Why investors are pouring money into AML startups

Startups that provide anti-money-laundering technology to banks continue to raise large amounts of money because of tech advances they’ve made that can speed crime detection. But the companies may have to expand their business models to keep momentum going.

The AML software company Quantexa recently raised $153 million. A competitor, ThetaRay, drew $31 million. Comply Advantage added $120 million, and Hawk AI raised $10 million in its initial round. These companies have been riding a yearlong wave of investor interest.

But there is a limit to the number of potential clients to go around for every fintech. That math often raises the question of how long the financing trail can extend.

“It has passed the point of critical mass in my mind,” Colin Whitmore, senior compliance and technology analyst for Aite Group, said of the AML investment trend. “These [AML] companies are building a lot of traction, as it’s not just a man and his dog working on a new idea. Some of these companies have grown substantially.”

It could be a limited area of growth, Whitmore contends, because selling AML software is not like selling a service to consumers, where there’s a mass market that can be cross-sold to.

“With AML, you are selling to banks and then maybe to payment providers, many of which are new clients to some of these AML products,” Whitmore said. “If you sell a solution to Bank of America, for example, and they double their customers overnight, it doesn’t mean you are going to sell more AML tech to them.”

Still, there is the potential for AML vendors to sell advanced analytics and data-gathering tools that could be used to ferret out other types of fraud. That opportunity is a key reason the series of funding rounds have been successful.

New models sought

BlackFin Capital Partners, operating out of Paris, Brussels and Frankfurt, led the initial $10 million funding round for the startup Hawk AI to help it expand in Europe and move into North America. Like many investment groups, Blackfin generally takes either a majority shareholder position or an influential minority role.

Hawk AI, based in Germany, may be new to the game, but what it offers in protection alerts, compliance, decreasing false positives, real-time data analytics and data sharing has drawn investor attention. Plus, it already landed a key U.S. client in North American Bancard Holdings, which is based in Troy, Michigan.

“We realize that many organizations bring a lot of innovation, but one use case that draws our attention is fraud detection, so we are looking for companies that bring something else on top of general business rules” in detecting fraud or money laundering, said Maxime Mandin, investment director for BlackFin.

BlackFin was quick to move on Hawk AI because it was looking for companies that bring artificial intelligence and data sharing into the mix for AML, payments and e-commerce, Mandin said.

Some players, such as Actimize, Experian, PwC, LexisNexis and Fiserv have been addressing AML and other security needs for many years, but new players continue to enter the market.

“It is amazing where they are all coming from, because it is a ‘thing’ at the moment,” said Aite’s Whitmore, who is tracking the current trend and says his list shows more than 60 AML software companies.

“You have to fear that the bubble could burst sometime, because these companies can’t all keep chasing the same customers,” Whitmore said.

Expansion a priority

Rather than view the fast track of AML investments as something that could screech to a halt, Quantexa CEO Vishal Marria sees a tech sector innovating rapidly for an increasing number of organizations that don’t have “a true single view of data” and need one badly.

The cost and effectiveness of know-your-customer and AML compliance is still an issue and a key topic for most bank boards, Marria said. “The simple fact is that traditional rules-based systems can be very inaccurate and create massive inefficiency,” he added. “New tech such as entity resolution, graph analytics and AI are the new standards driving AML and counterfraud, which can also be applied towards finding new revenue generation opportunities.”

Quantexa didn’t just find success on its most recent funding round. A year ago, the London-based data and analytics software company received $64.7 million in Series C funding from HSBC, ABN Amro Ventures, Evolution Equity Partners, Dawn Capital, AlbionVC and Accenture. The company welcomed Warburg Pincus into its investor fold in its most recent funding round.

In showcasing its Contextual Decision Intelligence model, which provides a single view of data that helps banks and other companies decide which transactions to approve and which ones to hold for further review, Quantexa says it believes it will stay relevant in AML and other fraud detection.

Technology like Quantexa’s is becoming vital as know-your-customer and AML transaction monitoring are likely to become more integrated in the future.

AML offenses include activity like wildlife, organ and human trafficking, as well as bribery and corruption. “We have observed that many companies identified as having connections to these crimes may potentially go unnoticed” without stronger monitoring, Marria said.

Also last month, Israel-based ThetaRay partnered with Google Cloud to strengthen its AML detection integration, a move that came not long after the company raised $31 million through current and new investors. The new financing brought ThetaRay’s fundraising efforts past the $90 million mark.

“We established our company seven years ago as an artificial intelligence company, and it was like science fiction, creating algorithms to ‘see in the dark’ and understand human intuition,” ThetaRay CEO Mark Gazit said.

The company noticed bad guys began to easily hack and take advantage of underlying rules-based systems built years ago — and as the pandemic forced more businesses and consumers online and into digital channels, the fraudsters followed along to use the same tools in their trade.

“We constantly follow what the bad guys are doing, and they have been using AI themselves for the past two years,” he added. “We don’t have any choice but to fight fire with fire. You have to use AI to keep digital business safe.”

Gazit agrees with the notion that AML providers could find themselves limited in how they can grow the business, and that investors could shy away from that reality.

“We took a different approach to that in saying that our AML solution for cross-border payments actually allows a bank to increase its business,” Gazit said. “They could do transactions and move money into countries that they could not sell services in before. It’s an impact on financial inclusion as well.”

In that manner, ThetaRay and its bank customers agree on a standard fee, and then negotiate a portion for ThetaRay from each new transaction that would not have been possible without the AML protection.

“That way, we grow together, and the investors like it too,” Gazit said.

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