Should Companies have a standby payments bank?
The recent IT failure at RBS has highlighted how close we all are to potentially serious failures within our companies. What happens if we cannot pay key suppliers or employees when payments are due? What happens if large payments from customers do not arrive?
Possible scenario for Treasurers:
Day 1: Bank system fails – unknown problem. Bank reassures customers that it will be fixed shortly.
Day 2: Bank system still down but should be fixed by close of business. Suppliers are irate and salary run due the following day.
Day 3: Bank system remains down. Bank releases statement saying that it should be back up soon with no definitive timeline given! Where is the cheque book? How many cheques are left? Is that old bank account in Z bank still open? Can we send payments from it?
Day 4: Bank system is back up. However, you cannot see any transactions for the previous four days. Trade union reps are demanding a meeting regarding unpaid salaries. Suppliers threaten to withdraw services until payment is received. CEO asks what the current cash position is. You don’t know!
Day 5: Bank system is now working fine. Who has been paid? Who has not been paid? Where is our cash? Why are some receipts missing for the past 5 days?
The bank maintains they had contingency plans for IT failure……
There are multiple banking risks faced by companies and a standby banking arrangement for payments and collections is strongly recommended. It should take into account the ‘contagious’ nature of a major banking problem. The standby arrangement should be fully tested and implementable with immediate effect (inside 24 hours).
Some of the main bank risks to consider
1. Failure of a bank
This could be the result of a bank running out of liquidity as a result of a ‘run’ on the bank (depositors panic and withdraw their funds) or a sudden large unforeseen loss. Recent examples are too numerous to mention here.
In all probability the bank’s operations would continue as normal with steps taken by the government to protect the viability of the bank. Even in the troubled economies there is now a perception that banks will not be allowed to fail.
2. Failure of a bank’s IT system
A bank IT failure is now a greater concern to some companies more so than the credit worthiness of its banks. The IT failure at RBS is the single largest IT failure at any bank globally and shook many organizations who took banking for granted.
Other recent IT failures to hit the global headlines recently include the Nasdaq system failure for the Facebook IPO and the technology breakdown at Knight Capital. Both of these illustrate the huge financial and business consequences of even a short term IT system failure.
3. Failure of payments networks
This could potentially have more serious implications than a failure at an individual bank. However, there are so many ‘buffers’ at different points in payments networks with so many different owners it is difficult to envisage a widespread breakdown. In fact you could say that the explosion in the number of providers of payment services has helped to ‘de-risk’ the global payments system.
4. Bank strike
In more recent bank strikes, banks have remained open with branches manned by senior management and there has been major disruption to business. At the end of August a two day bank strike involving 85,000 bank employees paralysed the banking system across India.
Bank strikes are more like to impact on a retail branch network more so than a corporate bank. They are likely to be confined to a particular country but can still cause havoc.
5. Break-up of the Euro
Without speculating on how this might pan out was it to happen, it is unlikely to lead to a disruption in to day to day banking services. However, it would have many other implications for the wider banking position of many companies.
Regulators and Central Banks have contingency plans for their banking systems and companies should know what these are and how they would be implemented. There is obviously no way that companies can eliminate all of the risk. However, a strong contingency plan should take account of all of the different scenarios and seek to minimize the overall risk. Such a plan should be fully tested, with all relevant employees trained appropriately.