Between 2016 and 2021, operational issues (including but not limited to cross-border and domestic payments over various networks) cost the banking industry almost $600 Bn. That’s an almost three-fold increase when compared to the period between 2011 and 2016 (Source: Banking operational risk loss data report 2022, ORX, June 2022).
Key examples of operational issues in payments
Whether human error, system error, or process failures, operational issues may be caused by a myriad of different factors. And, regardless of whether banks are relying on manual processes, automated processes, or a mixture of both – these controls aren’t always fail-proof. Manual maker-checker controls can demonstrate certain weaknesses, especially near banking cut-off times.
Similarly, while automated controls reduce the risks associated with manual errors, they also increase exposure to automated control failures and oftentimes require adaptation or recalibration that allows operational glitches to materialise.
The payments landscape continues to evolve. Payments today are increasingly digitised, available through an ever-growing number of digital and mobile channels, with more new industry players and third parties operating than ever before. Payment standards also continue to evolve with the global migration to ISO 20022 well underway. While we continue to strive for instant and frictionless payments, the time allowed for retrieving erroneous payments is reducing, while the pressure to deploy operational controls quickly is increasing.
All of this means financial institutions must adapt their operational controls to cater for these new channels and developments. It’s therefore more important than ever for financial institutions to stop the operational errors that can lead to financial loss, operational costs, reputational damage, or regulatory scrutiny.
How operational issues can impact your institution
When operational issues arise, so do operational costs. While financial institutions can suffer financial loss, there’s also an indirect expense as banks are required to compensate customers and adapt control policies to align with industry changes.
Problematic payments also pose operational costs associated with the recall and recovery processes, as well as the additional headcount needed to handle the ever-increasing volumes of problematic payments.
Beyond financial loss and operational costs, operational issues also carry the threat of reputational risk which affects the trust of customers, clients, and regulators.
Operational issues can translate into payments made by error, or incorrect payment instructions – both of which cause friction and hinder the speed and cost objectives of the wider industry as we strive collectively toward instant and frictionless payments.
Different ways to detect operational issues in your payments
While the causes underpinning operational issues may be different, the common denominator is that operational issues typically manifest as payments with anomalies.
The good news is that these anomalies are identifiable in advance and can be detected with tools such as Swift Payment Controls (PCS).
Let’s explore some typical issues that lead to payments containing errors being sent, and payments being sent by mistake:
Accidentally repeating payments
Scenario example
Sometimes a manual error can lead to the same payment being sent twice. For instance, if your payment operator-initiated payment of $30,000 from your institution’s account at the end of your business day but failed to save the spreadsheet used to record the status of payments. The operator then returns to the payment backlog and could send the same payment again, as it was marked as ‘pending’ rather than ‘completed’.
Impact on your business
Financial loss, operational costs of recall and recovery attempts, possible reputational damage among customers and correspondent financial institutions (FIs).
Anomaly detection
An alert when your bank is about to initiate a repeated payment (the same amount and the same currency) between the same ordering and beneficiary accounts within 24 hours would help to quickly identify and investigate repeated transactions.
How Payment Controls helps
In Payment Controls, you’re able to create rules, like the ‘duplicate payment rule’, which you can set to be alerted or to block repeated payments in a given time frame.
Processing the incorrect amount
Scenario example
Suppose your payment operator is meant to initiate a payment of $100,000 on behalf of a customer account, but makes a clerical error and logs the payment value as $1,000,000 instead. Your institution has 4-eyes maker-checker controls in place, but the reviewer does not notice the wrong amount and approves the payment.
Impact on your business
Operational costs related to recall and recovery attempts, reimbursement costs to your client, and reputational damage. In some cases, this can also raise regulatory scrutiny.
Anomaly detection
In this situation, you want to be alerted when your bank is about to initiate a payment of an abnormally high amount.
How Payment Controls helps
With the ‘single payment rule’, you can choose to be alerted or to block payments exceeding a defined threshold (absolute or relative value) on a single payment. You can also apply filters for specific currencies, country corridors, and/or FI corridors, and define lists of account numbers you wish to include or exclude from this logic.
Incorrect data input on creditor or debtor account
Scenario example
Imagine your automated controls for payment flows are still manually reconfigured each time a standard or regulatory requirement change. In such a recalibration exercise, one of your staff accidentally makes an error by mapping the wrong ordering account number and beneficiary account number fields. As such, the payments your institution initiates lead to a high number of payments being sent from the wrong ordering account and/or to the wrong beneficiary account.
Impact on your business
Operational costs of recall and recovery attempts, reimbursement cost to your client and reputational damage. In some cases, this can also raise regulatory scrutiny.
Anomaly detection
In this situation, you want to be alerted when your bank is about to initiate a payment between two accounts that have never exchanged a payment with one another before.
How Payment Controls helps
With the 'new account scenario’ rule, you can choose to block payments, or to be alerted when new ordering accounts, new beneficiary accounts, or new relationships are formed between two known accounts.
Using the incorrect currency
Scenario example
Image your institution has introduced a new digital payment service for corporate clients that relies on a third-party solution. Perhaps in error, your in-house default currency controls (which are automated) were not properly recalibrated to apply to this new payment flow. One of your clients initiated a payment of AED100,000 via the new channel but your automated controls instead treat it as EUR100,000.
Impact on your business
Operational costs of recall and recovery attempts, reimbursement cost to your client and reputational damage. In some cases, this can also raise regulatory scrutiny.
Anomaly detection
In this situation, you want to be alerted when an account sends a payment to a beneficiary account with which it has already been exchanged before, but in a new currency which has never been used between those two accounts.
How Payment Controls helps
With the ‘new account scenario’ rule, you can choose to be alerted or to block payments involving the usage of a new currency by an ordering account, a new currency for a beneficiary account, or the usage of a new currency between two accounts that have exchanged payments before.
Those are just some examples of issues that can arise. We understand how complex, important, and precise systems need to be in order to operate efficiently in today’s world. Fortunately, Swift Payment Controls is specially designed to deal with the anomalies that can arise with the modern volumes and errors associated with payments.
Learn more about how Swift Payment Controls can help
As we’ve discussed, operational issues show themselves via anomalies. Swift Payment Controls can help you to detect these anomalies automatically before your payments are released from our network.
Payment Controls offers both rules-based and scoring-based approaches, allowing you to implement controls that are easy to configure and rapid to deploy, and because it’s hosted on the Swift network any in-house back-office issues will not affect Payment Control’s performance.
While your internal back-office processes and controls remain integral to solving operational issues, Payment Controls’ real-time alerting and blocking capabilities give you an extra, complementary layer of control.
