Time and time again banks have made headlines for significant payment-related errors resulting in major financial and reputational costs. Take the news about Deutsche Bank – in 2015 concerns about the robustness of the bank’s security controls were raised after news leaked that they paid $6bn to a hedge fund client by mistake. Unfortunately, these kinds of events are more frequent than you might expect. And these are just the ones that make the headlines. 

Time and time again banks have made headlines for significant payment-related errors resulting in major financial and reputational costs

One particularly infamous example is Citigroup’s accidental payment of $900 million to cosmetics company Revlon in 2020. Aside from a news-worthy headline, mistakes like this result in long-lasting financial impacts due to subsequent regulatory fines, legal fees and, sometimes, the inability to regain the full amount paid. But, are Citi and Deutsche Bank just cautionary tales? And what about the instances that don’t make the headlines?, With the significant flow of money that occurs both internally and externally within banks, one might question whether these errors not only likely, but inevitable? 

Piecemeal attempts to mitigate risk are not enough

Up to this point, efforts to mitigate payment risk have largely been tactical. Banks are currently heavily reliant on large workforces to process trade issues and payment failures. So, they’re working reactively, as opposed to identifying potential issues prior to payments being released, and continually reviewing and ensuring the right controls are set and the right risk ownership mindset is instilled in their employees.

Banks are also faced with continual product innovations within financial instruments, resulting in even more complex payoff structures. As these innovations evolve at an accelerated rate, banks feel pressure to keep up, whilst concurrently are inhibited by legacy technology architecture and complex operating models behind the scenes. As a result, teams rely on human intervention to circumvent existing processes in an attempt to keep up with the industry and meet client needs.

Citigroup’s error resulted in the requirement for an eye-watering $1 billion investment in infrastructure and a resolution plan

Together this gradual, “piecemeal” approach, responding to regulatory fines and media stories in real time, is one of the key contributing factors to payment-related errors and the resulting costs. In Citigroup’s case, their error resulted in the requirement for an eye-watering $1 billion investment in infrastructure and a resolution plan. This impact was further exacerbated by the significant knock-on effect to shareholders. Their equity value eroded overnight – a $4 billion market capitalisation drop within 3 working days of the incident. Something’s got to change.

Why act now?

Banks have been dealing with payments in the same way for many years, so why should they act now? The accelerated rate of Fintech disruption (VCs invested $57.1bn worldwide in 2021) within payments, from cross-border payments provider Stellar to open banking solutions like TrueLayer, alongside the pace of new products and services being offered, is driving an increasingly dynamic payment landscape. As a result, banks are being forced to remain competitive through building new solutions-house or partnering with start-ups. Bank of America has partnered with digital payments Fintech Zelle since 2020, which has facilitated over 102 million transactions and over $27 billion payments for their customers. With increasing focus and investment to keep-up with constantly changing client demands, banks are in turn exposed to more risk and a need to implement more robust, effective and proactive controls.

With fines of up to $400 million in response to the lack of robust risk management systems in place for Citigroup, it is likely that penalties will become increasingly substantial in an effort to encourage banks to implement more robust risk controls. In Citigroup’s case, the combined impact of the payment errors themselves, resulting regulator demands and shareholder impact, led to an overall loss of $5.5 billion.

Banks need to wake up to the potentially disastrous consequences that could arise if they fail to respond to a new set of risks

Corporate and investment banks have experienced similar experiences in the past and these are likely to be an indicator of the times to come for others. Banks need to wake up to the potentially disastrous consequences that could arise if they fail to respond to a new set of risks – risks like increasing operating model complexity and fast evolving technology architecture. 

So, how can you minimise the inevitable?

Minimising payment-related errors does not need to be a multi-year programme requiring significant investment. Here are some ways corporate and investment banks can act now:

  1. Implement a consistence and robust foundation across the business to ensure consistency

Becoming siloed within a business is a common theme when it comes to errors. And products are the key reason. For example, lending products and fixed income products are inherently very different, and therefore have different operating models. However, introducing an overarching policy alongside continual refreshed active training and a risk-based control framework will ensure some level of consistency and rigour when it comes to mitigating payment risk. Standardised does not mean the same; controls must be appropriate for the risk they carry.

  1. Proactively monitor and trace end-to-end payments

A hybrid of legacy and modern technology, combined with limited availability of reliable clean data, creates a “black hole” when it comes to understanding payment flows and potential issues resulting from internal hand-offs and intervention. Implementing a solution that enables real-time tracing of payments overlaid with the right artificial learning and machine intelligence forecasting provides banks with a powerful risk mitigation tool.

  1. Instil a culture where everyone takes accountability for their role in mitigating risk

Each individual must take accountability for their role in mitigating payment risk.  

Senior management need to instil a risk mindset within their teams and ensure they are equipped with the key risk indicators to actively monitor risk with education and a reporting structure that drives accountability.

The front office needs to ensure all payments are easily traceable end-to-end to flag a potential live event and should never sidestep standard processes – even when requests are ‘urgent’.

Operations need to proactively monitor active payments and ensure there is a continuous feedback process so there is clarity about which part of the processes are breaking down due to manual workarounds being used to overcome system limitations.

Ancillary functions must use simple workflow tools to enable data to be captured, end-to-end visibility and a clear audit trail where offline tasks or approvals are required.

How we can help

The general population only hear about errors that make international headlines because these make for an entertaining read. But we cannot deny that payment errors are a universal challenge faced daily by all banks. Following these simple steps can help keep you in the clear.

Our financial services experts work with organisations around the world to help them avoid potential millions on payment errors. Connect with us today to kickstart your strategy to minimise risks.