Over $4.3 billion in fines were imposed by financial regulators worldwide in 2024, with 95% of these actions taken by US regulators alone. Several significant fines have been imposed as a result of the increasing focus on anti-money laundering (AML) compliance, including a staggering $3.1 billion fine against TD Bank for AML violations. For financial institutions, this harsh regulatory landscape demonstrates a crucial truth: compliance is no longer optional; it is essential. The Transaction Processing System, or TPS, is an essential but frequently overlooked component of financial compliance.
A strong TPS is the foundation for regulatory compliance, audit readiness, and complete financial integrity, even though it is typically viewed through the lens of operational efficiency. A well-structured TPS is positioned not only as a transaction handler but also as a crucial compliance enabler for financial institutions navigating an increasingly complex regulatory environment. This article examines how a well-structured TPS contributes to payment compliance, supports financial audits, and streamlines regulatory reporting. Why FinTechs are placing an increasing emphasis on compliance FinTechs must quickly adapt to remain compliant as the regulatory landscape for financial institutions continues to change rapidly, posing significant obstacles. The compliance landscape is being reshaped by a number of important regulatory drivers: Regulating AML More Stringently The 6th Anti-Money Laundering Directive (AMLD6) of the European Union represents a significant shift in compliance requirements.
AMLD6 introduces criminal liability for AML failures, harmonises the EU’s definition of money laundering offenses, and expands liability beyond individuals to include legal entities. This means putting in place AML frameworks that are stronger and better able to pinpoint suspicious transactions for FinTech businesses. According to Alex Malyshev, CEO of SDK.finance, “based on SDK.finance’s experience with financial institutions across Europe, we’ve observed that companies implementing proactive transaction monitoring strategies ahead of AMLD6 deadlines have experienced fewer regulatory enquiries than those taking a reactive approach.” “The shift from entity-based monitoring to activity-based monitoring has proven particularly effective in identifying suspicious patterns that traditional KYC processes might miss,” the statement reads. Increasing Compliance Review Worldwide, regulatory bodies are intensifying their supervision of financial institutions, paying particular attention to FinTech startups.
The Financial Action Task Force (FATF) keeps updating its recommendations, which call for more advanced methods of monitoring and reporting suspicious activities. Rising Costs of Compliance By the middle of 2025, financial crime compliance costs are anticipated to exceed $22 billion, according to recent industry analyses, rising at a compound annual growth rate of 23.5 percent. The expanding scope and complexity of the compliance requirements that financial institutions must address are reflected in this rapid rise. Costly Repercussions of Not Complying Noncompliance carries significant reputational damage as well as the risk of losing banking relationships, in addition to the immediate financial penalties. These repercussions can be particularly severe for e-money institutions (EMIs) and payment service providers (PSPs), possibly leading to license revocation and business closure.
It is not only a regulatory requirement but also a business imperative to have systems that can adapt to changing compliance requirements in this environment. A well-organized Transaction Processing System comes in handy here. TPS as the Foundation for the Integrity of Financial Data The accuracy, consistency, and traceability of all financial data that moves through an organization are ensured by Transaction Processing Systems, which act as the financial operations’ central nervous system. In addition to improving operational efficiency, this position is crucial for ensuring the integrity of financial data, which is an essential component of audit readiness and compliance. ensuring the traceability of transactions By collecting comprehensive information for each transaction, a robust TPS creates a comprehensive audit trail: Identifying the initiator of the transaction Information with a timestamp (times of creation, modification, and approval) Account details for the source and destination Classification of transaction types Currency and amount information Reference data and the goal of the transaction With this level of detail, auditors and compliance officers can follow any transaction’s lifecycle from start to finish, providing crucial visibility for regulatory review.
Creating Records That Cannot Be Tame Implementations of TPS in the modern era include safeguards against unauthorized modifications: Locking mechanisms at the record level Validation of transactions with digital signatures Verification of data using hashes Access controls based on roles automatic recording of all attempts to access A crucial requirement for financial regulators concerned with fraud prevention and data integrity is met by these features, which create a secure transaction environment where alterations are virtually impossible to avoid detection.
Creating a standardized data structure Consistent data standards are enforced across all transactions by a well-designed TPS, which is invaluable for compliance purposes: categories and codes for transactions that are consistent standardized data field specifications monetary values formatted in a consistent manner structured data regarding payment references data that is normally used to identify customers By ensuring that data can be reliably aggregated and analyzed in accordance with regulatory requirements, this consistency makes regulatory reporting simpler.
Using transaction data to improve AML and KYC Recognition of Fraud Patterns in Real Time Advanced capabilities for pattern recognition have replaced simple record-keeping in modern transaction processing systems: Detection of unusual transaction timing Recognizing unusual transaction amounts Identification of suspicious sequences of transactions Identification of unusual patterns across the globe highlighting transactions with sanctioned parties or jurisdictions at high risk Instead of discovering potentially fraudulent activities during periodic reviews, when damage may already have been done, these capabilities assist financial institutions in detecting them as they occur.
Linking Transaction Trails and Identity Verification The most important link between KYC procedures and ongoing transaction monitoring is a TPS: comparing the parties to the transaction to the KYC records transactions involving unverified or partially verified entities are flagged automatically. Workflows for identity verification integration restrictions on risk-based transactions based on KYC status a record of the relationship between the parties to the transaction This integration fulfills a fundamental requirement of worldwide AML regulations by ensuring that transactions proceed only with properly identified parties.
Using behavioral data to support ongoing due diligence Based on SDK.finance’s experience working with real-time processing platforms, behavioral transaction data is an essential component of contemporary AML systems. Customers’ transactional patterns frequently reveal compliance risks that static KYC data alone cannot, according to industry experts. Rich behavioral data that supports ongoing due diligence is captured by a comprehensive TPS: Analysis of transaction frequency Profiles of typical transaction amounts Counterparties in common transactions Habitual patterns of geographic transactions Trends in day-to-day transactions Compliance officers are able to spot anomalies thanks to these behavioral profiles, which may point to suspicious behavior that calls for additional investigation.
Facilitating Clear Audit Trails A well-implemented TPS provides the transparency and traceability required to verify financial integrity for financial auditors. This transparency is made possible by a few key capabilities: Comprehensive Recording of Actions All system interactions are recorded in great detail in a robust TPS: Events pertaining to user access (activities related to login and logout) Events that create and modify transactions Actions for approval and authorization Changes to the configuration that affect transaction rules Alerts and notifications generated by the system Auditor’s ability to reconstruct the entire sequence of events surrounding any transaction is guaranteed by this extensive logging.
Reliable Audit Records Immutable record-keeping methods are becoming increasingly common in modern transaction processing systems: Numbering of transactions in order Record-based cryptography of transactions Mechanisms for timestamp verification Capabilities of a distributed ledger based on the blockchain Batches of transactions are digitally notarized. Auditor confidence in the integrity of the financial data being examined is increased because these methods make it technically impossible to change historical records without being detected. Documentation-Based Access Controls Based on Roles Access controls are implemented in great detail in transaction systems with strong compliance features: Permission structures that are granular by transaction type Principle enforcement with four eyes for sensitive operations Approval workflows that are documented Enforcement of duties segregation Notification of security exceptions automatically With the assistance of these controls, auditors are able to verify that all financial activities were properly governed and that transactions were authorized in accordance with organizational policies.
