A strategic framework for managing operating and compliance risk in the payments business

Abstract

A variety of environmental factors have combined to raise the risk inherent in processing payment transactions. Among other factors, risk is increasing because payment methods and channels are proliferating and becoming more complex, settlement infrastructures are expanding access in order to compete, and the velocity and leverage of financial transactions are increasing. In response, regulators have raised the bar, and Boards of Directors and senior management at both banks and other financial services providers are asking tough questions. This paper reviews some of the key forces driving increased operating and compliance risk in the payments industry and outlines an approach for effectively managing this risk. The authors recommend that payment risk be viewed in its component parts at a foundational level and also offer a more comprehensive framework for risk management that includes not only compliance and control, but also customer experience, efficiency and delivery architecture. Finally, an industry-wide approach to identifying and eliminating risk more rapidly and effectively through a consortium that would share information on payment risks is suggested. This consortium could ultimately also provide a basis for more transparent measurement, monitoring and insurance of payment risk.