Using Service Provider Connections to Model Operational Payment Networks

This paper uses data on bank connections with service providers to construct a representation of an operational network used to facilitate the sending of Fedwire transactions. Our data contains 227 connections between 215 banks (mostly community banks, but also some large banks) and four unique payment products used by the firms to send and receive Fedwire transactions. By constructing such an operational network between banks and payment providers, we can perform multiple analyses that are useful in operational resilience considerations. First, we use the mean daily Fedwire volume for each bank to create a dollar estimate of the "operational risk exposure" associated with each service platform based on its bank clients. Second, we examine how these bank payment risk exposure estimates compare with other, publicly available benchmarks, since payment data are usually confidential. Last, we use the network model to conduct analysis on network concentration, which provides an example of how such networks could be used in analyzing the likely impact of operational outages. Our results indicate that data on service provider connections such as that we analyze can provide important insights into the extent to which payment network resilience mitigates risk to the financial sector. Our results also indicate that several publicly available benchmarks can serve as substitutes (with certain caveats) for payments data in estimating payment risk exposure.