The Cost of Poor Software Design: A Cautionary Tale

If your business is using software with a poorly designed user interface, how much is it costing your bottom line? Perhaps a significant portion of your team’s hours are spent navigating confusing systems, time that would have otherwise been spent on productive projects. Perhaps your team is unable to navigate the systems themselves, necessitating the expense of external technical consultants. In August 2020, the multinational financial services group Citibank made an accidental payout of nearly $900M as a result of bad software design. How much do you stand to lose as a result of the usability of your software?

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Interesting Interest Payments

In 2016, beauty product company Revlon Inc. took out a large seven-year syndicated term loan.? Citibank N.A. acted as the administrative agent on the loan, meaning it received interest and principal payments from Revlon and passed them on to the Revlon’s creditors. On August 11, 2020, Citibank was scheduled to send out interest payments totaling $7.8 million to these creditors via a financial software platform called Flexcube.

At the time, Revlon was in the process of refinancing its debt, paying off a few creditors while rolling the rest of its debt into a new loan. This restructuring, combined with Flexcube’s confusing interface, led Citibank to accidentally pay out the entire principal on the loan, most of which was not due until 2023. Rather than the $7.8M they had intended to distribute, Citibank paid out almost $900M.

Here's how U.S. District Judge Jesse Furman describes the situation in his opinion:

On Flexcube, the easiest (or perhaps only) way to execute the transaction… was to enter it in the system as if paying off the loan in its entirety, thereby triggering accrued interest payments to all Lenders, but to direct the principal portion of the payment to a "wash account"—"an internal Citibank account... to help ensure that money does not leave the bank."

Many of us are familiar with similar convoluted methods for tricking a software into performing the way you want. In this case, Citibank needed to pretend to pay off the entirety of the loan but redirect the principal to an internal Citibank account. All of the loan would be “paid off”, but Citibank would send the accrued interest to the creditors and the principal to themselves.

The process of entering this transaction into Flexcube fell to a subcontractor in India. He was presented with a Flexcube screen that looked like this:

According to the manual, in order to suppress payment of a principal amount, the user must check the box “Overwrite default settlement instruction”. If this is done correctly, the principal is redirected to the Citibank wash account and the interest is paid out to the appropriate creditors. Logically, the subcontractor thought that checking the box next to "principal" and entering the account number for the Citibank wash account would send the principal payment there. He was wrong.

To prevent payment of the principal, the subcontractor actually needed to set the "front" and "fund" fields to the wash account as well. Luckily for the subcontractor, Citibank has a “six-eye review” process that requires at least 3 people to sign off on a transaction of this size before proceeding. the subcontractor passed this off to a colleague of his in India, who unfortunately made the same mistake as he did. The third pair of eyes was a senior Citibank official in Delaware, who again misinterpreted the FlexCube interface and thought that the principal was being directed to a wash account and not the lenders. As he approved the transaction, the official wrote: "looks good, please proceed. Principal is going to wash."

It is worth noting that the Flexcube software did provide a warning, though not a very good one. According to Judge Furman’s opinion:

[He] then proceeded with the final steps to approve the transfers, which prompted a warning on his computer screen — referred to as a “stop sign” — stating: “Account used is Wire Account and Funds will be sent out of the bank. Do you want to continue?” But “[t]he ‘stop sign’ did not indicate the amount that would be ‘sent out of the bank,’ or whether it constituted an amount equal to the intended interest payment, an amount equal to the outstanding principal on the loan, or a total of both.” Because [he]? intended to release “the interim interest payment to [the] [L]enders,” he therefore clicked “YES.”

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Monetary Mulligan

When the mistake was realized, Citibank notified each creditor that the principal payments had been made accidentally in hopes that they would return the funds. Some of the creditors sent the money back but others refused, leaving Citibank out $500 million.

In normal circumstances paying the loan off early would not be much of an issue. After all, the creditors deliberately gave Citibank the principal in the first place to create the loan, so the parties could simply negotiate a new loan on similar terms. Unfortunately for Citibank, due to some aggressive tactics taken by Revlon in the aforementioned restructuring, some of the lenders were not on good terms with either Revlon or Citibank. Some were worried that they would not have otherwise had their loan repaid and opted to keep the accidental payment. Because the $900M paid out actually belonged to Citibank, this left them as Revlon's new creditor.

Citibank sued, arguing that they were entitled to get the money back since the cash was sent out by mistake. Under New York law, anyone who sends an erroneous wire transfer (such as sending a payment to the wrong account) is entitled to get the money back. Unfortunately for Citibank, the law makes an exception when the creditor has legitimate reason to believe that the payment was not made in error. The creditors argued that not only were they valid recipients of payments associated with the loan, but the amounts they received matched the amounts Revlon owed down to the penny. As such they argued that it was reasonable for them to assume it was an early repayment of the loan.

Judge Furman agreed with the defendants and stated that it was reasonable for the creditors to assume that a bank as sophisticated as Citibank wouldn't send out such a large amount of money by accident:

To believe that Citibank, one of the most sophisticated financial institutions in the world, had made a mistake that had never happened before, to the tune of nearly $1 billion—would have been borderline irrational…

In the end, Citibank was left holding the $500M bag as a result of poorly designed software, despite the apparently reasonable actions of their subcontractors.

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Unfortunate Software Interfaces are Unfortunately All Too Common

Software interface deficiencies are not isolated to any particular industry. If we learn one thing from the events above, it should be that Citibank’s mistake was both all too familiar and avoidable.

Many mission-critical finance and accounting systems were designed and developed decades ago. Any functioning team need to have adequate tools to perform their roles effectively, and stories like Citibank’s help us draw the line between which designs are acceptable and which are unacceptable. Poor user interface design, usability, and feedback will inevitably lead to mistakes regardless of the software’s intended function. If your business is using old software packages, your industry is at risk too.

Lucasys Is Building Better Software for the Utility Industry

The Lucasys suite of software solutions is solving the problems of a complex industry by making tools that focus on transparency and usability. No longer will large industries be reliant on convoluted interfaces or remote contractors to manage their finances. Data can be organized in a flexible and customizable way, returning control of your business to you. The days of the black-box software solutions are over.

Our knowledgeable team of consultants has the experience to restructure and standardize tax and accounting systems to adapt to the growing needs of the enterprise. For organizations looking for insight on standardizing their software portfolio with the latest tools available to the industry, Lucasys has the solutions. To learn more about how Lucasys can help, visit https://www.lucasys.com/solutions.