Handling Risk & Compliance in Payment Systems

Payments are synonyms for banks and financial institutions. It forms the very existence of the BFSI sector, which means that the industry can never meddle with the intensities and contingencies of the payment systems. Daily payments and transactions worth billions of dollars take place, which exposes the process to multiple risks simultaneously.

As the payment system is steadily shifting to the digital platform, it further raises a serious threat and concern regarding the security of the payment platform. Fraud and operational risks are high in payment innovations. Organizations are doing their bit to control the risks and threats, but it is not quite enough to ensure the complete security of the transaction and payment systems. There are three categories of risk in the payment systems. Let’s look at what are those.

  1. Fraud – A payment transaction that is carried out in a deceptive way and leads to huge financial loss. This kind of payment transaction falls under fraud risk category.
  2. Operational – The different types of human and technical errors that interrupt the clearing and settlement of a payment transaction may lead to financial loss. This kind of payment transaction falls under operational risk category.
  3. Legal – When the rights and obligations of payer and payee engaged in payment transactions are subjected to considerable uncertainty, it may lead to loss. This kind of transaction falls under legal risk category.

A brief on payment systems

Payment and financial transactions are contracts exchanged between two or more parties in the form of cash or services. A work of a payment system is to manage and settle the financial transactions and keep a record of such transactions for future reference. The exchange is made possible by modules that include instruments, people, institutions, rules, standards, procedures, and technologies. The most common payment system is an operational network that links people to bank accounts and exchanges monetary values and services through registered financial hubs.

Earlier, the payments and transactions were exchanged in more conventional ways. But with digitalization, a digital payment system has emerged. Today there are multiple payment instruments and channels like RTGS (Real Time Gross Settlement), IMPS (Immediate Payment Service), NEFT (National Electronic Funds Transfer), AEPS (Aadhaar-enabled Payments), UPI (Unified Payments Interface), SWIFT, SEPA, Wallets, Card Payments, ATM/POS transactions, Internet Banking, Mobile Banking, Third-party apps, Kiosk, and Micro ATM. Each payment system has its protocol or procedure, whether physical or electronic, and each one must be regularized and tied to compliance.

Managing risk in the payment systems

Before we learn how to handle risk in the payment systems, we must understand what payment risk is and what is the risk in payment systems. Let us explore them one by one. There are two types of risk in financial transactions – credit risk and liquidity risk. When one party does not receive the outstanding amount in the transaction process, this is credit risk; and the liquidity risk is when one party owes an amount but is unable to pay on time. Payment risk arises when a company incur loss due to some unforeseen payment events. Since businesses have long shifted their focus to digital transactions, a massive volume of online transactions and payments happen on the digital platform, which exposes them to payment risk.

Many companies have been fighting continuously against these frauds with their strong management strategies. But it is hard to remain resistant to the payment risk or forgery. It is hard to determine if a transaction is approved or if there is any fraudulent activity involved. However, an inaccurate evaluation can lead to a serious predicament like harming a company’s reputation and the monetary loss that may become hard for companies to overcome. Hence, managing the risk of a company by identifying threats, monitoring, and controlling to minimize the negative impact of risk on the company becomes an essential step.

Various sources affect the company, such as technology issues, financial uncertainties, legal liabilities, management errors, natural disasters, accidents, and more. All these can lead to risk in payment systems. With so much risk involved in payment systems, it is only fair to adhere to the rules and regulations and remain compliant with the guidelines. Risk and compliance go hand in hand. Risk is linked with the area of uncertainty, which focuses on the internal issues of an organization, while compliance is linked with adherence, which focuses on the external regulatory bodies.

What is Payment Compliance?

Shifting to digital payment has made many organizations and government to be more vigilant with the payment systems. They are more stringent in setting up guidelines now. For payment systems to remain compliant with the rules and guidelines issued by the government, company must follow a specific set of industry standards for risk avoidance. It is an essential step, which allows organizations to protect their payment systems from risk and fraud by reducing data breaches, cyber threat and more. It protects the companies’ data, improves goodwill, and avoids several fines.

Digital payment systems from the past few years have created uncertainties for financial institutions. As the payment systems have become digitalized now with the emergence of internet banking, smart cards, and mobile banking, banks and financial institutions are embracing laws and regulations to remain more compliant with the changes in the payment systems. Financial institutions study the compliance guide to payment systems thoroughly and understand the rules about all types of payment systems before offering guidance to the customers. The below mentioned are types of payment compliance,

  1. Payment card industry data security standard:

Under this type, a set of standards are developed to ensure that all companies accepting, storing, processing, and transmitting credit card information maintain secure methods of doing so. The PCI security standards council upholds it. The standards are made to protect such companies from high-risk merchant accounts.

  • Merchant ScanXpress software:

This method of compliance automates the underwriting and onboarding process. For each merchant, it provides you with a calculated risk scorecard for helping most of the businesses for avoiding risk.

  • KYC compliance:

It is compliance that involves identifying and verifying client details before opening their bank account. Monitoring and verification checks are conducted periodically. For risk-free businesses, merchants must follow the process of KYC compliance.

  • AML compliance:

The full form of AML compliance is anti-money laundering compliance that protects companies from criminal monetary activity and international transactions fraud. The rules of such compliance help detect the suspicious activity of money laundering and terrorist financial attempts.

Apart from the ones stated above there are also a few more that deserves a mention, as it ensures that the payment system remains compliant.

  • Money/currency
  • Bank checks
  • Smart cards and stored value products
  • Mobile banking
  • Allocation of loss for check fraud
  • ACH networks and NACHA Rules
  • Remittance instruments
  • Credit union share drafts
  • Credit CARD Act and disclosure requirements
  • Automated teller machines (ATMs) and automated intake of ATM deposits
  • Letters of credit
  • Internet transactions
  • Corporate account takeover
  • CFPB regulations regarding international transfers & CFPB changes to Regulation Z
  • FRB gift card rules
  • High-to-low debit posting
  • CFPB investigation of overdraft programs
  • Unfair, deceptive, or abusive acts and practices (UDAAP)
  • Payable through drafts & Documentary drafts
  • Wire transfers, including security procedures for in-person wire transfers and defences to unauthorized wire claims
  • Responsibilities of ODFIs and RDFIs regarding high-risk originators and questionable debit activity
  • Unlawful Internet Gambling Enforcement Act
  • Online authentication, including single-factor authentication resulting in bank liability
  • Home banking
  • Consensual security interests in deposit accounts

Importance of testing while handling risk in payment systems and maintaining system compliance

The national and international regulatory entities update payment systems with changes very frequently. As a result, banks and financial institutions are always left with challenges to incorporate those changes in very short notice. The systems in banks and financial institutions may face heavy damage if they are unadaptable to these changes. They always come with certain challenges and if banks fail to update their systems with these regular changes, they will fail to satisfy their customers.

Testing offers strong support that helps the organization to remain updated with sudden changes and always remain in the forefront to handle risks. Testing helps in finding out how well the systems in banks work. It also aims to find out errors in the system programming. Testing at regular intervals is also compulsory for maintaining a risk-free company while handling compliance with many payment methods. There are many different types of testing: UI/UX Testing, Functional TestingPerformance Testing, Security Testing, Integration TestingAcceptance TestingData Migration TestingRegression Testing, and more, which validates that the system functionalities in fastidious situations like quick change in payment system guidelines. After testing all the pros and cons of the company, reporting is the last process that must be followed.


The only purpose of risk management is to identify problems and apply different measures to reduce them. Banks and financial institutions must follow laws and regulations to prevent fraud and risk impact. Systems and software being an integral part of banks and FIs, they must be obligated to payment compliance. Only testing can validate the system functionalities and performance. It ensures that they remain compliant with the payment systems guidelines.

At Yethi, we have tested the payment systems for national and global banks, NBFCs and other financial institutions. We have tested various functionalities of payment systems across multiple channels like internet banking, mobile banking, wallets, agency banking, ATM/POS, wallet apps, third-party apps, KIOSK, and micro-ATM. We use different API levels as middleware/switches to connect with Core Banking and other gateway/networks. We have executed functional testing, interface testing, performance testing, API testing, and security testing to validate the processes like customer onboarding, customer authentication through a pin, biometrics, and token, payment initiation, multi-level authorization, payment processing, and inquiry and statements.

Our 5th generation codeless test automation engine, Tenjin, automates the entire software testing lifecycle from execution to build and manage, continuous delivery and defect reporting. Tenjin can execute test cases across applications and devices. It has various adapters and has a provision for adopting new application adapters within a few weeks. It can identify actual defects versus expected defects for field values and validate structured messages in SWIFT. Tenjin has a UI to define test cases and offers continuous support in the delivery pipeline. It can detect and report defects with ease.