Behind the Scenes: How Banks Handle Payment Claims and Disputes

Payment claim handling is a crucial process within the financial sector, ensuring that all monetary transactions are accurate, legitimate, and properly accounted for. Despite its significance, this activity remains largely invisible and underappreciated. Very few articles are written on LinkedIn or other specialized content platforms about this topic, so I thought of giving the topic the attention it deserves.

Payment claim handling refers to the procedures and actions taken to manage claims or disputes related to payments. This process ensures that errors, fraudulent activities, or discrepancies in payment transactions are identified, investigated, and resolved efficiently.

It encompasses both customer-initiated and counterparty-initiated claims and audits to maintain the integrity of financial transactions. Examples include:

• Fraudulent Transactions: Addressing unauthorized transactions made using a customer’s account.
• Duplicate Payments: Resolving instances where a payment has been processed more than once.
• Incorrect Amounts: Adjusting payments where the wrong amount was transacted.
• Unrecognized Charges: Investigating and potentially addressing charges that are not recognized. This can involve charges unrecognized by the customer or charges the bank does not recognize from payment counterparts or vice versa.
• Payment Failures: Handling failed transactions due to technical errors, insufficient funds, or other function issues (e.g. non-existent, closed or blocked payee account).
• Chargebacks: Managing claims from customers disputing a charge, often seen in credit card transactions.
• …​

Payment claim handling includes multiple tasks:

• Receiving Claims: Collecting and logging claims from customers and counterparties or detecting discrepancies through audits. Customer claims are typically received and logged by the Customer Service Team, while claims from counterparty banks usually come directly to the claims team via structured messages (e.g. SWIFT messages or specifically formatted emails).
• Verification: Validating the legitimacy of the claim through customer and counterparty interaction and checking transaction histories.
• Investigation: Conducting thorough investigations to understand the nature and cause of the issue. If any fraud is identified, fraud and compliance teams will get involved, and cases may be opened with the police. Specific reporting to regulators might also be required.
• Resolution: Taking appropriate actions to correct the issue, which may involve reversing transactions, issuing refunds, or making adjustments.
• Communication and Documentation: Keeping the customer and/or counterparty bank informed throughout the process, maintaining detailed records for future reference and compliance purposes and providing a resolution report.

In a bank, the "Payment Claim Handling" department can consist of dozens of employees dedicated to this process. For large international banks, it can involve hundreds of employees.

Therefore, necessary tooling to optimize and streamline these activities is crucial. A bank should first implement the necessary tools to avoid claims as much as possible. This can be achieved via multiple tools, such as:

• Advanced Financial Crime Detection Tools: These include fraud detection, verification of payee, AML, and sanction screening software to detect criminal activities before the payment occurs.
• Business Activity Monitoring Software: Continuously tracks all payments for possible anomalies and issues, allowing proactive actions before a claim is made. Monitoring execution time, quality, and the number of claims from counterparties can also be beneficial. An aggregated dashboard can help challenge counterparties for better quality and adapt dynamic payment routing algorithms to avoid certain counterparties for specific payment types.
• Robust Payment Flows: A modern payment architecture that is maximum STP and highly resilient in design, making numerous data validations before executing the payment, will ensure a minimal number of failed and rejected payments requiring manual intervention.
• Customer and Employee Portals: Providing full transparency to customers and all customer-facing employees about the life-cycle status of every payment and other details (like costs) can proactively communicate issues to customers, avoiding many claims as necessary information is readily available.

However, even with all these systems in place, claims will always be part of the process. Customers might still perceive errors, even when there are none, and counterparties might not be equipped with the same sophisticated tools. Additionally, certain anomalies will stll happen, and abnormal activity might not always be detected. Therefore, banks still need to equip their "Payment Claim Handling" departments with the necessary tools to manage received claims. This includes:

• Case Management Systems: To manage the lifecycle of each claim from initiation to resolution, keep track of all communications with other departments, counterparties, and customers. Ideally, the case management system should also have an efficient communication tool for managing these interactions.
• Data Analytics Tools: To search, retrieve and deep-dive in all payment transactions involved in a claim, allowing to analyse this transaction data in detail. Additionally analytics tools, can help to identify trends or recurring issues.
• Corrective Actions: Tools to act upon a payment, such as canceling, reversing, or modifying a payment, generating cost rectifications, invoicing with counterparties, and sending out structured communications (SWIFT messages).

Since this domain is quite hidden within the bank, it is often not well supported by excellent IT tooling. As a result, many departments are not very automated yet and still use tools like Excel to manage their work. Given the number of people employed in this domain, significant efficiency gains can be obtained. Implementing these improvements will not only reduce operational costs but also improve relationships with customers and counterparties, as the claim handling process will be executed faster and more accurately.

For more insights, visit my blog at  https://bankloch.blogspot.com