Understanding Risk in Payments Topic23

The Anatomy of Payment Risk

Key concepts from Topic 23, broken down to understand risk, its assessment, and mitigation in the world of payments.

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1. What is Risk?

Primary Point:

Risk is an organization's exposure to potential loss. It must be identified, assessed, managed, and reported to mitigate these potential losses.

Sub-points:

• Understanding risk allows organizations to develop procedures to manage it.
• In payments, there is only downside risk; expectations are for timely and efficient transactions.
• Failure to meet payment expectations can damage reputation, relationships, and even financial systems.

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2. Types of Risk in Payments

There are numerous types of risk that can impact payments. Here are some of the key ones:

Operational FX/Currency Settlement Credit Counterparty Cyber Conduct Reputational Legal Political Economic Systemic

For example, Cyber Risk involves theft of customer data leading to fraudulent payments, while Political Risk could involve new government policies that restrict moving funds internationally.

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3. Risk Identification & Management

Risk Appetite & Governance:

Organizations define their 'risk appetite'—the amount of risk they're willing to accept. A governance framework, often the "Three Lines of Defence," is used to manage it.

Three Lines of Defence:

• First Line: Operational managers who own and manage risk day-to-day.
• Second Line: Risk management functions that monitor and provide expertise.
• Third Line: Internal audit providing independent assurance.

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4. Risk Impact Assessment

A tool to rank risks by considering the probability of occurrence and its potential impact. This helps prioritize resources.

Impact	Likelihood of Occurrence
	Very Unlikely	Low	Medium	High	Very Probable
Catastrophic	C	B	B	A	A
High	D	C	B	B	A
Medium	D	D	C	B	B
Low	E	D	D	C	B
Insignificant	E	E	D	D	C

Top Priority

Lowest Priority

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5. When a Payment Goes Wrong: Incident Management

Primary Point:

When a risk event occurs, organizations use incident management to restore payment services as quickly as possible and minimize damage.

Sub-points:

• An Incident Management Team is mobilized to identify, categorize, and resolve the event.
• The process involves fixing the issue, communicating internally and externally, and managing reputational risk.
• A key challenge is managing reputational risk, like deciding whether to inform a client about a payment held for sanction checks, which could be illegal ("tipping off").
• The goal is always to restore service quickly while adhering to legal and regulatory constraints.

This infographic summarizes key points from "Topic 23: Risk". It is intended for educational purposes.