Payments Firms: Strategic Risk Management for Sustainable Growth

Executive Summary

The payments industry stands at an inflection point where explosive growth opportunities collide with unprecedented regulatory scrutiny. Payment service providers face a stark reality: fraud losses reached $8.8 billion in 2022 (up 49% from 2021), while enforcement actions against over 10 payments firms resulted in $200+ million in fines over three years.

This convergence of growth and risk demands strategic transformation. Leading firms are discovering that robust risk management frameworks don't constrain growth—they enable it. Effective risk management creates competitive differentiation, builds customer trust, enables efficient capital deployment, and positions firms for sustainable expansion in an increasingly regulated marketplace.

This analysis examines critical risk management imperatives for payments firms balancing rapid growth with regulatory compliance, operational resilience, and customer protection.

The Growth-Risk Integration Paradigm

Paradigm Shift in Regulatory Thinking

Recent regulatory actions by the Department of Justice, Federal Trade Commission, and Consumer Financial Protection Bureau signal a fundamental shift from reactive enforcement to proactive risk prevention. Regulators now scrutinize not just compliance outcomes but the quality of risk management processes themselves.

Enforcement Action Drivers:

• Insufficient merchant due diligence processes

• Poor adherence to industry payment standards

• Deceptive customer enrollment programs

• Erroneous charges and fee structures

• Expensive exit fees and inactive account charges

• Inadequate fraud prevention controls

• Weak safeguarding of customer funds

Financial and Operational Impact:

The costs of regulatory failures extend far beyond immediate fines. When enforcement actions are issued as consent orders, remediation typically requires more than five years to complete, with annual run rates exceeding $100 million for the largest players. Even more concerning: post-remediation risk and compliance programs typically cost 35-50% more than comparable peer programs, creating permanent cost disadvantages.

Beyond direct costs, regulatory actions create lasting reputational damage, limit market expansion opportunities, restrict product innovation capabilities, increase insurance premiums, and complicate partnership negotiations.

Wind-Down Planning: The Critical Weak Link

Effective risk management frameworks promote financial resilience by identifying and assessing risks and quantifying resources needed to cover them. Yet wind-down planning remains underdeveloped across the industry.

Payment firms must develop comprehensive wind-down plans addressing:

• Liquidity trigger identification and thresholds

• Customer fund protection mechanisms

• Critical service continuity during wind-down

• Intragroup dependency management

• Regulatory notification protocols

• Communication strategies for stakeholders

Failed payment firms averaged 65% shortfalls in customer funds over a five-year period, highlighting critical gaps in safeguarding and wind-down preparedness.

Operational Risk Management vs. Compliance-Driven Discovery

Operational Risk Excellence

Leading payment service providers implement comprehensive operational risk frameworks that integrate security, fraud prevention, and customer protection:

Multi-Layered Authentication:

• Biometric identification (fingerprint, facial recognition)

• Real-time behavioral analysis

• Device fingerprinting and geolocation

• Transaction pattern recognition

• Out-of-pattern activity detection

AI/ML-Powered Fraud Prevention:

• Real-time transaction monitoring analyzing millions of data points

• Machine learning models adapting to emerging fraud patterns

• Predictive analytics identifying high-risk transactions before completion

• Network analysis detecting coordinated fraud rings

• Anomaly detection flagging unusual account behavior

Seamless Customer Experience:

• Friction-right approach balancing security with convenience

• Transparent communication about security measures

• Proactive fraud alerts and education

• Simple dispute resolution processes

• Clear explanation of protective measures

Compliance-Driven Requirements

Regulatory requirements continue evolving, demanding enhanced safeguarding and operational resilience:

Customer Fund Protection (Effective 2026):

• Mandatory segregation of customer funds from operational accounts

• Daily reconciliation and verification procedures

• Monthly reporting on safeguarding measures

• Enhanced audit requirements

• Board-level oversight and accountability

Operational Resilience Mandates:

• Important business service identification

• Impact tolerance definition for critical services

• Scenario testing and validation

• Third-party dependency mapping

• Crisis management and communication protocols

Enhanced Due Diligence:

• Comprehensive merchant onboarding processes

• Ongoing monitoring of merchant activities

• Risk-based approach to customer verification

• Enhanced AML/KYC procedures

• Regular review and updating of risk assessments

Critical Risk Areas and Mitigation Strategies

Enterprise Risk Management Integration

Strategic Priorities:

Risk Appetite Framework: Clearly defined risk appetite statements aligned with business strategy, quantified risk limits across key categories, escalation protocols when approaching limits, and regular board review and adjustment.

Three Lines of Defense Model: Business units owning and managing risks, independent risk management function providing oversight, internal audit providing independent assurance, and clear accountability and reporting lines.

Risk Culture Development: Tone from the top emphasizing risk awareness, training and education programs, open communication about risk issues, rewards for identifying and escalating risks, and consequences for risk management failures.

Fraud and Financial Crime Prevention

Account Takeover (ATO) Prevention:

• Multi-factor authentication requirements

• Device and location verification

• Behavioral biometrics analysis

• Real-time alerts for suspicious activity

• Account recovery procedures with enhanced verification

Authorized Push Payment (APP) Fraud:

• Enhanced payee verification processes

• Transaction delay and confirmation for large or unusual payments

• Customer education on common scam tactics

• Confirmation of Payee (CoP) implementation

• Rapid response protocols for reported fraud

Anti-Money Laundering (AML):

• Risk-based customer due diligence

• Transaction monitoring and suspicious activity detection

• Enhanced due diligence for high-risk customers

• Regular training for staff on AML requirements

• Independent testing and validation of AML controls

Technology and Cyber Risk

Cybersecurity Framework:

• Comprehensive information security program

• Regular vulnerability assessments and penetration testing

• Incident response and crisis management plans

• Third-party security assessments

• Continuous monitoring and threat intelligence

Data Protection:

• Encryption of sensitive data at rest and in transit

• Access controls and privileged user management

• Data retention and destruction policies

• Privacy impact assessments for new products

• Compliance with state and federal privacy regulations

System Resilience:

• High availability architecture

• Disaster recovery and business continuity planning

• Regular testing of recovery procedures

• Capacity planning and performance monitoring

• Change management controls

Third-Party Risk Management

Payment firms increasingly rely on third-party service providers for critical functions, creating concentration risk and operational dependencies.

Comprehensive Third-Party Framework:

• Pre-engagement due diligence and risk assessment

• Contractual provisions addressing risk management and compliance

• Ongoing monitoring of third-party performance

• Regular audits and control attestations (SOC 2, ISO 27001)

• Exit strategies and alternative provider identification

• Incident response coordination

• Regulatory reporting for material third-party failures

Strategic Implementation Framework for Payment Services Leaders

Building Competitive Advantage Through Risk Excellence

Strategic Integration:

Risk-Enabled Growth: Risk management teams involved in strategic planning, risk considerations in product development, risk-adjusted return on capital metrics, and scenario analysis informing strategic decisions.

Operational Excellence Enhancement:

Process Optimization: Streamlined KYC/AML processes reducing friction, automated monitoring reducing manual review, exception-based workflows improving efficiency, and continuous improvement culture.

Technology Investment: Modern risk management platforms, integrated data and analytics capabilities, API-based connectivity with partners, and cloud-based scalability and flexibility.

Talent Development: Risk management expertise recruitment, training programs on emerging risks, cross-functional collaboration opportunities, and career development paths in risk functions.

Regulatory Relationship Management

Proactive Engagement:

• Regular dialogue with supervisory authorities

• Transparent communication about risk issues

• Early notification of material changes or incidents

• Seeking guidance on novel products or approaches

• Demonstrating commitment to compliance culture

Regulatory Intelligence:

• Monitoring regulatory developments and trends

• Participating in industry working groups

• Analyzing peer enforcement actions

• Adapting frameworks to evolving expectations

• Scenario planning for potential regulatory changes

Future Outlook and Conclusions

The payments industry transformation continues accelerating, driven by technological innovation, changing customer expectations, and evolving regulatory frameworks. Firms that successfully integrate risk management into their growth strategies will capture competitive advantages while those treating risk management as pure compliance cost will face increasing challenges.

Emerging Risk Areas:

Digital Assets and Crypto: As payments firms expand into digital assets, regulatory frameworks continue developing. Firms must balance innovation with robust controls addressing volatility, custody, AML/KYC, consumer protection, and operational resilience.

Embedded Finance: As financial services embed into non-financial platforms, new risks emerge around oversight, customer protection, data privacy, operational dependencies, and regulatory clarity.

Real-Time Payments: Faster payment systems reduce fraud detection windows, increase operational complexity, require enhanced monitoring, and demand immediate incident response capabilities.

Cross-Border Expansion: International growth introduces multi-jurisdictional compliance, foreign exchange risks, varied regulatory expectations, and complex operational structures.

Success Requires:

1. Proactive Compliance Culture: Risk awareness embedded throughout organization, open communication about issues, learning from incidents, and continuous improvement mindset.

2. Technology-Enabled Monitoring: Real-time risk dashboards, predictive analytics and AI, automated controls and testing, and integrated data platforms.

3. Customer-Centric Fraud Prevention: Balancing security with experience, transparent communication, education and awareness, and rapid response to issues.

4. Strategic Regulatory Engagement: Building trusted relationships, seeking guidance proactively, demonstrating commitment, and contributing to industry standards.

The payments firms thriving in 2025 and beyond will be those viewing risk management not as constraint but as strategic enabler—building trust with customers, confidence with regulators, and competitive differentiation in the marketplace.

About the Author

Suresh Iyer turns financial uncertainty into strategic clarity. With 25 years spanning Big Four audit leadership, corporate finance, and fractional CFO work, he guides publicly traded companies and high-growth startups through IPOs, complex transactions, and transformational growth—bringing technical precision and forward-thinking strategy to organizations that refuse to settle for reactive reporting.

JHS USA provides comprehensive risk management advisory, regulatory compliance, internal audit, and strategic planning services to payments firms, fintechs, and financial services companies navigating growth and regulatory transformation. Our team combines deep regulatory expertise with practical implementation experience to help clients build sustainable competitive advantages through risk excellence.

Contact JHS USA today to discuss your risk management and compliance strategy.

This report is for informational purposes only and does not constitute legal, regulatory, or financial advice. Organizations should consult with qualified professionals regarding their specific circumstances.

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