Strengthening Modern Banking: Eliot Heilpern on the Three Lines of Defence in a Rapidly Evolving Payments Landscape

The rapid acceleration of technology and the growing need for interoperability and robust risk management has become a defining characteristic of both domestic and international banking. With the expansion of Fintechs, Challenger Banks, and independent Payment Providers, as well as the evolution from Open Banking to Open Finance, the financial ecosystem is experiencing unprecedented transformation. These developments have reshaped the competitive landscape, disintermediating traditional UK clearing banks, long-established financial institutions, and other familiar market players.

Yet amid this sweeping digital progress, one element remains constant and unavoidable: risk.

Beyond traditional client risk, today’s institutions face heightened operational risk as new infrastructures, platforms, and services emerge. These modern systems demand sophisticated interoperability to deliver seamless experiences to end-users. While APIs and enhanced security frameworks offer valuable support, increased connectivity and systemic complexity inevitably introduce new vulnerabilities.

In this environment, Eliot Heilpern of Parthenon Communications emphasises that strict risk management and disciplined financial oversight, rather than risk aversion or over-caution must remain central to responsible banking operations.

The Three Lines of Defence: More Relevant Than Ever

The well-known Three Lines of Defence framework is now a critical pillar of institutional governance. For Corporate Bankers, Personal Bankers, Credit specialists, and Operational teams, this methodology should be second nature. As Eliot outlines:

1. First Line of Defence

The bank’s Client Relationship Officer serves as the initial risk owner, supported by operational management. This is where risk identification and day-to-day controls are executed.

2. Second Line of Defence

Risk Control, Credit, and Compliance functions form the second defence layer. While not entirely independent, given their reporting lines into senior management they are responsible for oversight, policy, and monitoring.

3. Third Line of Defence

The internal Audit Department, operating with greater independence than the second line, provides objective assurance. This team reports findings, positive, negative, or ambiguous according to the institution’s risk policy, regulatory standards and internal risk registers, ultimately supporting external regulatory requirements.

Introducing a Fourth Layer: The Psychological Line of Defence

Eliot introduces an additional, often overlooked layer: the Psychological Line of Defence.

This principle is simple yet powerful:

• If an employee or employer feels uneasy about a transaction or a series of transactions, stemming from a customer’s behaviour, they should err on the side of caution and report it.

• Raising a concern demonstrates professionalism, vigilance, and integrity; the issue may not have been detected within the previous lines of defence. Here, perception can become reality.

What Does This Teach Us?

The Psychological Line of Defence underscores the moral responsibility of every individual within a financial institution to 'do the right thing'. When employees act with integrity:

• The institution avoids financial loss and protects its reputation even when the concern ultimately aligns with policy and regulatory expectations

• Should a breach occur, early detection ensures it is captured and escalated appropriately

Looking Ahead: Risk in the Digital Asset Era

As digital assets, tokenisation and Crypto/Fiat models evolve, risk is becoming even more dynamic and, in many cases, more predatory. Technologies such as Smart Contracts and on/off-ramp transaction mechanisms promise stronger safeguards, yet the realities of global connectivity, cross-border access and interoperability still leave room for human error.

Eliot argues that in an age of complex digital payments, risk management cannot simply keep pace, it must stay ahead.

Author: Eliot Heilpern | Parthenon Communications