Risk management in banking is the process by which an institution develops a plan to detect, avoid, mitigate or respond to potential losses. Previously, the focus had been the risks inherent in highly leveraged financial institutions such as banks or hedge funds. And since the financial crisis of 2008, this takes the form of regulating against the development of illegal and unethical financial products, with countries increasingly demanding compliance from both domestic and global financial institutions and measures to protect the interests of depositors. As governments focused on the above, banks focused on internal governance structures for identifying and managing their two major risk points – cybersecurity and legal compliance. With the area becoming increasingly vital for financial services, the future of risk management in banking is a topic of great discussion.
In the aftermath of disruption caused by COVID-19, and as novel technologies such as blockchain and Distributed Ledger Technology (DLT) are coming to maturity, things are changing and will continue to change drastically over the next decade. We posit that bank executives will have to hyper-focus on the technological disruptions which pose strategic risks that threaten their very existence.
The future of risk management in banking will be focused on emerging disruptions such as DLT and the rise of fintech which banks haven’t fully embraced. Other risk drivers in the sector are changing customer expectations and a constantly evolving regulatory environment. These points span beyond proper management of loan portfolios and the need to protect depositor’s balance that were traditionally the focus of internal risks management programs and public policy.
By definition, banks are financial intermediaries. But DLT is a whole new way of finance, unlike anything that has ever existed in the past. DLT offers a means of transacting securely on a shared ledger without using an intermediary. The ledger is distributed and is simultaneously owned by everyone and no one. Banks may need to completely reimagine themselves, in a DLT value chain. Some of the risk factors present in traditional banking business models will diminish if not altogether disappear as DLT becomes more mainstream.
In the future, risk management in banking will need to leverage new technologies to stay ahead of emerging risks and disruptions. Tools like AMPLYFI’s DeepInsight leverage machine learning and data science to analyse unstructured deep-web data sources, helping to find signals that would normally remain hidden. With over 2 million papers, patents and business documents, banks can use the tool to scan the horizon and turn research into returns with minimal effort.
With this ability to generate advanced insights and foresight, executives can make informed decisions on strategies to prepare for disruptions before such innovations become mainstream.
A McKinsey report identified that the main source of profit for banks is customer side activities, including financing, investment, and transactions whose success is based on creating meaningful customer relationships. However, fintech startups have grown tremendously over the past five years and are edging away at legacy banks’ customer base by targeting their customer side operations. The fintech disruption is closely tied to the customer expectation risk driver. As customers experience the benefit of digital financial transactions, they shift these expectations to the banks. Banks are forced to reduce transaction fees, improve their customer experience or have their market base taken over by fintech companies. Therefore, banks must improve their risk management processes to mitigate and prepare for emerging disruptions that will shape the future of risk management in banking. This process will likely include new technology to keep up with emerging fintech.
Lastly, the regulatory environment is the final major risk factor facing banks. Banks need to develop a system of not only becoming aware of the legal changes as they happen but also, understanding the likely impact such changes will have on the industry.
With DeepInsight, banks can monitor areas of interest for emerging scenarios, with thousands of new documents added every day to save having to keep jumping between different data providers. It connects structured and unstructured data at scale to uncover previously hidden links, trends and opportunities, which can help users to make better-informed credit decisions. Technology such as ours can be used to create clear, market-changing insights to help organisations make better decisions.
Book a free, no-obligation consultation call with our team for a product demonstration and get an in-depth understanding of how AMPLYFI tools can support your risk management.