November 6, 2023 | This edition of the Institutional Risk Analyst is written from Dallas, TX. We are participating in a panel discussion this afternoon at the Texas Mortgage Bankers Association Education Symposium event with our friend and fellow scribe Rob Chrisman.
This past weekend was challenging for many financial professionals. A reported "technical problem" at the Electronic Payments Network (EPN), a private-sector operator of the Automated Clearinghouse (ACH) network in the United States, caused Bank of America (BAC), JPMorgan (JPM), U.S. Bancorp (USB) and Wells Fargo (WFC) to fail to receive deposits.
The EPN is one of two authorized ACH operations, the other being the Federal Reserve's FedACH. The EPN is a financial clearinghouse that handles a variety of electronic funds transfers for the private sector. It provides functions similar to those provided by Federal Reserve banks' FedACH service.
The EPN processes electronic funds transfers (EFT) between financial institutions. The two kinds of financial institutions in the ACH network are ODFIs (Originating Depository Financial Institution) and RDFIs (Receiving Depository Financial Institutions). EPN receives entries from an ODFI, distributes entries to the appropriate RDFI, and performs the settlement functions for the financial institutions.
The Federal Reserve noted in a bulletin last week:
“On November 3, 2023, a processing issue at EPN, the private sector ACH operator, resulted in a number of ACH entries having certain data elements obscured (file dated for November 1, 2023, processed on November 2, 2023, with effective dates from November 2-3). This error was contained in a single interoperator file that was distributed by EPN to its participants during the November 2 6:00 p.m. processing window. These entries contain valid Nacha syntax, but obscured account information and recipient information.”
Why is this all important? Because a significant number of deposits were not made on Friday, leading an equally significant number of bankers and executives to spend time over the weekend discussing the problem. Today a lot of people will be looking for their money.
"We did not have many problems Friday," one large New York regional banker told The IRA. "We had a couple of hundred non-posts because of missing account information. We ran the tape again and no problem." But larger banks seem to have been disproportionately impacted by the glitch.
Many consumers noticed the problem via their mobile app. We first became aware on Friday when BAC issued an alert to mobie customers, saying that some deposits may be "temporarily delayed due to an issue impacting multiple financial institutions." And the deposits did not arrive.
Was the breakdown of the normally stable and, indeed, routine workings of the Clearinghouse the result of bad actors? Did this failure have anything to do with deliberate cyberattacks on several financial institutions and governments over the past month? Nobody knows and the Fed's not talking.
The fact that payments flows can be impacted by technical problems and/or active attacks should give all investors and consumers pause. “We’re aware of an industry-wide technical issue impacting some deposits for Nov. 3,” Lee Henderson, at U.S. Bank, told CNBC in a statement. “Customer accounts remain secure, and balances will be updated when deposits are received.” Emphasis on when.
It is important to state that payments participants such as Amazon (AMZN) and other large players routinely have issues with sending and receiving, usually after making changes in systems or software. The problems are fixed and life goes on. But the fact that so many consumers, businesses and financial institutions were affected last week should caution one and all about the fragile nature of the payments system.
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