As we conclude this series, it's essential to reflect on the challenges and opportunities in compliance, payments, and banking. We've discussed how manual intervention, fragmented systems, and outdated methods drive up costs, slow down processes, and impact customer satisfaction and revenue recognition. As the industry moves from traditional approaches to integrated, AI-driven systems, the future of compliance, payments, and banking is becoming increasingly connected across both on-chain and off-chain environments. In this final installment, we explore these themes and how businesses can prepare for the future.
Beyond Automation – Connecting Systems for a Hybrid Financial World
Much like on-chain payments are transparent via blockchain ledgers (i.e., Ethereum and Bitcoin), Open Banking offers off-chain transparency to traditional payments and banking ledgers. With on-chain payments, every transaction is recorded on a public blockchain, making it possible for anyone to trace the flow of funds and verify that the data hasn’t been altered. This transparency helps prevent fraud and ensures that financial records can be easily audited.
Open Banking provides a similar level of visibility but for traditional financial systems. It allows banks and payment providers to share customer financial data securely through APIs, with the customer's consent. This makes it easier for different institutions to access up-to-date information about a person's financial activities, such as account balances, transaction histories, and spending patterns. It also enables institutions to perform real-time checks for compliance, like verifying a customer's identity or monitoring transactions for any signs of suspicious behavior.
On-chain payment systems, such as stablecoin transactions and smart contracts, offer transparency and programmability for digital asset transfers, while off-chain systems, like conventional payment networks, provide the structure for integrating with established financial infrastructure. By combining on-chain automation with off-chain banking networks, businesses can deliver a seamless experience where payment data and compliance workflows are interconnected, ensuring that compliance requirements are met while reducing friction for users.
For instance, on-chain solutions can handle real-time due diligence, instantly verifying digital asset transactions against decentralized identity credentials or monitoring blockchain activity for suspicious behavior. Meanwhile, off-chain compliance systems can integrate these findings into existing banking systems via API, ensuring that regulated financial institutions are aware of any risks associated with the funds.
The Essential Role of Human Expertise
While automation, AI, and the shift towards a hybrid on-chain and off-chain financial system are transforming compliance, human expertise remains indispensable. Even with advanced technology, there are still complex situations and judgment calls that require human oversight and decision-making.
Human Judgment in a Digital World
AI can efficiently analyze large volumes of data and detect patterns that may indicate risk, but it falls short of understanding the nuances and context behind every situation. For instance, if a high-value transaction originates from a region known for financial crime, AI might flag it as suspicious. However, a compliance expert could recognize that the transaction involves a government-approved project or a legitimate business expansion, thereby clearing it after deeper due diligence.
Consider cases where on-chain transactions involve decentralized autonomous organizations (DAOs). While AI might identify potential risks associated with anonymous participation, a human compliance officer can assess the governance structure and transaction history of the DAO to determine whether the organization adheres to ethical standards and regulatory requirements.
Similarly, sanctions screening often involves intricate scenarios. If a person with the same name as a sanctioned individual attempts to open an account, automated systems might flag the individual. A human expert can then investigate further, distinguishing whether it is a false positive or a genuine match by examining factors such as geographical location, affiliations, and other identifying details.
Humans in Crisis Management and Regulatory Changes
During crises, such as data breaches, sudden regulatory changes, or geopolitical events impacting markets, human leadership is crucial. While AI can quickly detect unusual patterns, such as spikes in withdrawals or data anomalies, only human experts can interpret the broader implications and take swift action. For instance, if a blockchain-based asset suddenly experiences a surge in fraudulent activity linked to a hacking incident, human-led teams are required to coordinate responses across various stakeholders, including regulators, financial institutions, and affected customers.
Human expertise is also essential when responding to unexpected regulatory changes. For example, if new anti-money laundering (AML) laws mandate stricter controls on cryptocurrency transactions, compliance officers must adapt internal policies, educate teams on the changes, and implement new compliance measures across both on-chain and off-chain systems. These tasks go beyond automation's reach and require a deep understanding of the regulatory environment to ensure that the organization remains compliant while maintaining operational efficiency.
Bridging the On-Chain and Off-Chain Divide
In the hybrid financial ecosystem, compliance officers must be capable of understanding both digital asset risks and traditional financial regulations. For example, when a client uses digital assets as collateral for an off-chain loan, the value of the collateral might fluctuate rapidly. Human expertise is needed to monitor these fluctuations, make decisions about margin requirements, and manage the risks associated with liquidating the assets if necessary.
The Role of LLMs in Automating Compliance Reasoning
Large Language Models (LLMs) can assist in automating compliance tasks, particularly those involving text-based information. While not designed for real-time transaction monitoring or structured data analysis, LLMs can still play a valuable role in streamlining compliance processes when combined with AI agents that automate specific tasks.
LLMs excel at text analysis and summarization, enabling compliance teams to quickly process regulatory documents and extract key requirements. They can also automate language-based tasks such as generating compliance reports, drafting regulatory filings, and handling customer communications about compliance policies. In addition, LLMs can flag potential risks in textual data, like mentions of high-risk jurisdictions or unusual activity in compliance reports, which may require further investigation.
AI agents can take this automation further by performing specific tasks such as cross-referencing flagged data with external regulatory databases, monitoring ongoing transactions, or verifying identity documents against known standards. For example, while an LLM might flag a suspicious term in a compliance report, an agent could automatically pull relevant data from an on-chain source or conduct a quick check against off-chain records to verify the details.
However, there are limitations to what LLMs and agents can do on their own. LLMs cannot perform real-time financial decision-making or monitor transactions directly; these tasks require specialized fraud detection algorithms. Similarly, agents may automate routine tasks but still lack the contextual understanding that humans bring to complex compliance decisions. Integrating both tools provides a more complete solution but does not replace the need for human oversight, especially when nuanced judgment is required.
When used together, LLMs and agents can complement each other and existing compliance systems. LLMs provide the language-based understanding to explain regulatory changes or summarize complex information, while agents automate specific actions like updating compliance records or flagging transactions for review. This combined approach reduces manual workloads, speeds up processes, and enhances the overall efficiency of compliance operations.
The Hybrid Future: On-Chain and Off-Chain Convergence
The future of payments and banking lies in the convergence of on-chain and off-chain systems. On-chain solutions provide transparency, efficiency, and programmability, enabling new financial products and services to be built directly on blockchain networks. This includes stablecoins for cross-border payments, decentralized finance (DeFi) platforms for lending and borrowing, and tokenized assets for fractional ownership.
Off-chain systems, on the other hand, continue to offer the reliability and connectivity needed for integrating with existing financial institutions. These traditional networks support large-scale payment processing, settlement, and regulatory compliance, ensuring that businesses can operate within established legal frameworks.
Unified compliance across on-chain and off-chain environments allows companies to leverage the benefits of both. For example, a business can use smart contracts to automate payment terms on-chain while simultaneously recording the transaction's details in an off-chain compliance system for audit purposes. This approach not only reduces the risk of manual errors but also ensures that all transactions meet regulatory standards.
The convergence of these systems will require a new set of tools and strategies, including:
Interoperability protocols that connect on-chain networks with traditional banking systems
Hybrid identity solutions that link decentralized digital identities with conventional KYC requirements
Real-time compliance monitoring that can assess both on-chain activities and off-chain financial records
Creative Destruction – Natural Evolution in Payments, Banking, and Compliance
Creative destruction, the process through which outdated practices are replaced by new and more efficient solutions, will continue to shape the new financial landscape. As technology advances, traditional payment systems and compliance methods will naturally evolve to accommodate on-chain innovations.
For businesses, embracing this evolution means staying adaptable and continuously evaluating how new technologies can improve existing practices. Companies that integrate on-chain solutions into their compliance processes can reduce costs, speed up operations, and enhance transparency. Meanwhile, those who fail to keep pace with these changes risk being left behind as the market shifts towards more efficient, integrated systems.
Instead of attempting to force a complete overhaul at once, businesses can adopt a phased approach to integrating on-chain technologies. This allows companies to gradually implement changes, test new solutions, and refine their strategies over time without disrupting existing operations.
Phased Integration – Moving Step by Step
Transitioning to a hybrid on-chain and off-chain system will not happen overnight. Companies need to take a phased approach to integrate new technologies and update their compliance processes step by step. This allows organizations to test each change in a controlled environment, address any issues early on, and scale up gradually.
The phased approach could start by implementing automation for simple compliance tasks, like verifying identities on-chain or using smart contracts for routine approvals. As the system matures, businesses can move toward integrating more complex functions, such as automating cross-border payments or streamlining compliance reporting across blockchain and traditional banking systems.
Navigating Privacy, Consent, and Ethical AI in a Hybrid System
With the rise of on-chain solutions and AI-driven automation, navigating privacy, consent, and ethical concerns becomes more challenging. Businesses must ensure that sensitive data, including both digital and traditional financial information, is handled responsibly. This means going beyond regulatory compliance to adopt privacy-first approaches that empower users to control their data.
Hybrid identity solutions that combine decentralized digital IDs with off-chain verification can enhance privacy while meeting legal requirements. Users can choose which pieces of information to share, allowing businesses to verify identities without compromising personal data. Additionally, companies should adopt ethical AI practices to monitor activities and detect suspicious behavior, ensuring that automated compliance decisions are fair and unbiased.
Unified Compliance – The Road Ahead for Payments and Banking
The future of compliance in payments and banking lies in building unified systems that connect on-chain innovations with off-chain reliability. As businesses embrace both digital assets and traditional financial networks, a holistic approach will be crucial for managing risks, meeting regulatory standards, and delivering seamless experiences.
By leveraging interoperability protocols, real-time compliance monitoring, and hybrid identity solutions, companies can create a unified compliance framework that adapts to the changing landscape. This framework will not only streamline onboarding and risk management but also open up new possibilities for payments and banking in a world where digital and traditional finance are becoming increasingly intertwined.
Conclusion – Embracing the Hybrid Financial Future
Manual intervention and outdated compliance systems have long hindered business growth. To move forward, companies need a phased approach that blends innovation with the stability of existing systems. By embracing gradual change and allowing outdated methods to be replaced, businesses can steadily transform their compliance processes to meet the evolving needs of payments and banking.
In today’s market, compliance firms are under more scrutiny as businesses seek more than just basic regulatory checks. With commoditized compliance products becoming the norm, companies are looking for partners who can provide meaningful insights and add value throughout the entire onboarding and client lifecycle. Standard KYC and KYB checks are no longer enough; forward-thinking businesses now expect integrated solutions that combine identity, document, and transaction management into a streamlined, cohesive process.
Businesses are also evaluating how well compliance firms use identity networks and alternative data sources to offer a comprehensive view of risk. Rather than treating compliance as a one-time obligation, firms need to provide “real-time” risk assessments, monitor customer profiles continuously, and deliver actionable insights that go beyond regulatory requirements.
To differentiate themselves, compliance firms need to help businesses optimize their compliance workflows, lower costs, improve customer experiences, and accelerate revenues. Firms that fail to provide added value, risk becoming interchangeable commodities, while those that deliver deeper insights and drive value across the entire compliance lifecycle will be better positioned to thrive in an increasingly competitive market.
About the Author
Appo Agbamu, CFA is the Founder and CEO @ Ahrvo Labs Inc. Ahrvo develops, markets, and sells compliance, payment, and banking solutions. Appo earned a B.Acc. in Accounting and a BBA in Economics, w/a minor in Financial Markets from the University of Minnesota. In addition, Agbamu is a Chartered Financial Analyst (CFA) charterholder.
About Ahrvo Labs
Ahrvo Labs offers businesses cutting-edge payment and compliance solutions that optimize payment and banking processes and ensure regulatory compliance. The Portable Identity Gateway features a single onboarding process that provides access to over 400 leading financial institutions worldwide. Ahrvo Comply provides 20+ identity, document, and transaction management solutions. With a commitment to regulatory compliance, our cutting-edge compliance, payment, and banking gateway is designed to simplify workflows and streamline operations for businesses. Learn more @ https://ahrvo.com.
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