Systemic risk in modern payment systems has shifted from purely operational to highly interconnected and real-time.
Modern fund transfer and clearing systems—such as RTGS, SWIFT, and CLS—are essential for ensuring seamless domestic and global payment operations. These systems are designed specifically to guarantee speed, finality of transactions, operational efficiency, liquidity management and systemic financial stability. However, modern payment and clearing systems face heightened exposure risks . As the banking industry becomes ever more complex, with an increase in the number of transactions, increasing regulation, advancing technology and growing cybersecurity threats, risks to financial institutions have increased.
Thus, risk assessment of current fund transfer and clearing systems is important in ensuring the payment system's reliability, resilience, and robustness. Disturbance to these systems may result in a domino effect throughout interconnected entities, liquidity, consumer confidence and market stability.
In fund transfers and clearing systems, risk is the chance of an event that would disrupt payment, information exchange, settlement, or liquidity processes within the financial system. Such interruptions will have major business effects, including financial losses, operational downtime, settlement delays, liquidity issues, regulatory fines, customer dissatisfaction, and damage to reputation. Payment discontinuity or loss of trust in the payment system can have consequences for customer confidence, market stability and institutional credibility in the BFSI sector, where payment continuity and trust in the payment system are essential. These risks are determined in terms of their significance, which depends on two things: The probability of occurrence and the magnitude of business impact.
Risk assessments related to payments must therefore be conducted through thorough organisation-wide analysis. This analysis is performed using quantitative and qualitative approaches. The quantitative approach involves analysing the number of transactions, the occurrence of problems, system availability, trends in fraud cases, settlements, and financial exposure. However, the other equally important approach is qualitative judgment because it is necessary for detecting new cyber threats, vulnerabilities in the system, geopolitical risks, technological failures, and other low-frequency but high-impact events that may be absent from historical data.
Key risk dimensions of contemporary payment systems
Operational risk
One of the primary risks in the field of fund transfer and clearing is operational risk, which is caused by network disturbances, processing errors, cyberattacks, human errors, or control failures. Operational risk in RTGS systems leads to delays in payments, settlement failures, and intraday liquidity risks. Operational risk in SWIFT systems might manifest as message failures, duplicates, or formatting errors (especially during migration to the ISO 20022 standard).
Liquidity risk
When liquidity becomes a problem, liquidity risk arises.This involves RTGS, which has sufficient liquidity to enable real-time settlement, whereas CLS requires adequate pre-funding for payment-versus-payment settlement within specific settlement cycles. Late incoming payments operational failures in liquidity pricing can result in increased liquidity risk and impact payment system operations.
Credit and settlement risks
RTGS virtually eliminates settlement risk by enabling payments to be made in real time. However, some risks may remain due to queued transactions, fallback payment and settlement systems and counterparty risk. The use of CLS eliminates currency settlement risk because it enables simultaneous settlement of the two legs of the transaction. Nonetheless, the failure of the counterparty, operational disruption or funding problem will have significant implications for CLS.
Information and messaging risks
Effective information flow is crucial to payment systems. Risks relating to messages on SWIFT networks include delays, inaccuracies in the information contained in messages, misuse of format codes, and cyberattacks, including fraudulent instructions.The link between messaging and settlement systems infrastructure implies that any interruptions in the flow of information have severe implications.
Compliance and reputational risks
The stringent rules governing fund transfer and clearing systems include requirements for compliance screening of transactions related to anti-money laundering (AML) and sanctions regulations. Any non-compliance will attract huge penalties and damage to reputation. As the amounts involved are generally large, reputational risks assume greater significance.
Risk assessment framework
It is imperative that the risk assessment framework of modern payment and clearing systems should remain up to date to keep pace with the evolving nature of the industry, i.e., migration to ISO 20022, adoption of real-time payments and cyber resilience. All these developments have a significant effect on the funds flow, information flow and control of the environment.
Assessment of potential risk events will involve ranking them in order of likelihood, consequences, recovery time, and impact on the overall payment system environment. Scenario planning, stress testing and workshops will aid in the accurate risk evaluation process.
Building Resilience through proactive risk assessment
Through proactive risk assessment, financial institutions can move from reacting to incidents to developing resilience in various forms. This encompasses system redundancy, disaster recovery procedures, intraday liquidity measures, cybersecurity and incident management.
In today’s fund transfer and settlement systems, it is vital to conduct risk assessments to ensure the integrity of the payment system.In view of the increasing size and complexity of RTGS, SWIFT and CLS environments, financial institutions need to take an integrated and proactive approach to risk assessment. By following the risk assessment process, which entails risk identification, risk assessment and risk ranking, financial institutions will be able to increase operational resilience, comply with regulations and facilitate transaction flows.