As European banks make final preparations for T+1, it is their technology teams who will face the biggest challenge with the new one-day payments system. Guy Warren, CEO of ITRS, explains the key risks and the steps you can take to adapt.
The long-awaited transition to T+1 has begun in the United States. The move to one-day settlement heralds a major change in the financial industry, bringing both opportunities and challenges for banks. However, it is the often-overlooked technology teams within these banks that are under the most pressure to ensure IT operations can adapt to this transition.
For any bank, an IT outage has serious implications, from lost revenue to reputational damage. These effects are even more severe at T+1. Tight settlement timelines mean that most post-trade activities (matching, assignment, confirmation, confirmation, submission) must be completed by 9:00 PM ET on the trade day. Therefore, if a bank suffers an outage, it can dramatically impact its ability to settle transactions within 24 hours.
It also increases the risk of IT issues due to human error. Tight payment deadlines and time zone differences can mean that staff at European banks are forced to work long hours after closing hours. The transition to T+1 could lead to an increase in IT issues due to human error, as stress and fatigue increase the risk of unconscious mistakes.
Technology teams face these risks in an increasingly regulatory environment. In January 2025, the Digital Operational Resilience Act (DORA) will come into effect. The act aims to strengthen IT security for financial institutions, including banks, by introducing a series of new requirements for reporting major IT incidents, managing third-party IT risk, and testing digital operational resilience.
As a result, banks could face fines and fines under the new standards if they fail to effectively mitigate or identify IT issues.
Given these challenges, banks' technology teams will be under new pressure to ensure a smooth transition to a T+1 environment. Here are some steps they can take:
- Stress testing and risk assessment – It is essential to conduct a comprehensive stress test and risk assessment to identify vulnerabilities and potential areas of weakness in your existing infrastructure. Technology teams must analyze critical business functions, systems, and processes to predict how they will function under shorter payment deadlines. These assessments provide valuable insight into where enhancements and adjustments are needed to avoid future IT problems.
- Budget review – Technology teams should ensure that budget allocations are aligned with the strategic priorities and requirements of the new one-day settlement system. This includes investing in proven technology as well as allocating funds for ongoing maintenance. Banks should strive to continually review this budget to minimize the risk of underinvestment or resource constraints after T+1 goes into effect.
- Update legacy frameworks with new technologies – Banks should use stress testing processes to identify areas where traditional frameworks may be insufficient to meet T+1 payment demands. Introducing new technology into your IT systems, such as monitoring and observability tools, not only helps streamline back-office operations, but also greatly increases visibility into your IT assets. Monitoring tools give your bank's technology team a single pane of glass into your back office, allowing them to quickly detect and respond to issues as they arise.
- Define clear roles and responsibilities – Establishing a clear accountability model is essential for effective incident management and response. This includes identifying key stakeholders, assigning specific duties, and establishing communication channels for rapid response and resolution. By clarifying roles and responsibilities, banks can create a much more streamlined decision-making process, resulting in a more agile and consistent response to IT challenges. As part of this, banks should practice scenarios that may arise and rehearse their responses.
Modern systems must be resilient enough to handle the demands of T+1, which means banks need to ensure their back offices are fully prepared for this change. This is not just a regulatory requirement, but also critical for banks in an increasingly competitive environment where business continuity and customer retention are more important than ever.
While T+1 will undoubtedly bring considerable headaches, it is also a great opportunity for banks to review their current infrastructure and future-proof their IT assets for years to come.
