What is Transaction Monitoring, and How Does it Help?

There’s no doubt that the financial landscape of today is rapidly evolving. That is exactly why every transaction needs vigilant security, which is what we call transaction monitoring. If that term sounds alien to you, you’re at the right place. 

As a compliance officer, insurance worker, government and regulatory agent, healthcare provider, or e-commerce worker, transaction monitoring is a crucial concept for you. Today, we’ll tell you all about transaction monitoring: what it is, why you need it, how it helps, and its limitations. 

Keep reading to find out how to use it to your leverage and secure all your transactions.

What is Transaction Monitoring?

Transaction monitoring is exactly what its name entails: it’s the scrutiny and supervision of all financial transactions across different industries. It’s most commonly used in retail, banking, and healthcare industries. The concept includes analyzing financial data to identify anomalies and potential signs of fraud. No matter how small or large, each transaction is observed to ensure integrity across all financial systems. Most importantly, transaction monitoring prevents fraud, money laundering, and terrorism financing. It utilizes very specific algorithms and rule-based systems to check whether any transaction is deviating from a business’ established patterns. This practice dates back to the 20th century as the earliest form of computerized banking systems. Today, the standard transaction monitoring system has adopted electronic banking and payment processing. It also utilizes machine learning and artificial intelligence to guarantee accurate detection of fraudulent behavior.

Key Components of Transaction Monitoring

Transaction monitoring relies greatly on comprehensive data collection. Whether it’s coming from banks, payment processors, or other financial institutions, the data needs to be collected in a clear and concise manner. These businesses store tons and tons of data, including details like transaction amounts, timestamps, location data, and parties involved. The transaction monitoring system needs to detect this data in real–time or at least near-real-time to avoid fraud and other suspicious activity. 

Of course, these systems also need to be automated, or it would take hours to monitor just one transaction. Transaction monitoring is simply incomplete without automation and advanced algorithms to process tons of data in mere seconds. With the help of predefined rules and logic, these systems can flag any activity that deviates from the business’ usual patterns. The best part about automation and machine learning, in this case, is their ability to improve their detection skills over time by analyzing historical data. 

Automation is efficient, speedy, and, more often than not, reliable. Still, it would be foolish to leave any technical system unattended with no human oversight. In the case of anomalies, a human touch is crucial to debug the system and get things running again. Trained analysts review any issues or flagged transactions alongside the automated system, but they’re able to use context clues and make judgments a machine can’t make. Unlike an automated system, humans can decipher between a simple anomaly and an actual threat.

How Does Transaction Monitoring Help?

You may be wondering: What is transaction monitoring for? Who does it benefit? Well, various industries like healthcare, retail, and finance rely on transaction monitoring to detect fraud, maintain compliance, and mitigate risks. Here’s how.

Of course, it’s obvious that transaction monitoring’s main aim is to detect and prevent fraud. It scrutinizes every single transaction, no matter how large or small, with accuracy and precision. With decades of hard work put into making these systems reliable, it’s safe to say they’re well-equipped to detect fraud. That includes an unauthorized credit card charge, a phishing scam, or identity theft, all of which a transacting monitoring system is quick to catch onto. Once it detects something amiss, it alerts the business right away.

Sure, transaction monitoring is beneficial for all financial institutions, but it’s also a legal requirement to have such a system embedded into your business. That’s because it protects the customer as well as the business from fraud or scams. All such institutions are required to abide by anti-money laundering (AML) as well as Know Your Customer (KYC) regulations. By keeping a transaction monitoring system in place, they can guarantee regulatory compliance with every exchange. 

Lastly, transaction monitoring helps greatly with risk mitigation. Financial risks are a big fear for any institution or business, and, unfortunately, they’re ever present. Transaction monitoring systems are quick to detect and delete all suspicious activity before the threat even has a chance to make its way past the security. That means businesses can count on these systems to prevent monetary losses as well as legal action. It also maintains trust between businesses and their customers, as people are more likely to rely on institutions that monitor their transactions.

Like any other system, transaction monitoring has its limitations and challenges. While some worry about privacy concerns, other cases are limited due to false positives and controversial public opinion.

Transaction monitoring requires intense scrutiny over every single detail related to the exchange, which has raised some privacy concerns as of late. Some customers may find the process invasive, considering their name and bank details are included in these details. Others have concerns that their data is being collected by these systems for more sinister purposes. Some have even argued that transaction monitoring systems are an invasion of privacy-related human laws. Still, you should note that transaction monitoring is entirely legal and safe. 

Transaction monitoring doesn’t have many challenges, but among the few is the common occurrence of false positives. That means these systems often flag legitimate transactions as suspicious without reason. As a result, the institution or business is burdened with the stress and additional work of investigating the transaction, only to find it harmless.

Transaction monitoring also has a mixed public perception. Luckily, the majority understands it as a necessity to avoid fraud and scams, but others consider it a violation of privacy. The strict surveillance surrounding transaction monitoring is often considered a violation of civil liberty rights.

Conclusion

Our article has shed some light on what transaction monitoring is and how it helps. Now that you’ve read it, you can incorporate it accordingly into your business, whether it’s in finance, retail, e-commerce, or healthcare. Transaction monitoring is a crucial concept in today’s financial landscape, and it’s also a great way to guarantee security with every financial exchange.