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Why Talk About Risk in Payments?

Yvette Bohanan

August 12, 2019

Yvette Bohanan

Let’s be honest, risk is not the first topic people gravitate to in payments. It’s much cooler to talk about open banking, fret about PSD2 implications, or ponder the pros and cons of a cashless society. Even risk managers I know tend to keep quiet about risk – especially at social events. So why are we running a one-day workshop about risk in payments?

Reason 1: The Times, They are a Changin’ 

Thank you, Nobel Laureate Bob Dylan for putting it so eloquently. Things in payments are a changin’ – fundamentally at their core, all over the world. A few examples:

  • The 2016 launch of India’s UPI is revolutionizing payments, where non-cash spend is expected to overtake cash spend by 2020
  • The TARGET Instant Payment Settlement (TIPS) service launched by the Eurosystem in November 2018
  • Real Time Payments (RTP) system launched by The Clearing House in the U.S. in 2018
  • The May 2019 announcement by the Central Bank of Venezuela to launch a new independent national payment system by 2020

These and other events are tectonic shifts in how central banks, money markets, commercial banks and processors are revolutionizing clearing and settlement infrastructures. New standards, like ISO 20022, EMVCo’s Secure Remote Commerce, and SWIFT gpi, are making transactions on many of these new systems more robust.

All in all, the pace of change in industry standards, systems, and technology is fast. And with new systems comes new risk exposures and new vectors that can be exploited by fraudsters.

Reason 2: Life in the Fast Lane 

To paraphrase Joe Walsh: life in the fast lane may be guaranteed to blow our minds. However, speed alone does not guarantee success. Taking a step back, it helps to remember that payments systems rely on volume to succeed. And efficient payments systems attract more volume. Papers discussing payments efficiency boil it down to three core components: speed, cost, and (you guessed it) risk.

Life in the payments fast lane helps lower the cost to the participant in the payment transaction that does not have access to funds (in payments geek speak – “float”). To this participant speed – how quickly money moves – is critical. Then there is cost – the costs of processing, infrastructure, and liquidity. These costs will influence how efficient the system is over time. Last but not least, risk and the cost of risk management procedures for each participant.

Each participant decides how to create more efficiency. Central Banks do this by managing net positions of banks through various monitors and controls. Liquidity and money supply are their main focus. Fintechs may find or create efficiency through arbitrage of transactions across multiple payments systems. Merchants may decide not to offer payments that take weeks to settle, are expensive, or are subject to intolerable financial loss relative to their margins, particularly after the sale occurs.

For a new system to get traction – at a macro level – the efficiency equation must be optimized across all participants. Like any equation, acting on one parameter can create intended or unintended results (risks) on another.

How do you calculate the impact of newly introduced variables in this equation?

  • Process times are being slashed in new and incumbent payments systems
  • Because of the cloud, mobile phones and new technology stacks, initial costs are low and should decrease over time

What does this mean for risk?

As a participant in the payment transaction, the best way to achieve balance is to understand the risks inherent in the incumbent and new payments systems and how to best manage them.

Unfortunately, there are still fractures and blind spots within and across participants, payments systems, and domains. These gaps have the potential to resolve past risks as well as open us to new ones. Luckily, there are strides in machine learning, authentication, and other technologies to help identify and mitigate many risks. Identifying, categorizing, and managing existing and emerging risks brings us to our third and final reason.

Reason 3: Risk Management is Still Confusing and Misunderstood 

For decades I thought the John Denver song lyrics to Rocky Mountain High were “Rocky Mountain High…porta bongo”. Sidenote: it’s Colorado. Much better.

The point is, we all have those misheard, misunderstood moments, that themselves are a real risk for teams trying to remove payments risk:

  • I’ve spent hours in design meetings only to have someone ask: “So, what exactly is a control?”
  • Or assert, “I don’t think we need to reconcile these files, if anything goes wrong the bank will take care of it.”
  • Or, the real zinger, “What are we talking about here, risk, compliance, or fraud?”

It’s so much better when we all understand the meaning behind the words, their context and purpose. Why they matter. Context and frameworks turn the words into meaningful lyrics and lyrics into the story. Clarity in context and meaning aligns us on our purpose – and that makes a difference in customer experience, product design, and long-term efficiency.

In short, there’s a lot to talk about when it comes to risk in payments. We hope you agree. Join us September 19 in Palo Alto for our Risk in Payments Insight Workshop.

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