What is Transaction Monitoring?
Transaction monitoring is the concept of reviewing, evaluating, and managing the transactions performed on a business application or system. The process of analyzing historical and current information provides insight into a user’s activity.
We’ve seen this process most prevalent among financial institutions. In fact, it’s a vital aspect for the banking industry, as it can detect suspicious or fraudulent activity and prevent money laundering.
Familiar with that message you receive from the bank asking to verify a charge? Well, that’s an example of transaction monitoring. With it, the banks can differentiate between normal, standard charges and abnormal ones.
Over the years, transaction monitoring has evolved to become even more sophisticated. Whereas before, local travel often required you to notify your bank. Today, many fraud detection systems can distinguish legitimate transactions, even in an unfamiliar location. While it’s still best to take financial precautions if traveling, the systems have definitely come a long way from where they started.
Analyzing transactions is a business process used far beyond the banking world. The concept applies to small, medium, and large enterprises in areas of healthcare, energy and utilities, government, education, and many others. Monitoring transactions aids in compliance management, fraud detection and prevention (FDP), customer identity management, and most commonly- anti-money laundering (AML). It can also be used to evaluate an activity or efficiency for a specific business process or system.
Why is Transaction Monitoring Important?
When it comes to financial institutions, monitoring transactions helps to spot fraudulent activities before they occur or very early on. It’s an important aspect in banking because the detection of a suspicious transaction could potentially prevent thousands of dollars from being laundered.
However, financial institutions don’t just use monitor transactions to prevent criminal activity. It also enables the banks to assess the risk level of a customer, by analyzing things like their employment type or residency status. Many aspects of a customer’s profile are evaluated when determining if an individual is a high or low risk.
Several other industries also use transaction monitoring for identifying high-risk activities. It’s an important concept adopted by enterprises for two main reasons; anti-theft and compliance regulations. It can also be used for assessing performance. Transaction monitoring typically includes evaluating a transaction’s size, type, nature, and consistency with their profile and historical data. Since this process is done at the database level, the method of transaction monitoring can apply to all systems and be used enterprise-wide.
The Benefits of Transaction Monitoring
- Improve risk control
- Align processes with regulatory compliance
- Gain insight using advanced analytics
- Increased visibility
- Protect your business
Transaction monitoring is a transparent and effective way for an enterprise to identify high-risk activities. It gives an organization a leg up on detecting suspicious activity and preventing fraud. Transaction monitoring is also the most efficient way for financial institutions and enterprises to comply with AML regulations.
The concept is applicable across multiple systems. For example, human resources, finance, and supply chain can all individually have a practice in place for monitoring department transactions or tables. This is necessary given that each department has its own unique areas of high risk.
The addition of a transaction monitoring system in many organizations also works as a deterrent against insider threats. Oftentimes, when employees or customers know processes are tracked or monitored, you’ll find that fewer are likely to engage in intentional misuse.
Manual vs. Automated - What’s the Best Choice?
In general, automated transaction monitoring processes are favored over manual methods. Since these systems collect and analyze a massive amount of data, a manual process would be timely, incredibly labor-intensive, and very expensive. Also, the likelihood of human error is exponentially higher.
However, automated systems still require some manual involvement. A transaction monitoring software, such as Sentinel, is intended to point you in the right direction of suspicious activity, rather than being a final solution. Upon receiving an alert of unusual activity, real people are still needed to further investigate the matter.
What does Transaction Monitoring mean for ERP systems?
An enterprise resource planning (ERP) system requires constant oversight of internal controls. Strict compliance regulations, like Sarbanes-Oxley SOX, are set in place to identify conflicting access where fraudulent activity is prevalent. However, the complexity of an ERP system warrants further monitoring to mitigate risk.
Transaction monitoring in ERP systems enables business users to further detect areas of high risk. By establishing thresholds for transactions based on time, size, or relevant factors, you gain insight into financial, operational, and risk control objectives. Monitoring risk and investigating suspicious transactions in ERP systems aids in complying with regulatory requirements, governance policies, and process efficiency.