Comparison Of Payment Systems, KRIs, And Risk Control Measures

Cost of transaction

Questions:

1.Which payment system is more prone to the following types of operational risk events?

2. How do the various payment systems compare to one another with regard to?

3. Which segments of the payment markets do you think each type of payment system will dominate in the future?  A market segment can be characterized, for example, by

4. Describe the process map of the activities within a bank (or within a division of your organization) with respect to one of the credit card service.  Identify the potential points of failure.

5. Describe the KRIs that have to be kept track of to monitor ops risk within your organization.  Discuss which ones are leading indicators and which ones lagging.  

6. Describe the nature of the possible events that can lead to Ops Risk losses.  Can you say something about the frequency distribution or the severity distribution?  If you do not have access to (or are not allowed to divulge) real data, then you still may be able to come up with some more qualitative assessments with regard to frequencies and severities. However, when you make qualitative assessments of potential losses, try, for example, to say something about the shape of the severity distribution.  Is there any chance that it would have a normal distribution or a lognormal distribution?  Do you think it has a fat (or thin) tail?  Why do you think the tail of the severity distribution would be fat (or thin)?

Key

VL- Very low

L- Low

M- Medium

H- High-

VH- Very High

• Cash- Cash Transactions are one of the riskiest transactions. The burden of carrying cash is extremely high (Bank Negara 2015). On top of that, there can occur some errors while transacting through cash as a person may be able to give out high amount by mistake. Cash transactions are also prone to theft as cash theft is one of the easiest and simplest forms of thefts.
• Cheques- Cheques are connected with the bank account of an individual. Cheque transactions are less risky than other cash transactions as they are backed by the security of the banks. The risk of theft is also extremely low (Liébana-Cabanillas, Fernandez, and Muñoz-Leiva 2014). The risk of money laundering is also reduced when an individual carries out his or her transaction by cheque.
• Credit Cards- Credit card is a loan method whereby the individual borrows a certain amount of money through their card from the bank. The risk of errors is extremely low in the case of credit cards; however, the risk of theft is extremely high in case of credit cards (Bis.org 2018). Money laundering is extremely low in case of Credit cards.
• Wire Transfers- Wired transfers are another form of transaction, which is prevalent. The risk of theft is low in this case but the risk of money laundering remains high. Risk of error is also low.
• Online Payment Systems- In online payment systems there can take place a huge degree of hacking. Hence, though it is a convenient method, it is extremely risky. Anyone can hack one`s account and can steal one`s money.

The payment systems dominating the payment markets based on the different segment characteristics are given below:

• Size of transaction- in case of transactions, which are extremely large in size, the online payment systems, will dominate the market (Glen 2013).
• General transactions between individuals, between various companies and between various individuals and companies.
• Payments involving currency exchange- These generally take place while dealing with foreign countries and therefore, crypto currency can be the dominating payment system in this segment.

As it can be seen from the given diagram, the credit card system undergoes various steps before it reaches the consumer. The documents of the customer need to be verified in case of issuance. When a customer purchases a product or a service via a credit card, the card number is entered into the system, then the sales detail is submitted, after that, the balance available is verified by the processor (Verbano and Venturini 2013). In case it is declined, then the money is declined and the cardholder cannot access the money. The main potential points of failure in the given system occur in case the verification and authorization is unable to take place. In such a case, the customer may not be able t withdraw the money even if he has the required balance (Shafiee and Kolios 2014). This may then lead to a system failure.

The KRIs used in an organization are:

• Staff turnover- The stuff turnover indicator may be linked to various risks such as fraud, staff shortages and process errors.
• Number of data captures errors- process errors that occur within the organization.
• Phishing attacks – A track of this may also be placed in case of IT systems failure.
• Number of limit breaches
• Number of outstanding items on BRS- This may be a lagging factor where the various outstanding items may be present and the brs system may not have been prepared (Moh’d Al-Tamimi, Khaled, and Obeidat 2013). This needs to be improved.

In the operational risk management, when a number of risks are present. These risks may vary from external fraud, clients, products, business practices; damage the goods and so on. For an operations risk manager, a sample of data describing the kind of risk is usually insufficient to make a statement therefore he has to undertake another analysis in order to determine the outcomes. A frequency distribution can be described as a table and graph, which describes the frequency of various outcomes.

A severity distribution can be described as the method to estimate the empirical operational risk loss in a business (Torabi, Baghersad and Mansouri 2015). There are usually two kinds of severity distributions, which are parametric entry or curve fitting entry.

For a lognormal kind of a severity distribution, the tail shape is generally not thin. However, the shape of the distribution depends largely on the severity as well as frequency distribution. Severity distribution is usually light tailed and frequency distribution is not light tailed. In such a case, the results may vary (Chen, Sohal and Prajogo 2013).

The various risk control measures are:

• Inspection- A business is a risky venture. Therefore, the company needs to make sure that they inspect regularly into the various aspects any risky areas in order to make sure that the company does not deviate from its actual goals.
• Maintenance- The relevant changes, which are made, need to be maintained and it has to be seen to it that those deviations need not be made again.
• Testing- Testing comprises of making sure that the various investments as made by the organization are as per the correct method.
• Automation- Automation can be adopted, as it will help to prevent any human errors.
• Due diligence- It has to be seen that the various human fraudulence is prevented and it is seen that those mistakes are prevented
• Audits- Continuous audits need to be carried out in order to make sure that there is no fraud.
• Policies- The Company needs to take out various policies, which will ensure measures to control risks.
• Communication- Proper communication needs to take place in an organization to make sure that the risk control messages are disseminated throughout the organization.
• Planning- Planning tends to form an essential part of an organization and helps in controlling risks.

References

Anderson, Ross, and Steven J. Murdoch. “EMV: why payment systems fail.” Communications of the ACM 57, no. 6 (2014): 24-28.

Arnold, Glen. Corporate financial management. Pearson Higher Ed, 2013.

Bis.org.2018. Basel Committee – BIS – Risk management. [online] Available at: https://www.bis.org/list/bcbs/tid_50/index.htm [Accessed 12 Jan. 2018].

Chen, Jie, Amrik S. Sohal, and Daniel I. Prajogo. “Supply chain operational risk mitigation: a collaborative approach.” International Journal of Production Research 51, no. 7 (2013): 2186-2199.

Liébana-Cabanillas, Francisco, Juan Sánchez-Fernández, and Francisco Muñoz-Leiva. “Antecedents of the adoption of the new mobile payment systems: The moderating effect of age.” Computers in Human Behavior 35 (2014): 464-478.

Malaysia, Bank Negara. Financial stability and payment systems report 2014. Bank Negara Malaysia, 2015.

Moh’d Al-Tamimi, Khaled Abdalla, and Samer Fakhri Obeidat. “Determinants of capital adequacy in commercial banks of Jordan an empirical study.” International Journal of Academic research in Economics and management sciences 2, no. 4 (2013): 44.

Murdoch, Steven J., and Ross Anderson. “Security protocols and evidence: Where many payment systems fail.” In International Conference on Financial Cryptography and Data Security, pp. 21-32. Springer Berlin Heidelberg, 2014.

Shafiee, M., and A. Kolios. “A multi-criteria decision model to mitigate the operational risks of offshore wind infrastructures.” Safety and Reliability: Methodology and Applications (2014): 539-547.

Torabi, S. A., M. Baghersad, and S. A. Mansouri. “Resilient supplier selection and order allocation under operational and disruption risks.” Transportation Research Part E: Logistics and Transportation Review 79 (2015): 22-48.

Verbano, Chiara, and Karen Venturini. “Managing risks in SMEs: A literature review and research agenda.” Journal of technology management & innovation 8, no. 3 (2013): 186-197.

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