Eddie Butterman and Mike Aragona look at business continuity planning in payments, why it’s important and how to put a good business continuity plan in place.
Despite advances in technology and the best efforts of participants in the financial system, the payment process can still break down.
This means that payments may not be made on time, funds may not be deposited to accounts and information regarding payments may be hard to come by.
Individuals and corporations should always ensure they have plans in place, to guarantee they can make payment in a timely manner. This is known as ‘business continuity planning’ (BCP).
BCP enables the continuation of a minimum level of essential services during, and after, the suspension of operations due to:
- natural disasters
- terrorist attacks
- computer or internet issues
- major global events.
The broad components of BCP are highlighted in this following illustration.
What should BCPs cover?
BCP can take many forms, depending on the sophistication of the entity and the type of process failure faced.
Because all firms have their own unique characteristics, it’s important for each to design its own strategy – addressing its particular risk profile – and to review it on an ongoing basis.
For example, the events of 11 September in the US demonstrated the lack of satisfactory BCP planning for many financial institutions. Those same lessons are now being tested in many nations, thanks to the global coronavirus pandemic.
It is nearly impossible to imagine every scenario for which an individual, corporate, payment service provider or clearing system should prepare. But at minimum, a BCP should:
- ensure customers have access to funds for essential purchases and information to make critical decisions
- prevent possible defaults on payments linked throughout society, with funds received as a counter value in a first transaction used to pay for another
- limit payment and settlement disorder since financial institution operations are deeply intertwined with broader economic activity
- maintain the institution’s and system’s reputation amongst users by exerting strong leadership – which is deeply involved in the process – investing managerial resources and showing a firm-wide awareness.
What to consider when creating a BCP?
When evaluating the preparedness of organisations – particularly payment service providers and clearing systems – important items to consider are:
- planning, testing, and review procedures
- a focus on critical operations
- co-ordination with external parties, as necessary
- consideration of special circumstances for major disruptions.
One way to maintain a strong BCP is to prepare an offsite location as a designated contingency payment processing site. These sites can be categorised as:
- ‘hot’ – generally well-staffed, frequent backed-up and able to be activated in a very short amount of time
- ‘warm’ – lightly staffed, with system configuration and of back-up download required prior to activation
- ‘cold’ – no staff or regularly backed-up data, reserved for when other locations become inaccessible
- ‘dual-processing centres’ – maintained simultaneously to primary location with mirrored data for seamless integration.
At a minimum, the back-up site or dual-payment processing site should be located on a different power grid to the primary site. Or it might house generators capable of supplying power for several days.
Operating under a BCP
Let’s look at some examples individuals, corporations and financial institutions may face when operating under BCP.
In one scenario, ABC company has received cheques from customers. The electronic system they normally use via a PC, Remote Deposit Capture (RDC) is out of service.
Local bank branches are closed to the public making a physical deposit unavailable. How can the company pay cheques into its account?
One option is for ABC to use a mobile app to make the deposit, if available. However, the depositor may need to scan each cheque individually, and there may be a daily value limit.
If the user has a high volume and value of cheques to deposit, using a mobile app may not be a workable option. As an alternative, a bank may allow overnighting cheques to its operations site for manual deposit.
However, users may not want to bear the cost of this delivery method since they are ultimately dealing with an interface issue. Should the bank be prepared to absorb these additional costs as a part of its BCP?
In another scenario, a customer needs to pay its venders, but the e-banking platform used to prepare wire transfers is currently down. Without this interface, the payment service provider may allow emailing or faxing payment instructions to its operations team directly.
However, manual wire transfers will require wet-ink authorised signatures and may require a call-back by phone to confirm the validity of the instructions.
This may not be an issue for an individual but could prove difficult for a corporation with signatories located across various time zones and a potentially high volume of payments to be made.
Should companies anticipate scenarios like this when determining essential staff, and signatories, for BCPs?
Test your BCP
We could provide countless examples of scenarios in which robust business continuity plans are needed.
Considering as many situations as possible is key to creating a robust plan that works in the worst of circumstances. In times of uncertainty, even the best laid plans can go awry.
When trying to plan for what you cannot foresee, the best option is to constantly test the system, review the results, and repeat. Flexibility and communication are key.
Michael Aragona is the Head of Global Transaction Banking Sales for the Americas at Mizuho Bank, Ltd. Currently based in New York, Michael has over 25 years of transaction banking advisory experience. He has worked around the world managing teams of treasury professionals and his own treasury consultancy business.
Eddie Butterman is a Vice President at Mizuho Bank, Ltd. Currently based in New York, Eddie helps corporate clients navigate the complex world of transaction banking to deliver efficiencies for their organisations.
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