Why banks should consider technology and data to be the antidote to risk

With so many new threats emerging today, from cyber to financial crime to climate change, what is the next step in the evolution of banks’ risk strategies? Human survival from generation to generation is based on competition and adaptation at the biological level. A financial institution is not any different: like an organism, it needs to compete and evolve to deal with threats and changes.

Our bodies’ immune systems are several different systems – organs, cells, processes and chemicals1 – which work together to keep us safe from threats, including how we construct and use the world around us. Similarly, banks must rely on different elements within the enterprise to work effectively together – culture, behaviors, and data, as well as risk-specific controls and models – to thrive in today’s markets. This paper suggests how Chief Risk Officers (CROs) thinking about the challenges and opportunities across risk, technology and data can keep their organizations safe and competitive.

RISH MANAGEMENT: A MULTI-FACED MECHANISM

To maximize the benefits to their organization, the CRO of the future will enable their business to identify and optimize the return on ‘good risks’ – that is, risk events which provide a possible positive impact – while controlling, mitigating or eliminating ‘bad risks’. This means a CRO and their wider organization must possess many different skills and perspectives to be successful: similar strategic capabilities to those of a Chief Executive Officer (CEO); an ability to understand regulations like a Chief Legal Officer (CLO); the same grasp of business operations as a Chief Operating Officer (COO); the ability to navigate financial risk like a Chief Financial Officer (CFO); exhibit the same technical knowledge as a Chief Information Officer (CIO); and understand risk data at the level of a Chief Data Officer (CDO).

To do this effectively, banks must infuse emerging technology – such as RegTech or RiskTech – to disintermediate the system complexities and opaqueness of risk data to better protect themselves against threats. This would be most relevant in respect of financial crime risk. Organizations must proactively seek out financial crime, from investigating and analyzing suspicious activity through to uncovering vulnerabilities and taking necessary steps to address them. The battle to stay ahead of the next financial crime must take place at all levels of the organization – i.e., credit scoring, customer onboarding, client communications, payment processing, client advisory, sector analysis, etc.

DATA: MONITORING WHAT’S GOING ON

Building and maintaining high levels of integrity around risk management is fundamentally about using data – and about finding ways to remove the ambiguity and biases which can undermine data-driven decision making. Data is the lifeblood of risk management, and there are increasingly powerful ways to investigate the inner workings of an organization and follow them in real-time.

So, how can the risk-focused data organization achieve this through their transformation journey? At the heart of things, CROs need to monitor what is transpiring and use the information they uncover to counter threats. To do this, we suggest banks use data lineage, quality, and governance capabilities to determine in real time how the organization is responding to specific events and threats. Our recommendations for organizations looking to unravel their data include:

1. Unpick the complex data lineage between legacy internal systems and create the ‘lineage by design’ governance structures to keep that data under control.

2. Enable users by creating semantic data layers - the key is to allow users to understand what data is available and to allow them to then aggregate and enrich that data.

3. Create data quality processes which don’t just monitor and validate quality but enhance it on an ongoing basis using automation and machine learning.

REACH INTO YOUR TOOLBOX

So, now you’ve established a stronger immune system for your business by enhancing data transparency to better identify and deal with threats, how do you evolve your business – and what tools do you have at your disposal? As we outline in our digital risk operating model,6 there are huge benefits to be derived from designing modern risk management practices wrapped in technology including cost savings, enhanced customer experiences, an expanded customer base, revenue opportunities and resiliency. For banks planning their next transformation journey, here are some valuable tools and insights to keep in mind:

AUTOMATION- Solutions which enable labor-intensive tasks to be done quickly and accurately, without human intervention. We can help you accelerate such initiatives to mitigate risks, improve data and change key processes and fix legacy practices.

BLOCKCHAIN- A distributed database that can keep track of transactions in a verifiable and permanent way. Such transactions allow firms to control their data through private and public keys, making their data immutable. We help clients save money, improve security and customer satisfaction.

BIG DATA- The recent rise of remote working brings opportunity for us to help clients to map out a data-drive roadmap and build measurement points to work with teams to ensure cyber security and data analytics are used to deliver continued process improvement.

DIGITAL TRANSFORMATION- We support business leaders in the transition into a Transformation Management Office to lead and manage longer-term digital and operational changes that builds on the lessons from the past.

INDUSTRY INSIGHTS:

Automation & additional technologies: Intelligent Automation (IA) integrates components from different emerging technologies.

Reinventing organisations, processes & functions: Coordinating cross-organizational efforts to propel the operating model and strategic direction.

Enhanced workforce: Redirecting repetitive mundane tasks to automation, enabling people to utilize and develop their skillset and focus on other fulfilling, high value adding activities.

Newfound transparency & trust: Third party trust organisations may no longer be necessary, creating a global decentralized source of trust for complex networks.

Global revolution: Blockchain has far-reaching opportunities with potential to transform how organisations operate, with speed, savings, and accuracy unlike any other technology.

Leveraging capabilities: Adoption of blockchain will enable new markets, new business models and new ecosystems, advancing all industries.

Big Data & AI: Techniques such as machine learning (ML), natural language processing (NLP) and reinforcement learning provide valuable insights, enable model transparency, build trust, and improve decision making.

Data as an asset: Organisations will need to evolve their mindsets, become more data-driven and introduce data-intensive business models and strategies to remain competitive and succeed in the modernization drive. Fully equipped digital organisations: From customer experience to internal processes, digitally maturing enterprises can redesign their ways of working, culture, workforce and offerings, to be in a position to compete. Successful adoption of emerging technologies: Remaining competitive to win and maintain loyalty, with the ability to adapt and remain resilient in a new ever-changing environment.

FINAL THOUGHTS

We have determined that organizations – like organisms – need to be:

• Good at identifying and dealing with threats in a holistic, multi-level way.

• Proactive at looking inside themselves, with technology facilitating this in a way that creates new possibilities in terms of addressing threats and seeing new opportunities.

• Effective at evolving to adjust to changes in the external competitive environment.

These traits inevitably identify opportunities for financial institutions to implement transformation strategies. At Capco, we believe forward-looking strategic decisions during a challenging environment can lead to significant growth opportunities for financial institutions. Having technology which permits efficient capture and utilization of data is fast becoming the trend of today’s leading institutions. We have seen recent supporting evidence of companies who have not only accelerated growth due to a focus on technological competitiveness, but also increased profitability during uncertain economic times.7 Such uncertainty is driven by elevated risks on different fronts: technological risks, including cybersecurity and trust; economic policy risks, including challenges to international institutions; social risks, including increasing inequality in many countries; and planetary risks, including climate change. However, while economic uncertainty still looms and the full ramifications of recent unprecedented times are yet to unfurl, we encourage our clients to take a step back, learn from their history and lean into the next phase of technological evolution with optimism.

Dr Alfie Lindsey Risk, Sales & Trading Lead, Capco UK