Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.
Federal Reserve Web Sites
Other Bank Regulatory Sites
January 17, 2012
How risky? The elements of an effective payments risk management program
Financial institutions manage a range of businesses with distinct risk management needs. Banks of all sizes that offer payment services to retail and commercial clients must appropriately identify and manage the myriad dimensions of risk entailed. The Retail Payments Risk Forum recently spoke with Tony DaSilva, a senior bank examiner at the Federal Reserve Bank of Atlanta. The conversation, captured in a podcast and highlighted in this post, covered the elements of a successful payments risk management program. Formerly a banker, DaSilva is able to take the perspective both of the supervisor and of the supervised institution when it comes to understanding the challenges of managing retail payments risk.
He said that in financial institutions today, "payments risk management is sometimes informal or decentralized." Without a comprehensive risk assessment, said DaSilva, these institutions have a heightened vulnerability to risks they do not understand. As a result, they may incur losses, lawsuits, or even regulatory formal actions.
Often, the scope and rigor of the bank's risk management program is not commensurate with the bank's risk profile. He added that the loose oversight combines with a variety of other factors to undercut a bank's risk management capabilities. A major driver in adding new payment services may be anxiety for fee income in an environment where many sources of payments revenue have been pressured.
Other factors include incomplete due diligence or inadequate "know-your-customer" (KYC) programs, or the institution may have insufficient payment expertise, senior leadership involvement, or employee and management training. DaSilva has seen institutions that do not perform adequate risk assessments or due diligence when deploying new payment products or services, for example, or when engaging in third-party service-provider relationships.
Implementing a strong risk management program
DaSilva explained that there are multiple types of risk in the payments business that institutions must consider. These types include "credit risk, compliance risk, transaction risk, fraud risk, and legal and reputational risk." Responding to all these requires establishing a risk management program with the following elements:
- Planning. Having clear, defined objectives, a well-developed business strategy, clear risk payments parameters, and a role within the financial institution's strategic plan.
- Risk identification and assessment. Senior management knowledge and understanding of their institution's risks is critical. The risk assessment should be incorporated into the bank's overall risk management process, which will vary by institution.
- Mitigation. Establish policies and procedures to mitigate identified risks. These policies should consist of clearly defined responsibilities and strong internal controls over transactions. Mitigation is also achieved through a good risk-based audit program, and well-designed contracts and agreements.
- Measurement and monitoring. Periodic reporting should enable the board and senior management to determine that payments activities remain within the bank's established risk parameters.
The role of bank leadership in risk management
DaSilva repeatedly emphasized that it is critical for bank board and senior management to be actively involved with and knowledgeable about their institution's payments risk management. For an institution to be able to gauge senior management knowledge, he suggested it begin by exploring whether management "understands the inherent product risks, the compliance requirements, the ability to monitor, the operations management and operational risks, [as well as] their reputational [and] legal risk."
DaSilva encouraged leveraging subject matter experts and ensuring that the retail payments strategy matches the bank's overall strategy and competencies. The best policy may be to limit product offerings to those for which management and employees have a full understanding of the accompanying risks. Despite the pressure to develop new sources of revenue, financial institutions should carefully evaluate the risks of any new payment product before adding it to their portfolio.
To end on a positive note, DaSilva has seen some institutions improving in all the right areas. They are assessing and mitigating risk across multiple payment channels, products, and delivery systems, including ACH, remote deposit capture, card products, and wire transfer. And for icing on the risk management cake, some do annual reviews of client accounts that include exposure from all payment, deposit, and loan products.
By Jennifer C. Windh, a payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
TrackBack URL for this entry:
Listed below are links to blogs that reference How risky? The elements of an effective payments risk management program:
- Will Biometrics Breed Virtual Clones?
- Putting All Our Payment Eggs in a Single Basket
- Waiting for the Other EMV Shoe to Drop
- Mobile Wallets: Is This the Year?
- Prisoner Release Cards: How to Protect the Interests of Recently Released Inmates?
- The Year In Review
- Help Determine the Payment and Fraud Data You See Reported
- Down and Out in Myanmar
- Inquiring Minds Want to Know More about Card Fraud
- Half Full or Half Empty?
- February 2016
- January 2016
- December 2015
- November 2015
- October 2015
- September 2015
- August 2015
- July 2015
- June 2015
- May 2015
- account takeovers
- ATM fraud
- bank supervision
- banks and banking
- card networks
- check fraud
- consumer fraud
- consumer protection
- cross-border wires
- data security
- debit cards
- emerging payments
- financial services
- identity theft
- law enforcement
- mobile banking
- mobile money transfer
- mobile network operator (MNO)
- mobile payments
- money laundering
- money services business (MSB)
- online banking fraud
- payments risk
- payments study
- payments systems
- phone fraud
- remotely created checks
- risk management
- Section 1073
- social networks
- third-party service provider
- trusted service manager
- Unfair and Deceptive Acts and Practices (UDAP)
- wire transfer fraud
- workplace fraud