October 11, 2011
High-impact events in a warming world: Business continuity planning for retail payments
Which will be the first to reopen after a major disaster: your financial institution or the local Waffle House? In some cases, you may be able to order your hash browns smothered, covered, peppered, and chunked before electricity is restored to your usual ATM. The breakfast chain invested heavily in crisis management planning following Hurricane Katrina, and today is recognized as one of the most responsive American companies to disasters. Whether the move was more about building goodwill and trust among customers or about profitability, the underlying operational risk management principles Waffle House employed apply equally to financial institutions and third-party payment processors.
Appropriate operational risk management for any organization includes business continuity planning for even unlikely disasters. In fact, this year's extreme weather highlights the need to prepare for even low-probability but high-impact events. In February, unprecedented snowfall blanketed Chicago. Record numbers of tornadoes ravaged the Southeast this April. Floodwaters swelled the Mississippi River to a new high in May. Just last month, historic flooding menaced the Northeast. Such disastrous weather leads not only to evacuations, grounded flights, and missed school days, but also could affect the ability of banks to maintain retail payment systems. Tellers may not be able to make it into branches to accept deposits and process withdrawals. Flooding can damage ATMs and the cash and checks they contain. Tornadoes may wreck back office processing centers or knock out the electricity and network connectivity critical for clearing and settling transactions on time.
Evidence indicates that global warming is causing an increase in extreme weather. Apart from being frightening, greater volatility in the weather requires a different approach to business continuity risk assessments. And this instability makes it difficult or impossible to determine the actual likelihood of a disruption. As part of a lessons-learned debriefing from Hurricane Katrina, the Federal Financial Institutions Examination Council emphasized that preparing for just this kind of disaster is critical. The agency's advice is to focus on potential outcome, not probability, in assessing business continuity plans:
The impact rather than the source of the threat should guide the development of disaster recovery and business continuity plans.... However, every threat that could pose a high adverse impact generally warrants further consideration regardless of its probability of occurrence.
The Bank for International Settlements has recognized the importance of business continuity planning for the financial services industry, so in 2006, it came out with seven high-level principles that can serve to direct financial institution and payment processor risk management efforts. These principles underline the importance of explicitly considering and preparing for major disruptions and acknowledge that such disruptions are occurring with increasing frequency. They also advise clear and regular communication with affected parties internal and external to the affected business, and note that ultimate responsibility for operational risk rests with senior management and the board of directors of the organization. Once implemented, plans should also be periodically tested and refined as necessary.
In a world that isn't always predictable, strong business continuity plans hinge on making sure businesses are ready for the unexpected. The mission-critical nature of retail payments should challenge financial institutions to be at least as prepared as the local diner.
By Jennifer C. Windh, a payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
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