maintaining a comprehensive audit trail is essential for regulatory compliance. While in-house development of these capabilities can be challenging, third-party solutions typically offer optimized user interfaces (UI) that allow teams to investigate alerts quickly, empowering compliance professionals to focus on high-priority, SAR-worthy alerts.

2. Minimized false positives for efficient monitoring

Many firms struggle with fine-tuning rules and tailoring them to different customer profiles when using in-house systems. This can ultimately lead to a higher volume of false positives, which can further exacerbate compliance teams’ workloads. With this in mind, many firms opt for third-party solutions to relieve the pressure – some have even been shown to reduce false positives by up to 70 percent through increased accuracy and machine learning. 

3. Access to expertise and proactive guidance

Determining the level of specialized expertise needed and assessing internal capabilities is crucial when considering the development of a transaction monitoring system. Building a flexible, reliable, and configurable system requires expert compliance and risk management knowledge, coupled with a deep understanding of technology. 

While some firms may possess the aforementioned expertise in-house, third-party solutions often offer proactive and ongoing support, providing valuable guidance and assistance in ever-changing technological advancements. Also, the expertise of third-party providers can ensure that transaction monitoring systems remain up-to-date with evolving industry standards and best practices, enhancing their effectiveness in detecting and preventing financial crimes.

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4. Mitigating non-compliance risks with comprehensive monitoring

AML compliance requires navigating jurisdictional nuances in regulatory obligations, demanding constant vigilance and adaptation. When evaluating these global requirements, firms need to ensure they utilize a solution that meets such standards, considering the significant risks associated with non-compliance. 

Partnering with a third-party transaction monitoring vendor offers a strategic advantage in this regard, as reputable providers design their solutions in accordance with recommendations laid out by the Financial Action Task Force (FATF). By aligning with such vendors, firms ensure robust compliance frameworks that evolve in tandem with regulatory shifts, mitigating the risk of non-compliance and safeguarding reputational integrity.

5. Cost-effectiveness for enhanced operational efficiency

a. Opportunity cost

Opportunity costs arise from the resources and time diverted from core business activities towards building and managing an in-house transaction monitoring system. Developing such a system requires significant infrastructure, technology, and personnel investment. These resources could otherwise be allocated toward revenue-generating activities, innovation, or improving the customer experience. By outsourcing transaction monitoring, firms can redirect these resources to strategic initiatives, thereby maximizing their overall productivity and productivity. 

b. Hidden costs

Moreover, hidden costs often lurk beneath the surface of in-house solutions. Maintenance, updates, and compliance with evolving regulatory requirements demand ongoing investment. Additionally, the risk of system failures or breaches can result in unforeseen expenses such as fines, legal fees, and reputational damage. These hidden costs can quickly accumulate, eroding the perceived cost-effectiveness of an internally developed monitoring system. 

In contrast, outsourced transaction monitoring solutions often offer a transparent pricing structure, typically based on a subscription or usage model. The predictable cost structure allows firms to budget effectively without the worry of unexpected expenses.

6. Simplified rule complexity for enhanced detection

Outsourced solutions often provide ready-to-use rule libraries, simplifying transaction monitoring by offering pre-configured sets that can be implemented immediately. These libraries are tailored to industry standards and regulatory requirements, requiring minimal customization before deployment. By leveraging these out-of-the-box rule libraries, firms can swiftly enhance their detection capabilities without the complexity of developing rules from scratch, ensuring compliance and effective monitoring from day one.

7. Rapid configuration of new rules for adaptive monitoring

When custom rules are necessary, reputable transaction monitoring solutions providers offer rapid configuration, a distinct advantage over in-house systems where deployment can take up to six weeks by internal IT teams. This swift customization capability ensures firms can quickly adapt their monitoring parameters to address evolving regulatory requirements or emerging financial crime trends. This agility is crucial in the fast-paced financial landscape, enabling organizations to stay ahead of potential risks and regulatory changes effectively. 

Overseas payments and foreign exchange provider Lumon experienced this first-hand when it needed to react quickly in the early stages of the pandemic when it saw a sudden increase in COVID-related investment fraud.

“Within 48 hours of identifying this, Lumon developed and deployed new rule sets to combat the threat and prevent more customers from falling victim to scams.”

Alessio Giorgi, Head of Compliance and MLRO at Lumo

8. Swift implementation for accelerated time-to-market

In the competitive world of financial services, getting to market quickly can make a huge difference. Some outsourcing options are cost-effective and can be deployed in as little as two weeks, which can be a significant advantage over the potentially lengthy process of developing an in-house solution. 

This fast implementation not only helps firms meet compliance requirements quickly but also enables them to take advantage of market opportunities without delay, which enhances their competitive position. By using outsourced transaction monitoring solutions that can be deployed quickly, firms can focus on their core business activities while benefiting from efficient and timely compliance solutions tailored to their needs.

9. Actionable insights for informed decision-making

Defined as analytics-driven responses that go beyond mere alert generation, actionable insights empower compliance teams by offering granular explanations for each alert. This level of detail is vital for analysts as it provides a deeper understanding of the underlying triggers behind each alert, facilitating more effective remediation strategies. By understanding the rationale behind each alert, compliance teams can tailor their responses accordingly, prioritizing critical cases. This is why transaction monitoring vendors that offer high-quality, proprietary insights are often favored by firms, especially when these insights can be synthesized with a firm’s own internal insights for an even more comprehensive overview of customer risk.

10. Seamless scalability and future-proof solutions

Outsourced transaction monitoring solutions often emerge as a strategic choice for firms as they offer seamless scalability and future-proofed solutions that can be tailored to evolving business needs and regulatory requirements. These solutions are architected with scalability in mind, designed to smoothly accommodate fluctuations in transaction volumes without compromising performance or accuracy. Leveraging cloud-based infrastructures, outsourced providers can empower businesses to scale their monitoring operations on-demand, ensuring uninterrupted service delivery even during peak periods or sudden spikes in activity. 

This proactive approach not only mitigates the risks associated with obsolescence but also positions companies to capitalize on new opportunities and innovations in the rapidly evolving landscape of financial crime detection and compliance. 

To buy or to build a transaction monitoring solution?

As no two businesses are the same, no two choices are the same, and it’s important for firms to consider the pros and cons listed above before choosing a transaction monitoring solution that’s right for their business model, technological capabilities, and expertise. 

Implementing a new transaction monitoring solution requires sensitivity, careful planning, and consideration of key issues such as data quality and effective organizational change. Any large-scale deployment of new transaction monitoring technology needs to be properly integrated with existing teams, processes, data, and platforms to ensure firms get the best outcomes. That’s why it can be crucial to choose a solution provider that will accompany a firm in the transition, partnering with key stakeholders to ensure the best possible outcome.

With the right transaction monitoring technology, firms can be confident they meet – even exceed – regulator expectations while managing risks effectively.