Training Courses for Q1 & Q2 2010

Citadel Advantage's scheduled training courses for Q1 & Q2, 2010 are now available to view or to download as a PDF for handy reference.

Citadel Advantage Course Schedule Q1 & Q2 2010

View more documents from Stanley Epstein.

Some Great Quotations

Another year is drawing to a close … The year that is passing has unlike recent years been a tumultuous year, a year of concerns and of disappointments.

Now as we pause at the brink of 2010 it is time to reflect … on our lives, our disappointments, the future ….

There are many great leaders both past, present. Are you one of them? Here are some words of wisdom to live by.

Take a quick peek at this moment of inspiration and ask yourself "Who do I respect and who can I emulate to be a better person - who is emulating me? "

Click here for GREAT QUOTES FROM GREAT LEADERS

Royal Bank of Scotland's cheque system falls because of EDS mainframe failure

The Royal Bank of Scotland's cheque clearing system fell over on the 15th December after a massive mainframe failure at HP Enterprise Services (formally EDS).

An IBM Z10 at HP Enterprise Services's site in Stockley Park, near London apparently failed because microcode fixes had not been applied. The vendor's disaster recovery plan saw processes switched to an IBM Z10 in Mitcheldean, Gloucestershire, but this machine also failed to work, according to a report in UK technical journal. “The Register”.

The problem affected several large customers, including RBS, which saw its cheque clearing system go down for at least 12 hours, causing a huge backlog, says the Register, citing "insiders".

EDS was acquired in a $13.9 billion deal last year by HP, which promptly revealed plans to axe over 24,000 jobs worldwide.

According to “The Register” the Stockley Park hardware team, who would have made the microcode fixes, have all been made redundant, with a similar problem facing the Mitcheldean site.

Banker Arrested on NZ$ 17 million Fraud Charges

Citadel Advantage’s Correspondent in New Zealand reports that an investment banker from that country’s ASB Bank has been arrested on fraud charges totaling nearly NZ$ 18 million (USD 12.8 million).

Stephen Gerard Versalko, aged 51, was arrested last Friday and appeared in the Auckland District Court to face three charges by the Serious Fraud Office after a three-month investigation.

The Serious Fraud Office alleges that as a senior investment adviser, Versalko defrauded nearly 30 wealthy ASB clients of NZ$17,763,110 over a nine year period until he was fired by the bank last August.

Defence lawyer Stuart Grieve, said that Versalko had been co-operating with the Serious Fraud Office since the alleged offending came to light in August. Mr. Grieve successfully sought for his client to be released on bail without entering a plea. Versalko is scheduled to appear in the Auckland District Court on January 26.

Mr. Grieve also asked Judge Emma Aitken to suppress the specific allegations made by the Serious Fraud Office as there was a possibility the media would report them as fact. These allegations appeared in a document that outlined how Versalko allegedly defrauded the bank customers, what he allegedly spent the money on, how he was caught and how he described himself to Serious Fraud Office investigators.

Serious Fraud Office prosecutor Patrick McCann argued for the allegations to be published, under the principle of open justice. But Judge Aitken ruled that because she had no confidence in the media to report the summary as unproven allegations, not fact, it would be suppressed.

The charges against Versalko allege that he obtained NZ$12,958,608 from 17 ASB Bank clients by conducting 68 fraudulent transactions between October 2003 and August 2009.

A second charge accuses Versalko of offering fictitious investment opportunities to obtain NZ$1,074,077 in 12 fraudulent transactions between August 2000 and September 2003.

The third charge is that Versalko obtained NZ$3,730,423 from 28 ASB clients by conducting 43 fraudulent transactions between October 2003 and April 2009.

The ASB Bank refused to comment on the charges but said customers who had lost money had been repaid. Serious Fraud Office director Adam Feeley said the alleged fraud by Versalko, if proven, would be "one of the larger employee frauds in New Zealand in recent years", and the agency had responded with a speedy and thorough investigation.

"In tough market conditions there is a legitimate public expectation that law enforcement agencies will act in a timely manner to prevent or minimize the impacts of crime on society."

Mobile payments in Kenya

The increased use of mobile phone-based money transfers to pay for goods and services is promising to really get electronic commerce going in Kenya. Read this thought provoking article by Victor Juma in AllAfrica.com.

allAfrica.com: Kenya: Mobile Money Beats Credit Cards in the Retail Market (Page 1 of 1)

Fraud & Operational Risk High on 2010 Forecast

"10 Faces of Fraud for 2010" is an interesting forecast for the coming year in terms the ten most predominant types of fraud that institutions and their customers can expect to see in 2010, according to industry experts. The fraud “hit parade” includes ACH and Wire Transfer Fraud, ATM Skimming, Phishing Schemes and their Variations, Cheque Fraud, Mobile Phones, “Insider” crimes.

Read the full article from From Bank Info Security at;

10 Faces of Fraud for 2010

RTGS Payment System Glitch – Operational Risk Vulnerabilities in India

A snarl in the real-time gross settlement (RTGS) system this past Monday, saw a few banks face a near default-like situation. This has yet again raised questions on the value and the soundness of the infrastructure supporting the Indian financial system.

RTGS, for the uninitiated is an almost instantaneous funds-transfer and settlement system. In the Indian RTGS system, it’s possible to transfer money to another bank account within a maximum of two hours. RTGS is mainly used for high-value clearing.

When contacted, a Reserve Bank of India (RBI) spokesperson said, “There was a glitch (in the system) on Monday, after we upgraded the RTGS software over the weekend.” She clarified that RBI had rectified the problem on the same day.

Bankers familiar with the RTGS system said that while clustering of payments is an often-enough occurrence (four to five times a year) this is the first instance of such large-scale malfunction. One large state-owned bank, in particular, faced an acute payment crisis that forced it to request assistance from other banks, to meet its obligations. After a considerable delay, funds were arranged.

“Many of the counterparties did not receive payment till as late as 1.00 am the next morning. And by virtue of one critical fund or counterparty not paying up, it would have had a cascading effect on other banks,” said the head of treasury at one foreign bank.

Customer payments can be processed through the RTGS facility only up to 4.30 pm on weekdays while inter-bank transactions are possible up to 6.00 pm.

People familiar with the matter maintain that central bank officials and computer staff worked towards moving the entire RTGS load to the back-up site of the system vendor. It was only after this switch that RTGS operations could be brought back on an even keel.

While some say, the incident highlights the inadequacy of the RTGS infrastructure, others were too quick to commend RBI for the promptness with which it acted to restore order. “Any system is open to the occasional risk. However, there should always be a fallback arrangement to cater to such eventualities,” said an irate banker who had to soothe quite a number of ruffled clients.

However, a section of the industry terms it as just a blip on account of the fact that RTGS users have grown many-fold. “RBI and several banks are still in the process of enhancing their servers to cater to the excess load. This has occurred, because banks have crossed normal threshold limits, hence, the bunching up of payments. However, in such times, the National Electronic Fund Transfer (NEFT) system can provide an alternate. The only difference is that the window would be slightly larger than 4-6 hours,” said a senior staff member of a leading public sector bank.

Under NEFT, the transfer takes place either on the same day or on the next day, depending on the time of instructions given. Yet, senior private sector bankers disagree. “NEFT can’t be an alibi for RTGS. The bottom-line is that any robust infrastructure should have a fall back. If this had occurred during the month end, we would have had a virtual stampede,” a senior private sector banker said.

Remittances and Europe - Moldova

Remittances are a worldwide issue. All too often people associate “Remittances” with Africa or Asia. But remittances are a feature in any country where economic conditions are poor and where there are too many people for the jobs available. In these circumstances people migrate in the hope of finding work and being able to send money home to help feed and clothe family members who have remained behind.

This short video from the World Bank highlights conditions in Moldova, the poorest country in Europe. Its economy relies on money sent home by the hundreds of thousands of Moldovans who work outside the country. In the current global economic environment, it is inevitable that remittances will fall. Although it is still too early to tell by exactly how much, it is clear that declining remittances could have a large impact on families trying to cope with the economic downturn.

Payment Systems - Do you know how a cheque works?

Market research in the UK has confirmed that that consumer understanding of the oldest payment system, the cheque clearing process is still very low. To counter this, the UK’s Cheque and Credit Clearing Company (C&CCC) has launched an interactive online film that helps explain the different stages involved in clearing a cheque. It is educational, informative and very clearly presented.

Cheque clearing processes are basically universal, so even if you don’t live in the UK the principles covered are still valid. You can watch this online movie at: http://www.chequeandcredit.co.uk/files/candc/flash_files/candc_animationv6.swf

Payment Systems in India – A Vision for the Future

Recently the Reserve Bank of India released a report entitled ‘Payment Systems in India - Vision 2009-12‘. In this the Indian central bank discusses initiatives it has taken and what it plans to do to improve security of cards, make ATMs more accessible to the public, make banking more accessible to the public, improve its efficiency, timings and reduce risks. It notes that the future is in mobile payments and offers its outlook on alternate methods to improve the Indian payments industry.
This succinct summary of the Reserve Bank of India’s proposal MEDIANAMA is a “must read”. Access it at RBI’s Vision For Mobile & E-payments, Major Projects | MediaNama

The Cheque is More than a Payments Instrument

Stanley Epstein, Principal Associate, Citadel Advantage

So the venerable old cheque has been singled out and “tapped” for termination – in the UK at least. Of course, in the new world of electronic payments and instantaneous communications, the demise of the cheque was inevitable. A payment instrument devised in a simpler time, the cheque representing a negotiable claim on the bank account of the drawer, was a major innovation in its day. It represented a new way to make payments in a manner that avoided the actual transfer of cash or bullion. The humble cheque as a payment instrument spawned other major innovations such as the clearing and settlement processes that are major features of all electronic payment, clearing and settlement systems to this very day.

As a payment and a financial instrument, the cheque reigned supreme for over two centuries and spread across the face of the globe. But, as with all empires, the cheque’s star must eventually set. The cheque has become an anachronism in today’s high-tech, high-speed world. It is an expensive system to operate and worst of all its “flow” is all the wrong way.

In a technology driven, high-speed, risk averse world the way in which the cheque operates is a barrier to the smooth high-speed payments processing operation that puts all the right checks and balances in the right places and in the right sequence.

All other payment types flow from the payer to the payee (now that is a simple word for the receiver that today seems to have gone out of fashion). The opposing flow of the cheque from the recipient (payee) to the payer’s bank is just a hindrance to modern processing practices as well as a huge source of risk.

Of course the cheque is more than a payment instrument, though many people do not know this. The cheque served (and still does in many places) a multiplicity of financial roles, vital in day-to-day business activities.

Just consider four of these.
1. A means of commercial and consumer credit,
2. An access point to commercial bank lending,
3. A medium of exchange, and
4. A payment instrument.

In many countries, even today, the cheque still serves as a credit and loan instrument. Post dated cheques give buyers credit extended by a merchant or store, while the self-same cheques with their legal basis and their negotiability give that same merchant immediate access to discount facilities (i.e. the cash) at commercial banks.

During the six and a half month bankers strike in Ireland in 1970 the humble cheque served as a medium of exchange too, with very little default once the banks got back to operating again.

Until recently in most countries the only “payment” law in existence was that relating to the cheque. Cheque laws and banking laws run hand-in-glove. The legal corpus surrounding other types of payment instruments is, with a few exceptions, sketchy and in some cases nonexistent. Within the realms of the law the cheque or “Bill of Exchange”, which it really is, still has a lot of life left in it. Most countries created significant laws and legal principles based on the cheque/ bill of exchange.

The bill of exchange still remains the basic instrument of international trade and finance. While the UK may well abolish the use of the cheque for day-to-day payments purposes it is unlikely that the instrument will suffer an ignominious end. Trade practices and international conventions will ensure that the cheque/ bill of exchange will still be with us for a long time to come.

Training Course - Risk Management - Focus on Fraud

Join us in Madrid, Spain on 22 & 23 February 2010 for our 2-day training course “RISK MANAGEMENT - FOCUS ON FRAUD.”

Fraud is on the increase. Recent studies have shown a surge in economic crimes. The statistics reveal that the three most common forms of crime are theft, accounting fraud and corruption.

Of these, fraud has shown a particularly sharp rise. The rise in fraud stems from a mixture of increased opportunities and growing incentives. Companies have been reducing the number of people employed to monitor workers at a time when employees are more tempted to break the rules because their living standards are eroding and their jobs are looking shakier. The proportion of frauds committed by middle managers has shown a particularly sharp rise, from 26% in 2007 to 42% today.

Just consider the following questions;

• Can your bank or organization cope with fraud?
• Can you identify a fraud in your working environment?
• Are you maximizing your staffs’ potential to reduce fraud and error in your systems?
• How aware are you or employees of fraud?
• Do they have a clear understanding of the role they play in detecting fraud?
• Do they understand you organization’s fraud policies and procedures?

The “Risk Management - Focus on Fraud” course in Madrid on 22 & 23 February 2010 is a 2-day intensive course on fraud and how it presents huge challenges for banks, requiring them to radically modify behavior and increase their vigilance in many of the traditional risks associated with banking activities.

Ensure that your staff are able to cope with the growing fraud threat.For more details including a fully descriptive course brochure e-mail us at courses@citadeladvantage.com today. Please indicate FRAUD-MADRID in the subject line.

Training Course - Migrant Worker Remittances - Issues & Opportunities

Join us in Johannesburg, South Africa on 25 & 26 January 2010 for our 2-day course “MIGRANT WORKER REMITTANCES - ISSUES & OPPORTUNITIES.”

Money sent home by migrants constitutes the second largest financial inflow into many developing countries, exceeding even international aid. Remittances contribute to economic growth and to the livelihoods of needy people worldwide. Moreover, remittance transfers can also promote access to financial services for the sender and recipient, thereby increasing financial and social inclusion.

Although African workers send home more than US$40 billion to the region each year, restrictive laws and costly fees hamper the power of remittances to lift people out of poverty, according to a recent report by the UN's rural poverty agency, the International Fund for Agricultural Development (IFAD).

Even if your organization already has a Remittance Program or Product, this course will be of immense value to you and your staff.

Remittances are not as simple as a monetary transfer from A to B. It is the fine details of the remittance processes and the subtle nuances of being a stranger in a foreign land or simply a receiver in a remote location in one’s own country that constitute the major problems for remitters and receivers.

Get to grips with these and other uniquely African problems faced in providing remittance services in this region.

Understand how new technologies - such as the mobile phone - and existing infrastructure - particularly post offices or small retail outlets - could vastly increase the reach of remittance services.

Learn about the unique problems being faced by both Remitters and Receivers – problems that banks and other financial institutions are uniquely placed to help solve.

Remittances represent a huge business opportunity for banks and other organizations to satisfy the needs of this huge and growing market.

Cement your position in the Remittance Market by attending “MIGRANT WORKER REMITTANCES - ISSUES & OPPORTUNITIES” in Johannesburg on 25 & 26 January 2010.

For full details including a Course Brochure e-mail us at courses@citadeladvantage.com Please state REMIT-JHB in the subject line.

How to Fit a Password - Learn about the Most Popular Passwords on the Internet

A fascinating view of a total lack of security consciousness. You need to read this article in the Ecommerce Journal. Access it by clicking on the article title below.

How to fit a password, learn about the most popular passwords on the Internet Ecommerce Journal

Posted using ShareThis

Technology is Revolutionizing Payments and Remittances

Are you thinking outside the box? I have come across this video on YouTube by Dr. Patrick Dixon. Patrick Dixon is a Futurist, author 12 books including Futurewise, conference speaker who works with many of the world's largest corporations on global trends, new technology forecasts, biotech, health care, marketing, risk management, product design, innovation, motivation and customer insight.

Here he talks about mobile payment systems, micropayments, mobile phone credit card transactions and loans. This is thinking outside the box at its finest. As a bank or financial institution are you up to the “Technology Challenge” or will you lose you advantage to those bold enough to seize the day and step into the future?

Computer Programmers Charged in Madoff Affair

The Securities and Exchange Commission has accused Jerome O’Hara and George Perez of provideing the technical support necessary to produce false documents and trading records, and took hush money to help keep Bernard Madoff’s massive Ponzi scheme going.

Last week the two computer programmers were charged for their role in helping Madoff cover up the fraud for more than 15 years. The SEC alleges that the two provided the technical support necessary to produce false documents and trading records, and took hush money to help keep the scheme going.

“Without the help of O’Hara and Perez, the Madoff fraud would not have been possible,” said George S. Canellos, Director of the SEC’s New York Regional Office. “They used their special computer skills to create sophisticated, credible and entirely phony trading records that were critical to the success of Madoff’s scheme for so many years.”

According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, Madoff and his lieutenant Frank DiPascali, Jr., routinely asked O’Hara and Perez for their help in creating records that, among other things, combined actual positions and activity from BMIS’ market-making and proprietary trading businesses with the fictional balances maintained in investor accounts. O’Hara and Perez wrote programs that generated many thousands of pages of fake trade blotters, stock records, Depository Trust Corporation (DTC) reports and other phantom books and records to substantiate nonexistent trading. They assigned file names to many of these programs that began with “SPCL,” which is short for “special.”

A separate computer internally known as “House 17” was used to process BMIS investment advisory account data at the direction of Madoff, DiPascali and others. The SEC alleges that O’Hara and Perez knew that the House 17 computer was missing a host of functioning programs necessary for actual securities trading and reporting. According to the SEC’s complaint, they recognized that the trades being entered into House 17 and the account statements and trade confirmations being sent to investors did not reflect actual trades.

The SEC alleges that O’Hara and Perez had a crisis of conscience in 2006 and tried to cover their tracks by attempting to delete approximately 218 of the 225 special programs from the House 17 computer. But they did not delete the monthly backup tapes. O’Hara and Perez then cashed out hundreds of thousands of dollars each from their personal BMIS accounts before confronting Madoff and refusing to generate any more fabricated books and records.

According to O’Hara’s handwritten notes from the encounter, one of them told Madoff, “I won’t lie any longer. Next time, I say ‘ask Frank,’” meaning that Madoff should rely on DiPascali alone to create the false data and reports.

The SEC’s complaint alleges that Madoff responded by telling DiPascali to offer O’Hara and Perez as much money as necessary to keep quiet and not expose the misrepresentations. O’Hara and Perez considered the offer and demanded a salary increase of nearly 25 percent along with one-time bonuses in late 2006 of more than $60,000 each. They stated to DiPascali at the time that they did not ask for more because a greater amount might appear too suspicious. DiPascali then managed to convince O’Hara and Perez to modify computer programs so that he and other 17th floor employees could create the necessary reports themselves.

This is the SEC’s latest enforcement action concerning the Madoff fraud since the scheme collapsed last December. The Commission previously charged Madoff and BMIS, DiPascali, and auditors David G. Friehling and Friehling & Horowitz CPAs, P.C. The SEC also charged certain feeders with committing securities fraud through a Ponzi scheme perpetrated on advisory and brokerage customers of BMIS. Madoff, DiPascali and Friehling have all pleaded guilty to criminal charges related to their conduct.

Among other things, the SEC’s complaint seeks financial penalties and a court order requiring O’Hara and Perez to disgorge their ill-gotten gains.

“Quants” say their bosses don't understand them

A staggering two thirds of quantitative analysts (Quants) think their supervisors do not understand the work they do, according to a survey from training firm “7city Learning”.
The poll of almost 400 active quants and risk professionals reveals a significant gap in understanding between them and their supervisors.

Quants and risk managers have been pointed to by many economists as one of the principle reasons the global financial crisis escalated so precipitously.

Yet 86% of quants feel their supervisors' level of understanding of the job of a quant is the same or worse than it was a year ago. In addition, 70% feel that the level of understanding of the role of quants within their institutions has decreased or has not changed at all from a year ago.

Paul Wilmott, director of 7city's Certificate in Quantitative Finance course, says: "These numbers are alarming. They indicate that even with the events of the past year, financial institutions are still not taking the importance of financial education seriously, especially as it pertains to improving relationships and understanding between quants and their managers."
A recent report by financial regulatory agencies called on financial services firms to make substantial and sustained investments in IT infrastructure if they are to overcome severe underlying weaknesses in their risk management capabilities.

The Senior Supervisors Group (SSG) that comprises watchdogs from seven countries (United States, Canada, France, Germany, Japan, Switzerland, United Kingdom) says that underlying weaknesses in governance, incentive structures, information technology infrastructure and internal controls require substantial work to address.

RBI Proposes New Payment Systems

The Reserve Bank of India (RBI) has proposed an action plan on payment systems which have been targeted to be achieved in the next one-to-three years. This includes putting in place alternate settlement arrangements in the event of non-availability of RBI as a settlement bank.

Additionally a road map for the National Payments Corporation of India (NPCI) is to be finalized. NPCI has been set up as an umbrella organization by the banking community to take over the retail payment system activities.

All large-value and time-critical payments will be processed only by electronic means. All bank branches will be enabled with Indian Financial System Code (IFSC) and MICR codes. The intention is to leave the user with the choice of payment product for retail and small-value transactions.

The RBI document ‘Payment systems in India — Vision 2009-12’ is available on the central bank’s website for public comment. The document may be downloaded at http://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=573

New projects and major initiatives listed in the plan include;

• Implementing a new and feature rich RTGS system – The need to migrate to a new version of RTGS that could leverage on advancements in technology, provide for scalability in volumes, parameterize more features in line with similar facilities available in other countries, result in more flexibility in operations, better liquidity saving features, etc., would be pursued.
• India MoneyLine – A 24x7 system for one-to-one funds transfers – The existing NEFT system operates during weekdays from 9 am to 5 pm and on Saturdays from 9 am to 12 noon. The Bank would pursue the suggestion to consider the need to extend NEFT to function on a 24x7 basis or to develop a new system akin to the Faster Payments Service in the UK which operates on a 24x7 basis.
• India Card – A domestic card initiative –The concept of a domestic payment card (India Card) and a PoS switch network for issuance and acceptance of payment cards would be looked into. The need for such a system arises from two major considerations (a) the high cost borne by the Indian banks for affiliation with international card associations in the absence of a domestic price setter (b) the connection with international card associations resulting in the need for routing even domestic transactions, which account for more than 90% of the total, through a switch located outside the country.
• Redesigning ECS to function as a true Automated Clearing House (ACH) for bulk transactions – Currently, Local ECS (to facilitate bulk electronic transactions with one-to-many and many-to-one variants) is operational at 76 centres. Centralisation of this process is already underway with the launch of credit variant of NECS at Mumbai (and RECS on a pilot basis). The debit variant is also being planned for implementation. The ECS / NECS solution is internally developed and has been in use since long and the need for building a technology and feature-rich ACH network by totally redesigning the existing ECS to provide end-to-end processing in a straight-through manner would be examined.
• Mobile payments settlement network – Mobile phones are expected to emerge as an important channel for transmission of payment instructions. Efficient mobile payments would require real time transfer of funds with adequate security. Currently all inter-bank mobile transfers are payment instructions for settling funds through existing payment systems. This would require building a national infrastructure for facilitating real time mobile payments.

Mobile Money Africa

Mobile Money Africa has just published their November edition. The focus is on 'Banking the unbanked African'. Mobile Money Africa is available as a free PDF download at http://mobilemoneyafrica.com/free-emag?did=2

Migrant Remittance to Developing Nations to Reach $317 bn

Migrant remittance flow to developing countries, will be around $317 billion this year, a lower-than-expected fall from the year-ago level, but will return to the recovery path in years to come, the World Bank has said.

Remittance flow to developing countries will touch $317 billion in 2009, and going forward, the inflows to these nations are expected to remain almost flat in 2010, (with a modest rise of 1.4 per cent) and grow by 3.9 per cent in 2011, the World Bank said in its Migration and Development Brief.

The projected remittance flow this year will represent a 6.1 per cent fall from the 2008 level against the earlier expectation of a 7.3 per cent dip.

The officially recorded remittance flow to developing countries reached $338 billion in 2008, higher than the previous estimate of $328 billion, according to the newly available data with the World Bank.

The report further added the remittance flows this year is likely to witness certain risks, and expected to slow down "in a lagged response to a weak global economy".

In the immediate future, the flows in all the regions are likely to face three downside risks: a jobless economic recovery, tighter immigration controls and unpredictable exchange rate movements.

Global Forum on Remittances

The International Fund for Agricultural Development (IFAD) and the African Development Bank (AfDB) in collaboration with the Inter-American Dialogue (IAD) organized the Global Forum on Remittances 2009, in Tunis. This was held on 22 and 23 of October 2009.

Africans are relying more than ever on cash sent home by relatives working abroad, yet a big chunk of the money gets wasted or lost according to a United Nations study released recently. As much as 20 percent of what workers pay to support families in Africa can get swallowed up in transaction costs.

This report from Voice of America’s “In Focus” examines some of the issues raised at the forum.

US Banks Face Criticism Over Foreign Card Compatibility Issues

The Aite Group estimates that nearly 10 million US cardholders experienced problems using their credit cards abroad in 2008 alone, a majority of which changed their card usage behavior as a result.

The report which is based on a September 2009 Aite Group online survey of 1,019 US resident cardholders who traveled to countries outside of Canada, the Caribbean and Mexico between 2006 and 2009.

For cardholders traveling to Western Europe over the past three years, there is an almost 50% chance that they have experienced some form of problem using a US payment card, says the analyst house.

The Aite Group estimates that 9.7 million US cardholders experienced issues with card payments abroad in 2008, and that the US card industry missed out on $3.9 billion in transactions and $447 million in revenues as a result of the failures.

With European markets moving to smart card-based payments, US travelers are finding their magstripe cards being rejected at retailer Chip and PIN terminals and foreign cash machines. European issuers meanwhile are growing concerned at the higher incidence of counterfeit card fraud occurring on US shores, leading to calls for the US banking industry to switch to the chip-based EMV payment card standard.

"Nearly two-thirds of cardholders adjust payment behavior after a bad experience, directly resulting in lower usage of the problem card," says Nick Holland, senior analyst with Aite Group. "An issue caused by incompatible card technology is treated far more seriously by cardholders than issues stemming from card acceptance, fees or merchant policies. A quarter of cardholders experiencing these types of problems will agree either somewhat or totally that the problem ruined or almost ruined their trip."

Eight Key Issues in Managing Operational Risk

Author: Stanley Epstein

In much the same light as the management of market risk and credit risk is vital to preserve a business. Many banks and firms see operational risk and its management only as a response to the requirements of regulators.

They see operational risk from a totally different viewpoint to the management of market risk and credit risk. The latter two are accepted as being vital to ensure the survival of the business, while operational risk is seen as something else entirely. For many businesses the management of operational risk is perceived as a nuisance with added costs and other inconveniences imposed by some outside bureaucrat.

Of course this perception is totally wrong.

In this article we are going to examine the 8 key issues that one needs to keep in mind when managing operational risk. Let us begin with a definition of operational risk.

“Operational risk is the risk of loss resulting from inadequate internal processes, people, and systems or from external events”.

Operational risk can be equated in a broad sense with unexpected risk, meaning that while we may have a pretty good feel for risks such as credit risk or market risk which can often be anticipated with a fair amount of accuracy, when we get to the operational side this usually is pretty much an unknown quantity.

Let’s look a little more closely at the elements of this definition. What do we understand by some of its components?

"People” - People are employees; our workers. Employees can make mistakes. These could be intentional or unintentional. People also often fail to follow correct procedures which can result in losses.

“Processes” – All business activities are made up of processes. These may be complex sequences of events such as one finds in a factory engaged in manufacture or a more simple sequence of tasks involved in taking an order and dispatching the goods to a purchaser. All activities involve procedures. Just think of all the detail involved in the procedure that we all follow each and every day when we wake up and get ready to leave home to go to work.

If there are deficiencies in an existing procedure, or if no procedure is defined, this could result in losses.

“Systems” – Most procedures require the use of outside apparatus. These could be computer systems or machinery or tools. Getting back to our waking up “process” something like our toothbrush can be seen as such a system.

“External events” – Our processes take place in the wider world. This environment is constantly under threat of disruption. Disruptions could be bad weather, natural disasters, pandemics, political turmoil, social unrest and so on.

Within this context there are eight key issues that need to be addressed if management of Operational Risk is to be effective.

1. Internal Environment. The internal environment relates to how the firm sets the tone and what is called its “risk appetite”. This relates to the firms’ policy in relation to risk and the extent to which the firm is prepared to accept risk. Remember that risk cannot be eliminated entirely but it can be mitigated.
2. Setting Objectives. Based on the firm’s define risk appetite explicit objectives can now be set in terms of “risk events” and their management.
3. Event Identification. This is a definitive list of what risks the firm faces and how they can be identified.
4. Risk Assessment. It is vital that in reviewing the risks these have to be understood in terms of the dangers that they present to the firm. This assessment requires an analysis of and an understanding of what these risks are.
5. Risk response. What is the firm going to do about the risk? What actions is it going to take to reduce and mitigate these risks or to compensate for the potential loss?
6. Control Activities. This is part of the risk management process that in advance develops plans to respond to these previously identified risks.
7. Information and communication. A vital part of managing risk is effective communication and information to people both inside and outside the organization in relation to the roles and the responsibilities they have in responses to the various risks.
8. Monitoring. This is the ongoing process of reviewing and evaluating the business processes and the effectiveness of the risk management programme.

Managing Operational Risk is a continual task. It is not something one does and then simply forgets about. It has to be practiced all the time. To use an old adage “Operational risk management is a journey, NOT a destination”.

About the Author:

Stanley Epstein is a Principal Associate and Director of Citadel Advantage Ltd., a consultancy dealing in bank operations and specializing in Operations Risk and Payment Systems. Citadel Advantage provides comprehensive range of Risk Management & Payments related Training Courses for banks and other financial institutions. Further information and details can be found at http://www.citadeladvantage.com . For regular insights into payments & risk issues, visit Citadel Advantage’s blog at http://citadeladvantage.blogspot.com/

Article Source: ArticlesBase.com - Eight Key Issues in Managing Operational Risk

Eight Steps To Protect Your Corporate Reputation

By Jonathan Hemus

A strong corporate reputation is recognised as a valuable asset, one which takes years to build, and requires constant nurturing to maintain. A crisis, whether a product safety scare, an environmental incident, labour relations, management scandal or online attack, puts that reputation to the test. The outcome can be devastating; but it doesn't have to be.

Rigorous preparation is the most important factor in protecting the corporate reputation in the event of a crisis. More than that, research shows that thorough preparation actually reduces the likelihood of a major crisis happening in the first place. This is because the preparation phase highlights flaws and vulnerabilities that can be addressed, and creates a heightened sense of crisis awareness and vigilance that acts as an early warning system to snuff out potential crises before they escalate and emerge. So engaging in crisis preparation and prevention is one of the best investments you can make.

What are the key areas you should address? Here are eight steps to protect your corporate reputation:

1. Compile a list of reputational risks - involve colleagues from different functions in this process to ensure you cover as many threats as possible. Encourage people to think worst case scenario rather than adopting an attitude of "it could never happen here".

2. Identify your stakeholders - these are likely to include emergency services, regulators, bodies, employees, even competitors and suppliers, as well as the media. Make sure you have up to date contact details always to hand.

3. Work out the best communication methods to reach your stakeholders in a crisis - this can vary from simple telephone calls, emails and briefings through to media interviews and press conferences. Don't overlook online channels: for example, have Twitter accounts set up and ready to go.

4. Form a crisis team - convene a small team of individuals with the relevant expertise and personal qualities necessary to handle a crisis. But remember, you will still need to run the rest of your business, and ensure you have deputies for all team members.

5. Identify and equip a training room - a dedicated room containing items such as direct phone lines, Wi-Fi, fax machine, TV, crisis manual, telephone contact list, whiteboards, flipcharts and so on. An adjacent quiet room, in which statements and other documents can be prepared, is also useful. Make sure that these rooms are out of range of camera lenses.

6. Prepare a crisis manual - a set of clear processes and materials is an invaluable aid to effective crisis management. But make sure it is not so large and detailed that it is unusable in a real incident.

7. Train the crisis team - make them familiar with crisis procedures, test them using simulations, and put spokespeople through professional media training.

8. Make your crisis planning come alive - re-visit the manual regularly, plan a schedule of training courses, and build bridges with your stakeholders before a crisis occurs.

Preparation is essential if organisations want to protect their corporate reputation in the event of a crisis. Sound judgement and skilful leadership will also be required, but having strong foundations on which to apply these skills provides a significant headstart.

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Jonathan Hemus is the founder of Insignia Communications - http://www.insigniacomms.com - a consultancy specialising in corporate reputation management and crisis communication. His experience in crisis management for a range of global corporations and public sector organisations has helped to protect and preserve many reputations. For regular insights into corporate reputation management, log on to Insignia's blog at www.insigniatalks.com

Remittances and Anti Terror Laws

For months, Somalis living in Columbus, Ohio have complained that it has become increasingly difficult to send money home to family members because of banking-industry fears that the funds could end up with terrorists.

Huntington, JPMorgan Chase and Charter One are among the banks that have closed accounts set up by remittance companies, said Omar Tarazi, a local lawyer who has worked with the Somali American Chamber of Commerce and several remittance companies.
Somali leaders said remittances that refugees send home are a lifeline to families and friends struggling in the war-torn African nation. It has few banks, so remittance companies are crucial to sending money home.

You can read the full article at:
http://www.dispatchpolitics.com/live/content/local_news/stories/2009/10/26/copy/REMIT.ART_ART_10-26-09_B3_PEFFS0A.html?adsec=politics&sid=101

Mobiles and Bank Loans

Mobiles are not only for Payments and Remittances. Bank Loans are also a part of a growing range of banking applications that are becoming available on Mobile phones.
FrontlineSMS:Credit is aiming to make every formal financial service available to the entrepreneurial poor in 160 characters or less. By interconnecting the functionality of FrontlineSMS with local mobile payment systems, implementing institutions will be able to provide a full range of customizable services, from savings and credit to insurance and payroll.

Watch Ben Lyon, Executive Director of FrontlineSMS:Credit speaking at the Africa Gathering conference in London recently on just this issue.

Ben Lyon from Africa Gathering on Vimeo.

Mobiles are not only for Banking

In recent times we have seen a huge drive, especially in Africa as regards Mobile Banking. But the Mobile is being used for many other services as well. This video explains many of these services and the growing significance of mobile technology across sub-Saharan Africa and the developing world.

Hacking an ATM

There is no end to people’s ingenuity when there is a fast buck to be made. In this story from Australia a pizza shop employee cum computer wizz was able to make huge withdrawals of cash based on information he found on the internet and in an ATM manual. His plan however had a major flaw - to make the withdrawals he used his own card and those of his mother, girlfriend and two friends.

Although Prosecutors had called for a two year jail term the judge decided a conviction should not be entered after Sommer agreed to pay the money back and applied to become an avionics technician in the Australian Defence Force.

You can read the whole story at
http://www.frasercoastchronicle.com.au/story/2009/10/23/free-money-too-good-to-be-true-no-conviction-recor/

Systemic Risk

The financial crisis has taken us down paths we have never dreamed of. Much research and discussion is taking place (and will for years to come) on many aspects of what we have been experiencing over these past two years.

In a paper published in the September edition of the “International Journal of Central Banking” Piergiorgio Alessandria, Prasanna Gaib, Sujit Kapadiaa, Nada Moraa, and Claus Puhrc describe a prototype quantitative framework for gauging systemic risk which explicitly characterizes banks’ balance sheets and allows for macro credit risk, interest income risk, market risk, network interactions, and asset-side feedback effects. In presenting their results, the authors focus on projections for system wide banking assets in the United Kingdom, considering both unconditional distributions and stress scenarios. The paper “Towards a Framework for Quantifying Systemic Stability” is available at http://www.ijcb.org/journal/ijcb09q3a2.htm

Risk & Payments Training Course Schedule - 2009 - 2010

Browse or Download this handy schedule of our Risk & Payments Training Courses for the remainder of 2009 and early 2010.

Citadel Advantage Course Schedule - 2009 - 2010

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Liquidity & Capital Reform

The UK’s Financial Services Authority (FSA) has issued a discussion paper which focuses on policy measures aimed at addressing the problem of systemically important ‘too-big-to-fail’ banks.

There are huge dangers posed by those financial firms that are seen as too-big or too-interconnected-to-fail, or too-big-to-rescue. In the discussion paper the FSA describes the full range of policy options that are available in order to provide the basis for an informed debate, but also outlines the position which the FSA is currently proposing in various bodies. Key positions are:

• There is a strong case for applying some form of capital (and perhaps liquidity) surcharge internationally for systemically important banks; surcharges could be proportional to continuous and increasing measures of systemic importance, avoiding the dangers created by specific thresholds of systemic importance.
• A capital surcharge could be combined with an approach to global banking groups which places greater emphasis on the standalone sustainability of national subsidiaries, with overt understanding that home country authorities will not be responsible for the rescue of entire groups. The more that groups are organised on this basis, the less the required surcharge at group level might need to be.
• Action should be taken to reduce inter-connectedness in wholesale trading markets, with much over-the-counter (OTC) derivative trading moved to central counterparties (CCPs), and with effective collateral and margin call arrangements for bilateral trades which reduce the dangers of strongly pro-cyclical margin call effects.
• Reform to trading book capital should significantly increase capital requirements and differentiate more strongly between basic market making functions which support customer service and riskier trading activities, with a bias for conservatism in relation to the latter.
• Systemically important banks should be required to produce recovery and resolution plans (‘living wills’) which set out how operations would be resolved in an orderly fashion. If supervision examination of these plans reveals serious obstacles to resolution, then steps will need to be taken to reduce or remove them – this could require restructuring certain parts of the group. Restructuring could include clear separation between retail deposit taking business and businesses involved in proprietary trading activities, with the latter able to fail even if the former were supported in crisis conditions.

The discussion paper also stresses the need to assess the possible cumulative impact of multiple reforms to capital and liquidity regimes now being considered by international standard-setting bodies. It describes the case for significant increases in capital and liquidity requirements to reduce financial instability risks, while recognizing the potential implications for lending volumes and the cost of credit intermediation. It considers methodologies which can help inform judgments on the trade-offs involved.

The FSA’s plan of action includes:
• Living wills: The FSA intends to press ahead with resolution and recovery plans in the UK and work is underway to produce guidance for systemically important firms to use in developing living wills. The plans will build on requirements the FSA has already put in place that contribute to a firm’s preparedness for recovery. By the end of 2009, according to the FSA, a small number of major UK banking groups will have begun to produce living wills as part of a pilot exercise intended to help the FSA develop policy in this area.
• Cumulative impact of capital and liquidity reforms: The FSA acknowledges that given the inherent uncertainties involved in assessing optimal capital and liquidity levels, it means that models such as those described in the DP can never provide ‘the answer’. However, the FSA believes that the conceptual approach described can help inform an effective global debate on optimal capital levels. It will, therefore, encourage global regulatory bodies, industry groups and academics to conduct similar analysis.
•Conference: The issues discussed in the discussion paper will set the agenda for the second Turner Review conference which is being held on 2 November 2009.

The FSA regulates the UK’s financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.

Risk Management Lessons from the Global Banking Crisis of 2008

Senior financial supervisors from seven countries (collectively the “Senior Supervisors Group”) have issued a report that evaluates how weaknesses in risk management and internal controls contributed to industry distress during the financial crisis.

The report—Risk Management Lessons from the Global Banking Crisis of 2008—reviews in detail the funding and liquidity issues central to the recent crisis and explores critical areas of risk management practice in need of improvement across the financial services industry.

The report concludes that despite firms’ recent progress in improving risk management practices, underlying weaknesses in governance, incentive structures, information technology infrastructure and internal controls require substantial work to address.

The observations and conclusions in the report reflect the results of two initiatives undertaken by the SSG. These initiatives involved a series of interviews with firms about funding and liquidity challenges and a self-assessment exercise in which firms were asked to benchmark their risk management practices against a series of recommendations and observations taken from industry and supervisory studies published in 2008.

The report may be downloaded at http://www.newyorkfed.org/newsevents/news/banking/2009/SSG_report.pdf

Bank Lending – Some Basic Principals

By Stanley Epstein - Principal Associate

The financial world is in a pretty messed up shape at the moment. So in examining the Financial Services Authority’s proposals regarding the reform of the mortgage market in the UK I get the basic impression that I am in Alice in Wonderland, at the Mad Hatter’s Tea Party to be exact.

What on earth has happened to basic lending principles? The FSA speaks of a changed approach to a more “intrusive and interventionist style of regulation”. As a part of these proposals they set out what they refer to as “key features”, six in all.
But of the six, three should, as a matter of course, be part and parcel of a bankers’ normal business practice. A regulator should not have to tell a bank what the basic principles of lending money are. Just consider the three following “key features”;

• “Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay” – there are two conditions wrapped up in one; affordability and the lender’s responsibility regarding the borrower’s repayment ability. The first is a dead standard condition for the granting of any consumer loan. The second issue goes without saying.
• “Banning ‘self-cert’ mortgages through required verification of borrowers’ income” –this is like leaving the fox in charge of the henhouse. Third party certification of a borrower’s income is also a standard consumer credit tool.
• “Calling for the FSA’s scope to cover buy-to-let and all lending secured on a home” – lending for a home to live in, is one thing. When a borrower purchases a property with a view to letting it and generating income this is something else. Here he or she is running a business and sound lending practice should also call for additional information like details of the letting market’s potential, letting conditions, contractual arrangements with renters, refurbishment costs, insurance and other business expenses and the like. This is a commercial loan not a consumer one. It is a logical extension of the first “consumer” aspect that the regulator should be looking after both facets of the business, not just one.

There should be absolutely no need to tell a banker, never mind make it a regulation, as to what the basic principles of lending money are. Unless of course the lenders aren’t really bankers! This of course begs the question as to why these people are even allowed to be in the business of lending money in the first place? These “banks” have obviously thrown all caution and prudential behaviour to the wind in their pursuit of market share and profits.

A few days ago I railed in Blog on the Finextra website against a new range of obscene staff bonuses to be paid by Goldman Sachs (“Is this just a Bad Dream?” http://www.finextra.com/community/fullblog.aspx?id=3438 ). I wondered there whether I had awoken in “Alice in Wonderland”. Now I know I have, and I am at the Mad Hatters’ Tea Party.

Good luck to the Financial Services Authority in what they are trying to achieve.

Mobile Payments Operator M-Pesa Ventures Abroad

With the recent expansion of Safaricom’s M-Pesa money transfer service to the UK, Kenyans abroad now have an additional cash remittance avenue besides the well-known Western Union and MoneyGram services.

According to Safaricom’s chief executive Michael Joseph, the firm plans to run the Kenya-UK service for three months before expanding to other markets.

“We would like to introduce the service to Uganda, the United Arab Emirates and US, but only after we comply with regulatory issues in those countries,” said Mr. Joseph.

To send money to Kenya using the service, users will be required to identify themselves, provide the recipient’s name, Kenyan mobile number and the amount being sent in pounds Sterling.

With transaction fees ranging from $5.6 to $9.6, the transfer is converted to Kenya shillings at the day’s prevailing exchange rate, thereby guarding against exchange fluctuations as it is an instant transfer.

Currently, the maximum amount that can be transferred internationally through M-Pesa is $350 with the amount allowed per month from a single sender in the UK capped at $14,000.

M-Pesa, which was launched in Kenya in 2007, had a subscriber base of 7.3 million by end of July, served by an agent network of over 12,000, with cumulative person-to-person transfers of $2.7 billion. The volume of monthly transfers is $2.5 million.

The move to launch the service in the UK is seen as one meant to tap into the international remittances market especially from Kenyans living and working abroad.

M-Pesa Used in Job Scam

A sign of maturity in the development and use of new products is its adaptation to use by criminal elements. M-Pesa the highly successful Kenyan mobile payment system is no exception as this investigative report from Kenya’s NTV shows.

Bank Training – Critical Element for Today’s Banker

Banking has changed dramatically in the past decade. These changes have been so far reaching that the old disciplines that were core to the successful banker of the 1990s have long since relegated to the dusty back shelf.

To succeed in banking today the banker has to master a wide range of new disciplines. Although he may never become a true expert in these he or she still needs to have a sufficient working knowledge of the subject to enable a reasonable level of effective decision making.

This is equally true for bankers at the “coal face” such as those at the front desk or in the back office as well as those in the more lofty towers of head office, be they in accounting, audit, strategy, planning, operations or the like.

This is why staff training is so very critical. Bankers today need to understand the wider world, whether it is the operation of payment systems, credit cards, real time gross settlement, Swift, ACH operations, electronic payments, mobile payments and so on.

They also need to have a clear understanding of where banking and bank operations are heading – what is done today and how it will be done tomorrow. Technology continues to change the world. To keep up with these changes, to exploit them to your organizations benefit you first need to understand them. Just look at how the Mobile Phone is redrawing the banking world. New applications and processes for the Mobile Phone are being developed and launched by the day.

Of course all these changes also bring with them new dangers and risks – ways in which the ever vigilant banker and his staff may be duped. So an investment in Operational Risk Management training is also critical. What is operational risk? How it can be mitigated? What is fraud and how do you manage it? What is Business Continuity and how do you set it up? All these are key issues that the modern banker needs to know about.

Citadel Advantage offers a wide & comprehensive range of professional courses and training for commercial and central banks in the areas of; Operational Risk Management (for Basel II and for back-office risk mitigation), Specific Operational Risk Management areas including Business Continuity Planning, Anti Money Laundering & Payment Systems, and Liquidity Management.

We also offer a range of Workshops and Introductory Lectures dealing with the main areas covered in our full courses. If you can't find the exact course in our schedule that you are looking for, contact us. We may be able to build a course for your specific needs. Professional courses and training are available at a centralized venue, regionally (currently in Southern Africa & Western Europe), or In-house on your premises.

We use real-life case studies to illustrate the course material, so enhancing the learning process.
Our training courses are offered as:

• Public Courses: Citadel Advantage provide courses and lecturers to the key banking and risk training organizations around the world as well as in its own name. Ask your local or regional provider of banking and risk training courses for a Citadel Advantage course.
• In-house Courses (at your location or offsite at a location of your choice): Citadel Advantage provides cost-effective in-house training programs that allow you to determine the, depth, attendee size, length and sequence of the training within the security of your own organization. If you have 5 or more people to train our In-House training service will save you money. All Citadel Advantage courses can be run on your premises anywhere around the world.
• Tailored Courses (to meet your organization's specific needs): Citadel Advantage also provides tailored training services to the banking and financial sector. We can tailor any course to your needs or develop a new course within a relatively short period of time as required.
• CAPMen Program (the “Citadel Advantage Personal Mentoring” program): This service is designed to provide non-judgmental and professional support to those (Mentee) in senior management or aiming to reach senior management positions requiring an in-depth competency in the areas “Payments & Settlements” and “Operations Risk Management”. “CAPMen” Mentoring utilizes the full range of our experience and specialized professional courses to provide coaching, guidance and advice on a one-to-one basis, in your offices, helping you, the professional, set new goals, broaden your vision and build strategies. “CAPMen” mentoring also helps develop personal management skills such as creative thinking, decision-making, problem-solving, and effective use of resources.
  
• For details of our current course offerings please see; http://www.citadeladvantage.com/schedule.htm
  Our full course catalogue may be viewed at; http://www.citadeladvantage.com/catalog.htm

Risk Management - Focus on Fraud

CITADEL ADVANTAGE is presenting a 2-day intensive training course on Fraud within the context of Operations Risk Management in Madrid, Spain on the 22 & 23 February 2010.

Fraud can be extremely difficult to detect and studies show that most fraud occurs from or through trusted insiders. How aware are you or employees of fraud? Do they have a clear understanding of the role they play in detecting fraud? Do they understand you organization’s fraud policies and procedures?

“Risk Management - Focus on Fraud” is a 2-day intensive course on fraud and how it presents huge challenges for banks, requiring them to radically modify behavior and increase their vigilance in many of the traditional risks associated with banking activities.

Can your bank or organization cope with fraud? In fact could you even identify a fraud in your working environment? Are you maximizing your staffs’ potential to reduce fraud and error in your systems?

A major by-product of the financial crisis was the number of frauds which have come to light – frauds that had been running for years.

Don't miss this opportunity to ensure that you and your staff are able to understand fraud and its ramifications.
WHAT THIS COURSE COVERS
What you and your staff will gain from this course

• Understanding the Human Dynamic – Greed and Fraud
• Understand and identify the key Fraud indicators and Red Flags
• Understanding Operational Risk – in the context of Fraud
• Positioning the organization to successfully manage the ever-present Fraud problem.
• Successful approaches to identifying and mitigating Fraud

WHO SHOULD ATTEND?
• Senior Bank Executives
• Risk Managers
• Operations Managers
• Internal and External Auditors
• Operations Officers
• Business Managers
• Compliance Officers
• I.T. applications providers serving financial institutions
• Consultants and professionals serving the financial services industry.

For more details including a fully descriptive course brochure e-mail us at courses@citadeladvantage.com today. Please indicate FRAUD-MADRID in the subject line.

Liquidity – New Risks In Uncertain Conditions

For the past 15 years at least central banks around the world have been pushing “just-in-time” intraday liquidity as the preferred method of banks funding their real-time settlement (RTGS) accounts. While the implementation of RTGS took the settlement risk out of the majority of financial systems, it adoption and use for more and more critical financial systems (such as CLS) has exacerbated another problem – liquidity risk. This weakness has been spotlighted by t the liquidity crises that affected markets in March 2008 and, more severely, in September and October 2008. It can no longer be taken for granted that just-in-time liquidity will be available to financial market utilities at a time when multiple market participants are in danger of defaulting. This is the findings of researcher made public in the “Chicago Fed Letter” (see http://www.chicagofed.org/publications/fedletter/cflnovember2009_268a.pdf )

Online Fraud: Absa takes Client to Court

The Financial Technology portal reports that Absa one of South Afric’a “big four” has taken a client to court over a matter of online fraud.

The full report, which you can access at http://www.financialtechnologyafrica.com/Online_Fraud_Absa_Drags_FoneWorx_to_Court.htm , reads:

‘Johannesburg, South Africa: Big four bank Absa has denied any liability in a fraud case that saw R3 million illegally moved from FoneWorx's accounts. FoneWorx says just over R3 million of its money had been fraudulently moved out of its eight Absa accounts into 183 unknown, and unauthorised, Absa accounts, in February.

It has since recouped R1.56 million of the stolen funds, and now wants the rest paid back to it. CEO Mark Smith says the balance of the missing money was transferred into the company's attorney's trust account, but then again removed by Absa.

The bank claimed the money had been wrongfully transferred and was actually a duplicate payment, he says. But Absa's head of media relations, Patrick Wadula, insists this is a duplicate payment, which FoneWorx has “refused to repay to Absa”. He says the bank has instituted legal action against Foneworx and its legal representatives, Martini-Patlansky Attorneys, for the return of the duplicate payment.

The bank also denies liability for the money having been illegitimately transferred in the first place. Wadula says Absa “at no time had access to Foneworx's cash focus system”. He says the system is operated and managed by the client's system manager, and Absa has no right of access to or control.

“The only way to gain access to the cash focus system and, in turn, to transfer funds on the system is by way of passwords held by the client or its employees and agents. Absa has no knowledge of these passwords,” says Wadula. He adds that the bank is not liable for the wrongfully transferred money.

However, Wadula says, there have been similar, though minimal, incidents previously. “Absa constantly warns its clients to protect user identities and passwords and that security measures must be put in place to ensure that such information is safeguarded.”

Advocate Clive Pillay, the ombudsman for Banking Services, says he is not aware of this matter. However, he says: “In terms of the Code of Banking Practice, banks undertake to provide reliable banking and payment systems services and to take reasonable care to make these services safe and secure.” '

Money Transfers in Uganda

allAfrica.com: Uganda: Telecom Money Transfer Tilts Market

This article from AllAfrica.com provides an intersting insite into the current state of payments in Uganda. It is well worth a read. To access the original please click on the title post.

Kampala — Six months since the introduction of mobile money transfer, MTN and Zain have registered about 250,000 clients onto the mobile money transfer service moving over sh40b in transactions.

The two telecom companies' officials confirm that only the transactional limitation of sh1m seems to be standing in the way of the service which has tilted the market away from the traditional service providers.

Although figures are scanty about the actual market command of each player, there is ample evidence that MTN mobile money and Zain's Zap have eaten into the market share of traditional money transfer services of Western Union and MoneyGram as well as banks. MTN alone moves an average of sh6b monthly, according to Richard Mwami, MTN general manager, public access.
While Zain offers a diverse platform in which customers are able to merchandise, top up airtime and transfer money.

"The next phase which will soon be unveiled will see customers able to synchronise their mobile phone banking platform with their bank accounts with ZAP, " said George Buza, Zain's head of marketing.

The emerging dominance of the two products illustrates the thirst the market has for innovative products that make life easy.

Services like MoneyGram and Western Union have limited agents across the country.
Western Union, for instance, only has seven agent banks - Barclays, Ecobank, Centenary, Diamond Trust, Post, KCB and Crane Bank and a few sub agents.

On the other hand, there are hundreds of mobile money agents in all street corners across the country.

According to Juma Walusimbi, the communications director of Bank of Uganda, Western Union and MoneyGram were given a go ahead to operate under the financial institutions act because they are operating under licensed financial institutions.

"They presented their accounting and operational systems which ensured that they have audit trails and are safe," said Walusimbi.

But Walusimbi feels exclusivity rights on the two companies constrains the financial institutions that want to work with others.

"For instance, if bank A is working with Western Union, they cannot be allowed to work with MoneyGram," said Walusimbi.

Pride microfinance, for instance, falls under Crane bank which limits the amount of money Pride microfinance can collect as a full agent. Yet the microfinance firm is one of the most active branches, according to sources.

MoneyGram and Western Union international are reportedly reluctant in licensing new agents because of the added workload like supervision, training and hiring added workforce.

There are now six registered and operating telecom companies, two of who are offering the money transfer service. The benefits of the service have been boosted by the failure of commercial banks now numbering 21 to translate their services into everyday benefits to the common man.

Interest rates on savings are in point decimals while borrowing rates in Uganda are among the highest in the region. Also, inflation, both in the past (single digit) and present (at 14.5% in September) is way above the interest rates offered by banks for deposits. This means your meager savings in the bank's are simply wiped off by the high inflation.

"People do not save because there are no benefits to saving," said an expatriate working in Uganda.

Banks have remained largely urban based capturing just about 15% of the entire population.
The electronic funds transfer (EFT) and the real time gross settlement (RTGS) offered by banks are expensive, lengthy and uncompetitive. EFTs charges range from sh2,500 to sh10, 000 and take about two days, while RTGS charge upto sh15, 000.

"These two need to lower costs. But there is still business for everyone," cautioned Walusimbi.
In Kenya, the central bank said nearly half (47%) of all money transfers in Kenya are taking place through the mobile phones.

Although a major revolution in the money transfer business, mobile money has shortfalls. There are reports that agents sometimes run out of cash which creates lapses in the smooth running of the service. Also operators decry the lack of a harmonised identification system in Uganda like it is in Kenya and Tanzania.

"Keeping in consideration the sensitivity around money in Uganda, the slow pace at which people have embraced the use of this service in their day-to-day lives and the lack of a national/formal identification that restricts the acquisition of even more subscribers onto the mobile money service," said Mwami.

Leaving the responsibility of settling all claims by agents with little deposits in the rural areas are a burden and have limited growth of the service.

Will telecoms provide money storage as the banks do?

Isaac Nsereko, MTN chief marketing officer, says in the foreseeable future, it is very unlikely that telecom firms will undertake full banking roles like accepting deposits and extending credit.
"What I see more is collaboration on transfer and payment with the banks," said Nsereko.
In this arrangement, the mobile phone will continue to offer the infrastructure.

MoneyGram and Western Union have remained competitive by mainly exploiting strong brand presence and a public that has for long understood their modus operandi.

The mobile money service has clearly redrawn the competition lines with the traditional players.

Business Continuity & Payment Systems

Although many of us bank operations professionals are intimately involved in the day-to-day operations and functioning op payment systems, we tend to loose the true magnitude of what we are dealing with in the "system" with its "technology only" connotation. This is often compounded by an "on-us" view of our bank and our operations.

This view can cloud our thinking when planning for such critical issues as disaster recovery and business continuity. What is often overlooked is the big picture and how it all hangs together.

The events and aftermath of 9/11 clearly illustrated the problem. This is the subject of this short presentation are the events of that day, its impact on the financial system generally (and payment systems more specifically), the lessons learned and what we should be taking forward in our approach to Business Continuity Planning as regards Payment Systems.

The presentation was originally made by Stanley Epstein, one of our Principal Associates, to the Financial Services Technology Consortium in New York on 18 December 2008.

Business Continuity & Payment Systems

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Migrant Worker Remittances - Issues & Opportunities

CITADEL ADVANTAGE are presenting a 2-day intensive training course on Remittance Payments and the Business Opportunities that they create in Johannesburg, South Africa on the 25 & 26 January 2010.

International migration, the movement of people across international boundaries, has enormous implications for growth and welfare in both origin and destination countries. According to the World Bank nearly 200 million people live outside their country of birth. Although Remittances to developing countries are forecast to fall from an estimated $305 billion in 2008 to $290 billion in 2009, they will still outstrip private capital flows and official development aid.

For banks and payment service providers, migrant remittances are the single biggest untapped source of potential revenues. But to benefit from this vast sea of payments, banks and financial institutions need to gain a clear understanding of:
• What remittances are and how they work,
• The nature of the market,
• The market’s geographical spread,
• The customers for remittance services,
• The difficulties that both migrants and their beneficiaries face in the sending and the receiving of these funds, and
• How new initiatives and technology are changing the remittance landscape.

For numerous countries Remittance flows also represent the largest source of foreign exchange. In some developing countries they can account for as much as a 33% of GDP. International research reveals that the flow of remittances appears to be significantly more stable than that of other forms of external finance. This "resiliency" is because many migrants are unlikely to leave their adopted countries and will continue to send money home.

For senders and recipients the process is often times traumatic, and the difficulties associated with them have been increasingly recognized in recent years.
For banks and financial institutions remittances represent a huge opportunity – an opportunity to expand market share in a powerful, worldwide emerging market segment.

The rapid diffusion of technology into the payments world through devices such as the mobile phone heralds the promise of bringing modern real-time banking to even the remotest of villages.

This intensive interactive 2-day course will introduce partctipants to the biggest payment phenomenon of the 21st century. It will open your eyes to rapidly expanding market critically waiting for solutions to its needs.

This course is designed to assist banks, financial institutions and payment service providers who want to improve their understanding of this important market as well as develop the many business opportunities that present themselves.

Join us as we explore the world of Remittances and its many Business Opportunities.

For a fully detailed Brochure for this event please send a blank e-mail to courses@citadeladvantage.com (Please enter Remit -Jo'burg in the subject line)

European Commission Moves Closer to Enforcing SEPA End-Game

The European Commission is in talks with member states about setting a deadline for the migration of national payment schemes to the new Single Euro Payments Area (SEPA) after a public consultation exercise showed widespread support for the move.

The EC initiated consultation with key stakeholders in June on whether and how deadlines should be set for the migration of existing national credit transfers and direct debits to the new SEPA-compliant payment instruments.

The results showed that "a large majority" of respondents support the idea of enforcing dates for the use of legacy payment instruments, says the EC, although users expressed concerns about quality issues relating to direct debits and the need for enough time to become acquainted with the new products.

In July, a coalition of payments systems users published a highly critical report on the SEPA project and the lack of consultation with end-users, warning that the setting of an arbitrary end-date could destabilize the entire scheme.

One option under consideration by the Commission is to set separate deadlines for SEPA credit transfers and direct debits, since both schemes were not launched at the same time and do not have the same level of maturity.

Internal market and services commissioner Charlie McCreevy says: "Setting clear deadlines for the migration to SEPA would send a strong signal that SEPA is an irreversible process. It would provide certainty and predictability and act as a strong incentive for both industry and users to speed up migration."

Sins of the Risk Managers

Have risk managers really been doing their jobs properly? According to many they certainly have not. I came across this interesting item on the sum2llc Blog. It is certainly worth a read.

Click on the post title or the link below.
http://sum2llc.wordpress.com/2009/09/28/day-of-atonement-al-chet-for-risk-managers/

The Bank of England and Payment System Oversight

Central banks’ involvement in the oversight of payment systems arises from their core role as the systems’ settlement bank, providing the ultimate settlement asset, central bank money. This gives central banks a very direct interest in any potential systemic risks inherent in such systems. More broadly, payment systems are crucial to the functioning of the UK banking system and thus the wider financial system and economy, and it is therefore important that they operate in a way that contains risks to the system as a whole to an acceptable level. If payment systems are operated only in the narrow self-interest of their member participants, they may tend to underinvest in the mitigation of those risks. This can be countered by ensuring a broader risk perspective through central bank oversight.

This was recognized in the framework set out in the Memorandum of Understanding (MoU) with HM Treasury and the Financial Services Authority (FSA) in 1997.(1) The Banking Act 2009(2) puts the Bank of England’s oversight of payment systems onto a statutory footing.
On a recently published paper the Bank of England provides a brief overview of the relevant provisions of the Act and describes how the Bank intends to reflect these provisions in its approach to oversight. It also invites comments in relation to the draft Principles the Bank is intending to apply to recognized payment systems once the new framework is in place.

The full Bank of England paper may be downloaded at;
http://www.bankofengland.co.uk/publications/other/financialstability/oips/oips090928.pdf

Fraud and its Control – Get you Knowledge up to Speed

Fraud has been on many people’s minds this past year or so. Bernard Madoff in the US and Satyam in India are just two cases that come easily to mind. Are you able to recognize fraud in your organization? Do you understand the drivers of this specific form of Operational Risk?
“How to loose $360 million” is a case study taken from our extensive library of Operational Risk events. Shortly we will be offering a brand new training course aimed at understanding, recognizing and combating fraud. Watch blog and our Website (www.citadeladvantage.com ) for details.
In the meantime, for a taste of some of the material covered please view our short presentation.

Basel II Opps Risk How To Lose $360 Million Nov 2005

View more presentations from stanleye.

The Bank Model Is Dead

Chris Skinner did an intersting presentation at a conference this week. In essence he says that the traditional model of banking is dead, replaced by a new one. The dead model is the one where 80% of costs of retailing are in bank branches. Branch based banking is dead. Branches however are still very much alive. What is needed is a new focus. See his presentation here.

The Bank Model Is Dead

View more documents from Chris Skinner.

Is SWIFT Succumbing to the “Dinosaur” Syndrome?

By Stanley Epstein - Principal Associate at Citadel Advantage

The news item regarding impending staff a cut being ‘inevitable’ as SWIFT contends with declining volumes” (FINEXTRA News, 14 September 2009) triggered some wider thoughts that I would like to share.

SWIFT’s need to restructure and to contain operating costs is not in my view simply a result of the financial crisis and the downturn in message volumes. There is also a substantial element of the “dinosaur” syndrome in these events.

If SWIFT wants to succeed in the efficiencies that it seeks there are three basic issues that it needs to urgently address.

1. Speed up innovation – SWIFT is too slow to innovate. There are some great changes in the SWIFT pipeline but the problem is that they take forever to develop and implement. A competitive banking industry has rightfully not got the patience for this.
2. Get away from the technical focus - SWIFT messaging and its processing is a technical issue, but the market that it serves is driven by business requirements. From my own experience the business area is oft-times totally neglected. The business champions in the industry often do not really understand what SWIFT can do for them. Similarly the “translation” and melding of the technical and the business aspects is left to the banks to do. The banks are no good at this. If SWIFT wants banks to uses their solutions they need to actively show the banks how this can be done.
3. Temper the bureaucracy - SWIFT is run by (1) too many bureaucrats (who really don’t have an appreciation for the role that SWIFT ought to be playing) and (2) too many interbank bodies (who’s agenda’s are often shaped by the business interests of the financial institutions involved).

I am a great believer in and supporter of SWIFT – I have been since its birth way back in the 1970s – so please don’t take my thoughts amiss.

US Mobile Banking Report Cards - Some Banks Are Failing

Mobile banking in the US is not a bed of roses and some banks are not really making the grade there as Matt Hamblen writing in Computerworld reports.

Are We Heading Into Chaos – Again?

By Stanley Epstein - Principal Associate, Citadel Advantage Ltd.

This is the time of year when the financial services industry, or at least the “techie” element heads off to some exotic venue for the annual SWIFT jamboree. SWIFT as we all know is the global financial messaging operator. And as part and parcel of what they do, they have also created the messaging standards on which the financial world to a very large degree depends.

Of course there are huge exceptions, especially in the United States where most banks are not members of SWIFT. But in the rest of the world any bank that is worth its salt is a part of this very important element of the financial system’s operating backbone.

So with this as a background, I am somewhat taken aback to read that the international financial messaging standard which has become so ubiquitous over the past three decades is under “attack” for want of a better word.

Banks are, by all accounts, moving to back to proprietary systems for many of their new messaging requirements. There are many reasons for doing this; existing messaging systems can’t meet specific unique requirements, development cycles for new messaging standards are too long, existing services are too expensive (given the surge in message numbers), platform migrations are too complicated or not yet budgeted for and so-on. Now, I don’t want to get into the pros and the cons of all these issues. Everyone has surely got their own very valid points of view on this. And this question of the whys and the wherefores surely has material for many, many debates.

What does concern me however, is the fact that perhaps we are now plunging headlong into an ever increasing period of infrastructural chaos because of these actions. Are banks short term goals clouding the bigger picture?

If the financial industry as a whole looses this one – and we head into a new period of multiple, competing and incompatible messaging standards – we face years of soaring operating costs and other miseries as we try to bridge these developing operating gaps in the future.

My own view is “please let’s think this through properly before we condemn the next two decades of banking to immense problems”.
What are YOUR thoughts?