Booklet: Retail Payment Systems Section: Retail Payment Systems Risk Management Subsection: Strategic Risk

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Strategic risk is the risk associated with the financial institution’s future business plans and strategies. This risk category includes plans for entering new business lines, expanding existing services through mergers and acquisitions, and enhancing infrastructure (e.g., physical plant and equipment and information technology and networking). Financial institutions also increasingly compete with nonbank entities to provide retail payment services. This competition benefits the consumer through enhanced product offerings at a lower cost. Conversely, it places additional pressure on financial institutions to protect profitability through the development of new products and services while managing additional marketing, research, and development costs.

Strategic plans that include significant market expansion or the addition of new products may expose financial institutions to increased risk. For example, expanding Internet banking services to include electronic bill presentment and payment services, expanding existing bankcard issuing programs, or entering the merchant bankcard processing business significantly increase the potential risk to the financial institution. Strategic plans should demonstrate that management has assessed the risks and documented the institution’s program to mitigate them. Strategic plans should address the institution’s capability to provide the service.

Larger financial institutions often specialize in specific retail payments and invest in the resources and expertise to support high-volume transaction processing applications. Smaller financial institutions also compete in some retail payment segments through the use of advanced distributed information technology platforms and third-party service providers. Many retail payment system services are transaction intensive and priced competitively based on volume. Financial institutions providing large-scale bankcard issuing and merchant services, as well as other transaction-intensive retail services, should maintain a competitive operating environment. This often requires significant investments in information technology. Strategic plans should reflect these investments and link business-line goals and objectives with planned information technology enhancements.

To mitigate strategic risk, management should have a strategic planning process that addresses its retail payment business goals and objectives, including supporting information technology components. Because financial institutions often rely on third-party service providers for retail payment system products and services, the strategic plan should include a comprehensive vendor management program.

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