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Resilient Banking Systems

Transaction banking has historically been one of the staple businesses for financial institutions (FIs), but its importance was diminished a decade ago as banks were getting involved in more profitable investment banking…and coming up with more sophisticated financial products with higher margins.

However, as the 2008-2009 financial crisis hit, FIs once again realized the importance of transaction banking, which is often a less risky and more stable source of revenue amid tightening regulation of more sophisticated global finance. Still, the very nature of transaction banking is changing as an increasingly demanding customer base looks for ‘faster’ payments.

In the Asia-Pacific region, Japan was the pioneer in fast payments as it launched its Zengin real-time payments system, incredibly enough, in 1973. Zengin is now on its 6th edition and includes a dual-scheme for both net and real-time settlement. South Korea was the second country to offer faster payments and introduced its payment system in 2001. The most recent initiative was in Singapore, where the FAST network was rolled out in March 2014. In all cases, consumers and corporate clients were eager to adopt the new systems, as immediate arrival of payments to a counterparty account removes a significant amount of uncertainty and risk.

Volumes are high in mature payment networks. Japan’s Zengin is handling about USD 100 billion per day, while South Korea’s HOFINET is processing over USD 30 billion worth of payments daily. Transaction volumes in newly deployed systems are growing rapidly; China’s Internet Banking Payment System was introduced in 2010 and has seen 165% growth in 2013. Such an increase in volume requires more advanced technological solutions, capable of supporting the flood of transactions.

To be able to connect to payment systems and offer clients all the benefits that such new systems can offer, FIs have to be equipped with robust solutions themselves. Truly robust solutions provide the same level of service, functionality and reliability no matter the volume of transactions they have to handle.

As corporates get accustomed to real-time settlement of lower-value payments, they feel comfortable with transacting more often where they would have used batch payments before. More transactions means more business for FIs and an increased need for systems that can scale as business grows to ensure that the extra revenue is captured.

While robustness is important, banking system resilience may prove to be crucial to a business. As brand image and reputation are at stake, a breakdown in payment systems can hit any FI hard. This is especially crucial in the light of recent regulatory measures being implemented by the Monetary Authority of Singapore (MAS) that make it clear for banks that failure in their payment networks will not be tolerated.

Current MAS regulation, which has been in place since July 2014, states that all banks, operators and settlement institutions of payments systems are to ensure that maximum unscheduled downtime does not exceed 4 hours within any period of 12 months for each critical system. A critical system is defined as a system, “failure of which will cause significant disruption to the operations of the bank or materially impact the bank’s service to its customers”.

It is the first time for the regulator to specify timeframe to such detail and signifies the maturity of technology risk regulation in the country. Also, the Singaporean central bank was taking supervisory action toward banks for their system failures for the last several years, but now it will probably levy fines as a penalty. As the MAS is one of the leading financial regulators, other countries in the region might follow. With regulators taking a more stringent attitude, resilience of banking systems will become even more important.