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An exception in the business of payments.

Are the costs of exceptions one of the penalties of transacting payments?

In the real world, not all payments are straight through and the resulting exceptions are one of the hidden costs associated with the transaction.

It is estimated that between 1% and 8% of international payments generate exceptions, depending on the bank and the market, which impacts risk, costs and service levels.  As an indication, the cost to an organisation per exception is in the range of 10 to 40 Euros!

In general, there are two schools of thought on how the percentage of exceptions will evolve in the coming years:

1)      Either, with all the tools now available such as BIC/IBAN files, automated repairs and integrated payment solutions, STP can only increase in both quality and volume, and so the resulting exceptions shall become ever-more marginal, or

2)      The solutions to improve quality and increase volumes of STP exist but are not perfect and not keeping pace with the demands of the business, in particular the requirements for compliance are not being achieved, and thus exceptions are here to stay for the foreseeable future.

For managers responsible for (smooth) operations at banks and corporates, the difference between the first and second option is really only a question of magnitude as, in any case, the problem of exceptions will remain. So why is Exceptions Management not one of the top agenda items these days?

A few reasons come to mind:

1)      A lack of realization that the cost of managing exceptions is comparable to the cost of managing the rest of the payments

2)      An understandable focus on producing a correct original message in the first instance, instead of spending resources correcting errors

3)      Other priorities in international payments at the moment, in particular risk management

4)      The belief that Exceptions Management is not an area of acute pain and is one area for which workaround  solutions are available – a combination of more staff and increased tolerance towards the impact of exceptions on risk and client service levels

5)      Perception in the market that easy to implement solutions that deliver  immediate benefits are not readily available

6)      Uncertainty of when the new Exceptions & Investigations MX standard will be mandated by SWIFT; will it really be in 2012? at which date will the n92, n95 and n96 be decommissioned?

7)      A lack of momentum as banks wait for a signal from the big correspondents about their move to support E&I messages

In all likelihood, it is probably a combination of some or even all of the above, which explains why limited attention is being given to Exceptions Management. However, is this position sustainable in the face of profound changes resulting from the generalization of MX?

Surely, the ever increasing focus on costs, the wider impact of STP and the requirements of the business to provide a more reliable service to clients along with changes in standards and technology will soon require a fresh appraisal of Exceptions Management processes!

Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 10 March, 2010, 08:44Be the first to give this comment the thumbs up 0 likes

When customers send payments messages containing errors, payments shops tend to levy repair charges for any E&I work they carry out before the can complete execution of the payments. This could amount to a sizable revenue stream for payments shops. The basic technology for superior solutions already exists, their successful implementation has been proven to cut down E&I costs. But, the problem is, only some payments shops might look at that outcome in a favorable light - they could use their new found ability to offer lower repair charges as a competitive advantage to grow market shares; whereas others might fear a drastic reduction of revenues in a new world of greater transparency where prices are expected to be more closely linked to costs. 

How well the go to market strategies of Pega Systems, Viveo and other E&I players balance the apparently contrasting effects of a successful E&I implementation on the payments business would ultimately determine whether E&I enters boardroom agendas or stays on the sidelines.