Workflow series #3 - Orchestrating funds safeguarding with Numeral

As we covered in a dedicated article, safeguarding requirements for payment institutions (PIs) and electronic money institutions (EMIs) is crucial to ensure the safety and security of customer funds. It is, however, hard to achieve operationally with the expected rigour, and up to one-fourth of PI and EMIs in the UK and Ireland fell short of their obligations in 2023, according to the regulators. The main issues highlighted were then: 

• Co-mingling of funds and charges on the safeguarded account

• Misfunding of the segregation account

• Lack of proper reconciliation process for internal accounts

Working backwards from those challenges, we cover in this article how a bank orchestration platform like Numeral supports the critical challenges faced by payment teams accountable for fund safeguarding, making safeguarding orchestration scale and reliable.

We will explore those workflows from the perspective of regulated EMIs participating in SEPA in a country where safeguarding is conducted through segregation over insurance (leading to having two distinct accounts: one for safeguarding, one for payment and settlements).

Enabling a strategic approach to bank accounts to remove the mingling of funds

When setting up their safeguarding operations, payment operators have to ensure that the money movements related to their operations are segregated from customer funds. In practice, this means opening additional accounts for transactions associated with business running costs and non-customer funds to book incoming payments.

One of the reasons for failing to follow this account de-mingling strategy is complexity. Managing multiple accounts can quickly create headaches for finance and treasury teams, ensuring that all accounts are provisioned appropriately at all times. The Numeral bank orchestration platform solves this challenge by connecting to all bank accounts and combining them into a central view of all accounts that finance teams can access.

All connected accounts to Numeral can be queried through a single API request or accessed through the Numeral dashboard.

GET https://api.numeral.io/v1/connected_accounts

Once all bank accounts are connected to the platform, customers can leverage the API to build adequate payment workflows to ensure only customer funds are deposited on the safeguarding account while all other funds are sent to operational accounts.

Real-time data to support safeguarded account funding

Payment accounts are provisioned daily to ensure enough funds are available to fund the net settled position of the PI/EMI at the end of the day. If the account is underfunded and its balance becomes negative, there is a high chance that the sponsor bank will remove access to the CSM and discontinue day-to-day operations, which can have a dire impact on the company.

On the other hand, an overfunded account increases operational risk by making more customer funds ‘accessible’ in the payment account.

Therefore, the daily provisioning relies on estimated balances between incoming and outgoing payment orders expected to arrive and then adds a margin of error based on the PI or EMI’s risk profile to avoid underfunding.

Let’s explore how Numeral helps teams get a solid base for this forecasting exercise.

For payments initiated by the PI or EMI, the non-reconciled operations expected to impact the account in the upcoming day can be accessed through a single API call using the filter &reconciliation_status=unreconciled. Those payment orders are expected to impact the subsequent settlement and serve as a basis for the safeguarding forecast.

GET https://api.numeral.io/v1/payment_orders?reconciliation_status=unreconciled

For payments not initiated by the PI or EMI, SEPA indirect participants receive instantaneous pacs files and API calls to notify them of upcoming payments to be settled. In Numeral, those payment notifications are called incoming payments, and expected incoming payments across all schemes can be accessed through a single API query in Numeral.

GET https://api.numeral.io/v1/incoming_payments?reconciliation_status=unreconciled

Adding those incoming payments to be settled in the daily forecast on top of the initiated payments to be settled serves as a robust baseline for the forecasting.

Since the introduction of instant payments (FPS and SEPA Instant Credit Transfer), conducting a forecast of safeguarded funds once a day is no longer a viable option. Instant transfers in and out with instant settlement on the accounts can create balance variance, which has to be mitigated in real-time.

For this purpose, Numeral shares real-time updates through a webhook of balances to enable the payment teams to take corrective actions immediately through instant intra-day transfers.

Based on customer instant payment orders and the business internal logic, instant transfers can be initiated through Numeral from the safeguarding account to the settlement account to ensure adequate funds are available.

GET https://api.numeral.io/v1/payment_orders

Automated reconciliations to maintain robust internal accounts

A PI or EMI’s core banking system (CBS) is the single source of truth for customer balances. To remain accurate and compliant with regulations, CBSs need real-time access to payment execution and reconciliation statuses. With multiple incoming and outgoing money flows, keeping track in real-time of those data points for all customers can be daunting.

Numeral’s orchestration layer provides the foundation for scalable processes by bringing together three components:

• A customisable reconciliation engine leveraging 11 data points, including flexible metadata to allocate transactions to payment orders (and therefore customers)

• A counterparty view aggregating reconciliation through virtual IBANs and IBANs for a given internal customer accounts

• Webhooks on counterparty lifecycle events sending structured information back to the CBS

Combining those three capabilities, Numeral can automatically reconcile booked transactions, allocate them to customer accounts and share the structured information back with the PI or EMI’s CBS to update the central ledger. All the while keeping an auditable trail of all events and changes to support compliance operations.

Numeral for safeguarding orchestration

Numeral supports regulated financial institutions in building pan-European bank operations that can scale. If improving safeguarding operations is a key topic for your company, do not hesitate to contact us.