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Payments Banking Crisis 2023


BANKING CRISIS RIPPLE EFFECTS HIT THE PAYMENTS INDUSTRY

By  John Adams
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March 24, 2023, 9:35 a.m. EDT 5 Min Read
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British regulators are threatening to directly shut down payment companies that
don't have adequate risk controls, a move that suggests the banking crisis is
increasing the legal jeopardy for any firm connected to financial services. 

The Financial Conduct Authority has sent letters to nearly 300 payment
companies, alleging those firms are not protecting consumers from financial
risks, and are endangering the entire financial system. The FCA said it may
close payment companies or take other action as a result of what the regulator
sees as inadequate risk management. 

The FCA did not mention Silicon Valley Bank, Credit Suisse or other troubled
banks, but it was more than implied. Payment firms within and outside the U.K.
— and their bank partners — are expected to do more to shore up liquidity risks
and credit risks at a time when they are facing myriad other challenges.  



Pressure in the U.K. also does not necessarily mean a payments crackdown is
coming in the U.S., but it's likely the current bank crisis will result in
regulators at least pressuring banks to better manage risks for third-party
partnerships, such as fintechs or digital payment companies. This could increase
compliance costs for some payment firms, or even require them to quickly find a
new bank partner.  

Payment fraud risk is part of the fallout from the bank crisis, according to
Tipalti's Chen Amit.


"This will usher in another wave of de-risking," said Carol Van Cleef, a lawyer
and CEO of Luminous Group, a Washington, D.C.-based blockchain firm. 

De-risking generally refers to firms resetting terms or making moves to reduce
counterparty risk. For banks, that means closing or limiting accounts for
certain clients or partners, a trend that was common after the banking crisis of
2008. 

"The events of the past two weeks will lead into a period where regulators will
take a closer look at what banks have been doing in terms of due diligence, to
see if there has been a breakdown," Van Cleef said.

"Payment firms that have money transmitter licenses and industrial bank licenses
are already heavily regulated and may face less pressure to update compliance
and risk," Van Cleef said. "That includes most of the large well-known
U.S.-based payment companies."  

But newer payment companies that rely on bank partnerships to manage regulatory
compliance for digital payments or other financial services could find those
partnerships under scrutiny if regulators turn up the heat on banks.  

"As a veteran of numerous de-riskings over the years, there can be a great deal
of 'creativity' on the part of those firms that are looking for banks," Van
Cleef said, adding that regulators will likely examine how banks are vetting
fintech startups. "That will mean more work for the banks and that will mean
more work for the payment companies." 

The FCA did not return a request for comment, but its warning suggests it sees a
systemic lack of risk management for payment companies, at least in the U.K. The
regulator's letter said common failings among payment firms include safeguarding
consumers' money if the payment company becomes insolvent, inadequate
reconciliation and a lack of a procedure to identify which funds must be
safeguarded to protect customers. 

"Both the FTC and the CFPB have in the past held payment providers accountable
for ignoring the implementation of risk mitigation when it comes to protecting
consumers," said Heather Altepeter, CEO of National Merchants Association, a
payment service provider.

Banking Crisis 2023
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As the Silicon Valley Bank crisis unfolded, the potential for payments to get
delayed or frozen in the event of a sudden bank failure became apparent. There
were payroll outlays that were delayed for several days and a number of fintechs
were temporarily unable to access funds. Supply-chain payments were also
delayed, and as the crisis stretches into its third week, payment firms are
assessing future risk. Faster processing is emerging as one potential hedge for
payments risk, as well as diversifying bank relationships and beefing up
authentication to prevent payment fraud.    

"The backbone of the payments infrastructure in the U.S. is the banking
industry," said Greg Cohen, CEO of Fortis.  For credit card processors or ACH
processing in the U.S., there is a financial institution in the mix often
referred to as a "sponsor," Cohen explained. If a sponsor is impacted in any
way, there is potential exposure to the payment processors that leverage that
sponsor. 

Historically, the impacts of bank failures have been limited to a day or two of
delayed funding, prior to a third party like the FDIC or new bank stepping in.
"But there could be other effects including changes in underwriting and risk
management processes which could impact approval and funding practices of a
processor," Cohen said. 

The biggest issue when businesses move large sums of money around quickly is the
complexity of managing a business from multiple accounts, said Cohen.  

"Keeping all that straight isn't simple, especially for smaller businesses, and
could lead to increases in human error which can create terrible experiences for
customers, upset other business operations and potentially lose the company
money," Cohen said. 

Many businesses will diversify their bank accounts to accommodate bank stability
risk, according to Tipalti CEO Chen Amit, adding his own firm maintains several
bank accounts and can shift funds from one to another. 

"We're not out of the woods in terms of the bank crisis," Amit said. "There's a
psychological element to this and you want to ensure you're with a bank that has
a strong balance sheet."

Beyond compliance risk, payment firms also face heightened security risk
resulting from a spike in large transactions between clients. 

Payment fraud becomes a greater danger in times of economic stress, given the
large amount of funds that may be transferred if a supplier, or a supplier's
bank, is under duress, according to Amit. 

"These firms may be changing payments from account 'xyz' to a new bank account,"
Amit said, adding that if this transfer happens with a high sense of urgency, it
increases the chance that the firm isn't a client's vendor but a fraudster.

"This is a risk on a good day," Amit said. "In this environment many can fall
into this trap."


John Adams
, American Banker
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Payments Banking Crisis 2023
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