8 Risks Open Banking Poses to Financial Crime Compliance

Existing AML, counter-terrorist funding and KYC processes need attention due to the new ways third-party providers work under Open Banking

by Erik Stretz

August 12, 2021

Financial Institutions’ compliance officers and teams should be concerned that Open Banking may render their existing AML/CTF and KYC compliance programs inadequate. Open banking is evolving around an ecosystem of third-party providers (TPPs). These companies interface with FIs’ systems – via any method from regulated Open Banking APIs to unmonitored screen scraping – in order to access data or transactional functions. They provide added services to customers ranging from personal budgeting and spending alerts to personal funds transfers and cryptocurrency wallets.

What is Open Banking?

Open Banking is a term that describes an FI sharing customer and product data, as well as transfer and payment functions, with third parties via application programming interface (API). In some markets, like the EU, Open Banking is mandated and regulated. In other markets, like Japan, Open Banking is mandated and APIs are specified, but FIs are not mandated to participate. In markets like the US, Open Banking is neither mandated nor regulated, but is advancing, nonetheless.

AML experts are concerned about this model because TPPs can limit an FI’s visibility into how funds flow in and out of its systems and through the ecosystem. AML compliance has not traditionally focused on monitoring this type of network. AML/CTF compliance programs should be evaluated for whether they can address the specific risks Open Banking presents.

Here are 8 risks compliance managers should keep in mind when evaluating AML/CTF compliance programs for Open Banking:

1. Customer data screen-scraping widespread

Many TPPs have used customers’ login credentials to screen-scrape data from banks’ customer web portals and apps, sometimes without the bank’s knowledge. Screen-scraping is considered non-secure, may fall outside the defined scope of existing AML rules, and its use has been to a large degree restricted in the EU. Where it is less regulated, banks must consider how to govern this widespread practice.

2. Disordered markets create more AML challenges

In markets that are not regulated, compliance officers may face a disordered but expanding TPP ecosystem. Without API standards, centralized databases, and clear AML/CTF compliance rules for TPPs, it will be even more difficult to gain full visibility into how money flows across accounts, borders, FIs and fintechs. This creates new opportunities for placement, layering and integration of funds, especially where TPPs are not held to specific AML/CTF and KYC standards. Sanctions screening is also difficult to conduct without visibility into funds origins or final destinations.

3. AML plans needed when API technology fails

A large ecosystem of API providers has emerged to support fintechs across many business processes, including KYC and AML checks. Different API providers can specialize in distinct services. Where many may provide what they productize as KYC APIs, not all will also provide AML/CTF checks. Fintechs therefore may use combinations of API providers. FIs will need to consider standards and procedures to address technology failures, like API unavailability, and inadequacy.

4. Increased exposure to crypto threats

Open Banking includes new, known AML/CTF threats like money laundering conducted through cryptocurrency exchanges. Some crypto exchanges are even designed to attract financial criminals because they can offer anonymity and obscure the source of funds. Know your partner (KYP) processes, regulated or otherwise, must be enhanced to monitor the crypto domain for AML/CTF and sanctions compliance.

5. Ecosystem requires ongoing vetting

There are concerns that a TPP could be vetted as an AISP – those that only read and gather account information – but later become a PISP – providing payments and transfers, without being authorized or becoming AML/CTF compliant. Vetting the ecosystem for compliance will be an ongoing process for FIs because the whole ecosystem will grow and change.

6. Mandatory API access means FIs take on risk

In some regulated markets, like the EU, FIs must provide API access to any registered TPP that requests it. Enforcing compliance across hundreds or thousands of potential TPPs will be challenging. FIs are “all in” for Open Banking risks in markets where API access is mandatory.

7. Ecosystem-wide AML transaction monitoring may be needed

AML transaction monitoring is more complex in an ecosystem. An FI may see funds’ last hop into their accounts but have no visibility into or across TPPs and other FIs which the funds have previously transited, potentially including their own systems in cases of customers hopping in and out again. FIs must be able to understand chains of transactions across the ecosystem to ensure AML/CTF and sanctions compliance.

8. Know your partner (KYP) adds time, effort, and program scope

FIs must determine, based on regulated rules or its own process, whether any TPP meets AML/CTF and KYC requirements. The burden is on FI compliance officers to expand AML programs to cover the TPP ecosystem and to define, evolve, and enforce standards against which any TPP partner must be held over time.

Open Banking has become a reality for FIs in both regulated and market-driven geographies. Its emergence and basis in an ecosystem model mean money launderers and other financial criminals will find ways to exploit it. To operate with Open Banking’s new demands in mind, FIs should consider these and other emerging risks as they augment financial crimes compliance programs to address Open Banking head on.

To learn more about Open Banking, its AML compliance risks, and how Open Banking regulations are developing worldwide, please read our whitepaper: Open Banking Impacts for AML/CTF Regulatory Compliance.

Blog home

Protect & Comply

August 17, 2021

Average U.S. FICO® Score at 716, Indicating Improvement in Consumer Credit Behaviors Despite Pandemic

The FICO Score is a broad-based, independent standard measure of credit risk

hand extended holding a keychain of house keys

July 9, 2026

The GSE Data Is Public. Here's What It Shows About Credit Score Modernization.

Independent Milliman analysis of GSE historical data confirms what anyone can now verify directly: FICO® Score 10T is the most predictive score.

November 3, 2016

FICO® Score High Achievers: Is Age the Only Factor?

FICO’s latest research on <a href="http://www.fico.com/en/blogs/risk-compliance/us-credit-quality-rising-the-beat-goes-on/" target="_blank">national FICO® Score distribution</a> shows that US credit quality continues to trend upwards, with an increasing number of consumers scoring in the highest scores ranges. Given that, we decided it was time to refresh our study on “<a href="http://www.fico.com/en/blogs/risk-compliance/infographic-what-does-a-high-credit-scorer-look-like/" target="_blank">FICO® Score high achievers</a>,” where we examine the credit behavioural profiles of consumers with higher credit scores. As expected, our latest study showed that older people generally have higher scores, as has been the case in our <a href="http://www.fico.com/en/blogs/risk-compliance/age-before-beauty-credit-worthiness-before-youth/" target="_blank">past research</a>. This is largely because they have trade lines that have been open longer, which leads to higher scores (assuming the trade lines are in good standing and all other things equal). The most credit savvy among you will remember that length of credit history accounts for roughly 15% of the overall <a href="http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx" target="_blank">FICO® Score calculation</a>. But for younger consumers, it isn’t too helpful to say, “just wait until you are 50 years old, and that will fix things!” Thus, I decided to dive deeper with our analysis, including looking at the credit behavioural characteristics of younger consumers with high FICO® Scores. In this analysis, I looked at credit characteristics for the two highest score bands, 750-799 and 800-850, which have about 16% and 23% of the population, respectively. I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO® Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score. <a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a> Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li>Credit history. Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). Clearly, it helps to start credit use early in life – but that’s not the sole determining factor for high scoring. The younger cohorts in both the 800+ and 750-799 groups have time on file medians significantly less than their older counterparts.</li> <li>New credit. High credit scorers do, in fact, pursue new credit. We see little variation in months since last trade line opening and last inquiry among all groups observed.</li> <li>Pay on time. As you might expect, the further in the past the delinquency, the higher the score – and that’s if a delinquency ever happened. 95% of the 800+ people and 72% of the 750-799 group have never been delinquent, which is a striking contrast to the 57% for the total population. The percentages for the younger groups are even higher, especially so for the 750-799ers. Collection items are also scarce for these high scorers. While 23% of the national population have collection items greater than $99, the figures are only 0.5% for the 800+ group and 3% for the 750-799 group. It is clear that, in conjunction with starting a credit file early, paying on time is a key trait of the FICO® Score high achiever.</li> <li>Balance and utilization. Finally, we look at how credit is being used, focusing on revolving product use. (Since most people only have one mortgage or one auto loan, variation in instalment product figures is minimal and driven by payment history, which is near perfect for high scorers, as we’ve seen.) FICO® Score high achievers tend to have more open revolving accounts. While the % active trades and utilization are generally lower, by no means do high scorers avoid the use of credit products. What drives the difference here is the amount of available revolving credit utilized. The 800+ group is roughly 1/4 of the national median, both in total and on their highest utilized card; they also have lower balances and more cards. The 750-799 group is more active and higher utilized, but still only at 2/3 of the national figures. The young 750-799 group compensate with lower revolving balances and, as a result, lower utilization, which is in line with what we see for the 800+ group.</li> <li>Benchmarks. I’d like to point out that while this study provides good benchmarks of the typical credit traits of the FICO® Score high achiever, individual credit profiles will vary widely. And keep in mind that when we sort groups of consumers as a whole by different behaviours, some results may look superficially odd. For example, the 800+ band has a longer median average open account time (128 months) than average revolving months on file (140 months).</li> </ul> So, what do we conclude? A huge takeaway is that high scorers don’t have too much in the way of serious delinquencies and negative public record data. In most respects, the young 800+ people are like their peer group. They really only differ markedly in their shorter credit history and higher non-mortgage balance, both of which are a function of life stage. Our results show that you don’t have to be a credit product hermit; these high scorers have more credit cards. The takeaway is to start credit activity early and maintain well-managed and moderate usage. In many ways, the young 750-799 people are more interesting because their age profile is much younger. Their credit characteristics differ more from their peer group, particularly in terms of length of credit history. They compensate by having almost pristine credit records and lower balances. Ultimately, 39% of US consumers are FICO® Score high achievers, which they accomplish by following common-sense credit practices. It ain’t rocket science!

Take the next step

Connect with FICO for answers to all your product and solution questions. Interested in becoming a business partner? Contact us to learn more. We look forward to hearing from you.