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Going Digital Creates New Risks in The Financial Sector

Posted by Anna Mielczarek on 30-Oct-2018 07:30:00

The massive global movement of companies going digital is continually forcing essential changes in what new products and services are created, and how they are delivered to financial services customers.  The position of well-established, traditional banks is changing dramatically due to the emergence of new start-ups companies, and new business and operating models they use and promote.

In its recent paper ‘Moving from analog to digital: a new paradigm for risk management.’ EY states that industry transformation is afoot on an unprecedented scale.

Demographic change; radical new technologies and data usage; a changing regulatory paradigm; and a fast-changing and ever-more-complex ecosystem of competitors, partners and vendors are all listed as key trends that are supporting Digital Transformation. And although, they do force the necessary changes and provide firms with new opportunities, there are also associated with an uncertainty.


EY states that convergence across, not just within, sectors is contributing to the need for new business and operating models. Desired business outcomes such as firm profitability are becoming harder to sustain, especially as external pressures from unions, regulators, governments and other stakeholder groups are becoming harder to manage given the impact of social media. Major macroeconomic and geopolitical changes — some that may have an intergenerational effect — add to the scale and pace of change.

Because of these factors, risk management methods need to be changed and strategically designed for the future. And adaptive digital risk management, which focuses on ‘incorporating management of risks associated with the digital transformation from the front- to back-of office (digital risk management), as well as fully testing and deploying digital strategies to better manage risk (digitising risk management)' will be the heart of the new model.

In order to successfully address Digital Transformation, and any risk associated with it, EY proposes 4 key risk imperatives the chief risk officer and other key executives will have to focus on.


1. Leveraging risk management to enable business transformation and sustained growth

‘Risk management professionals have to work with the business in managing through a digital transformation to properly address new risks and identify and grasp growth opportunities presented by industry change.’ (EY)

However, this will require the change of a risk group and its processes, so that risk management can accelerate any risk-related decisions. Essentially, risks and controls need to be owned by the first line, right up to the business unit leaders as stated by EY.

It’s all about collaboration. First-line risk-takers cannot deny their responsibility to own and manage the risks they create, just because risk and compliance professionals sit alongside the first line, and work with their colleagues in the second line. Instead, they need to willingly and actively work with risk and compliance professionals in the second line so that those professionals have the knowledge and information to inform business unit strategies, new product design, credit and pricing decisions.

Essentially, it’s not about avoiding risk – it’s about realising that risk should be always considered and enabling the firm strategically in taking risk-informed decisions to grow and prosper.



2. Adapting to a risk environment and risk profile that is changing faster and more intensively than ever

‘Risk management has to stay in the moment, keeping a keen eye for immediate changes in market or firm conditions, and focus to the future to spot emerging or long-term risks and opportunities. It has to stay sensitive to financial and non-financial risks that are here today or that might emerge tomorrow.’ (EY)

Companies must focus on, and monitor short-term risk so that quick, but at the same time - informed decisions can be made on how to adapt to new changes and conditions. However, by focusing on short-term risk, firms cannot forget about emerging risks, which may be already known but increasing, and require more analysis and consideration.

EY states that today, such risks include cybersecurity threats; rising interest rates; use of technology; impact of FinTech; heightened reputational and privacy risks; industry disintermediation and ever-more growth in the dependency on third and fourth parties; as well as the evolving regulatory environment.

3. Delivering risk management effectively and efficiently

‘Risk management is a balancing act between effectiveness and efficiency… Risk management is not, and should not be immune from working efficiently. It has to seek out and continually find ways to conduct its work efficiently, working in partnership with other control functions that are also going through substantial change, such as compliance and internal audit.’ (EY)

Essentially, risk management should deploy new technologies in its own activities as it will lead to utilisng new operating and talent models. In its report EY states that the pace of change in digital risk management innovation is quite remarkable and ongoing. Now, we are seeing significantly more use of automation and data analytics leading to the establishment of new industry consortia and utilities in areas such as know-your-customer and other aspects of financial crime, as well as third-party risk management. Very soon, the same will be true in other fields, such as cybersecurity and fraud, credit analysis, and regulatory reporting and compliance.



4. Managing through and recovering from disruptions

‘Risk management has a central role to play not only in helping to navigate the evolving risk profile but also in preparing for, managing through and recovering from disruptions. Such disruptions appear to be becoming more commonplace, making senior executives increasingly concerned about their firm’s true resiliency capabilities.’ (EY)

Cyber-attacks; focus on fragile information technology; dependency on third- and fourth-party providers; new partners such as FinTech firms, are all driving some of the concerns. Most firms seem to have recognised that their continuity activities are disparate and unconnected. Few plans are connected or consistently applied; few have common or consistent triggers for escalation and decision-making; and few have properly prepared their senior executives and/or boards for actual crises. And this usually results in ineffective or slow decision-making process in stressful situations.

But apart from managing through crisis, risk management can help accelerate efforts to simulate crises to build muscle memory across the organization, especially at senior management and board levels.




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If you’d like to discuss with one of our experts on how you could successfully deploy Digital Transformation and Technology Development in your business drop us an email at hello@b60apps.co.uk or alternatively call us on 0121 405 0270.


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Topics: Finance, Digital Transformation, Emerging Technology, Challenges, Risk Management