Banks of the future: Managing Next-Gen Risks
In recent years, shifts in consumer behavior have led to a rapid digital transformation across financial institutions. With the rise of digital banking and fintech companies, traditional financial institutions have had to adapt in order to remain competitive. However, as the implementation of digital transformation continues to accelerate across global financial institutions, it has become clear that many institutions are struggling to keep up with the pace of change. While the frontend channels of these institutions are becoming increasingly sophisticated, the backend applications are often lagging behind the curve.
This digital push has brought about new risks for both frontend and backend channels. As financial institutions continue to digitize their operations, they are exposed to a host of new risks that were previously not a concern. These next-gen risks include but not limited to cyber threats, data breaches, and regulatory compliance issues. Additionally, as financial institutions increasingly rely on third-party vendors and service providers, they are exposed to risks associated with these partnerships. Fundamentally, the root casue of these risks is one or more of these layers:
- Inaccurate transaltion of business objectives
- Inadequate Operating model i.e., oversight, policies and standards, tools and culture
- Ineffective measures to control, monitor or track risk related activities
The framework to handle risks
Risk management frameworks are a set of guidelines and best practices that organizations can use to identify, assess, and manage risks. These frameworks provide a structured approach to risk management and can be tailored to the specific needs of an organization. There are many different risk management frameworks available, but they all generally have the same core components. Adapted from popular industry standards such as ISACA COBIT(R) for Risk, the following framework can be the foundation for building an effective risk management practice to tackle next gen risks in any financial institution.
The first step in any risk management framework is Risk Evaluation(RE). This involves identifying the potential risks that an organization may face, including both internal and external risks. Internal risks are those that are within the organization’s control, such as operational risks or compliance risks. External risks are those that are outside the organization’s control, such as natural disasters or cyber-attacks. Identifying risks involves a thorough assessment of the organization’s operations, processes, and systems, as well as an understanding of the external environment in which it operates. Once risks have been identified, they must be assessed in terms of their likelihood and impact. This involves analyzing the potential consequences of each risk and determining the likelihood that it will occur. The results of this assessment are used to prioritize the risks and determine which ones require the most attention. To tackle these risks, organizations often put controls in the form of policies and procedures. For a more holistic assessment, it is imperative to consider the controls and measure their effectiveness to mitigate risks and evaluate a net risk exposure. A sample approach to evaluate net risk exposure is as follows:
Once risks have been prioritized, a risk response plan can be developed. This plan includes measures for mitigating or managing the risks, such as implementing controls or procedures, or transferring the risk through insurance. It also includes monitoring and reporting mechanisms to ensure that the risk response plan is being implemented effectively. Implementing controls is an important step in managing risks. These controls are designed to minimize the likelihood or impact of a risk. They can include technical controls, such as firewalls and intrusion detection systems, or administrative controls, such as policies and procedures. Monitoring and reporting mechanisms are also critical to effective risk management. These mechanisms are used to ensure that the risk management plan is being implemented effectively and to detect and respond to potential incidents in a timely manner. This includes regular reviews of the risk management plan and assessments of the controls in place, as well as incident response plans and procedures. It is also important to consider the role of third-party vendors and service providers in risk management. Due diligence in the selection of vendors and ongoing monitoring and management of the vendor relationship is necessary to ensure that vendors are not introducing new risks to the organization.
The final element of effective risk management is effective governance. FIs should adopt risk governance structure and reporting mechanisms in periodic intervals. To further support the implementation of effective non-financial risk management, financial institutions can also leverage technology solutions. For example, utilizing a Governance, Risk and Compliance (GRC) platform can assist in identifying and assessing risks, monitoring controls, and reporting on risk management activities.
In conclusion, as digital transformation continues to reshape the financial industry, financial institutions must adapt to new risks. By identifying and assessing next-gen risks, developing a risk management plan, and implementing effective controls and monitoring mechanisms, financial institutions can effectively manage non-financial risks and ensure the security and compliance of their operations. Examples of this approach in practice can be seen with major financial institution’s shift to cloud based services, and their implementation of a robust security and compliance framework to protect their operations.
