Digital Banking and Fintech Flashcards

What does 'KYC' stand for and why is it critical in digital banking onboarding?

Answer: Know Your Customer — a regulatory process to verify customer identity and assess risk

KYC (Know Your Customer) requires banks to verify customer identities and assess money laundering or terrorist financing risk before establishing a business relationship.

What is 'tokenization' in the context of digital payments and data security?

Answer: Replacing sensitive payment data with a non-sensitive substitute value (token) to reduce breach exposure

Payment tokenization replaces a card's primary account number (PAN) with a unique token, so merchants never handle actual card data, reducing PCI DSS scope.

Which US federal law governs electronic fund transfers, including debit card transactions and ACH payments, and sets consumer error resolution rights?

Answer: Electronic Fund Transfer Act (EFTA) / Regulation E

The Electronic Fund Transfer Act and its implementing regulation, Regulation E, establish consumer rights for error resolution, liability limits, and disclosures for electronic payments.

What is 'open banking' and what technology typically enables it?

Answer: A framework allowing third parties to access customer financial data with consent, enabled by APIs

Open banking uses standardized APIs to allow licensed third-party providers to access customer account data and initiate payments, with the customer's explicit consent.

What is 'velocity checking' in digital banking fraud prevention?

Answer: Monitoring the frequency and speed of transactions to detect unusual patterns indicative of fraud

Velocity checks flag suspicious transaction patterns — such as multiple rapid purchases, failed login attempts, or rapid fund movements — that deviate from normal customer behavior.

What is a 'Central Bank Digital Currency' (CBDC) and how does it differ from cryptocurrency?

Answer: A CBDC is a digital form of sovereign currency issued and backed by a central bank; most cryptocurrencies are decentralized and not government-backed

CBDCs are legal tender issued by central banks in digital form, carrying government backing and credit, unlike decentralized cryptocurrencies that lack sovereign guarantee.

What is 'machine learning' commonly used for in digital banking risk management?

Answer: Detecting fraud patterns and credit risk by training models on large historical transaction datasets

Machine learning models identify complex patterns in transaction data to flag fraudulent activity and predict credit defaults more accurately than traditional rule-based systems.