Financial institutions are in the business of managing risk. Whether evaluating a loan application or analyzing investments, every decision is made with respect towards the bottom line. However, smart risk management approaches consider all aspects of risk including those that could threaten operations, client onboarding and assessment, compliance and legal liabilities, financial uncertainties, and technology. Left unchecked, institutions run the risk of damaging an otherwise good reputation. By practicing a holistic, ongoing approach to managing risk, institutions can yield better financial and business outcomes.
While financial institutions all face similar risks, their processes for evaluating and assessing risk can vary greatly. Yet, all risk assessment processes are not created equal, and some methods can leave institutions vulnerable to missing key factors that can cause them to approve the wrong customer or be slapped with fines for non-compliance.
At Hoverstate, we speak with many different financial institutions about their risk management processes. We are experts in the challenges they face, and what an ideal state looks like. To truly have an effective, streamlined risk process, institutions need to rethink their approach to risk management.
Challenges with Financial Risk Management
Risk management has only become more complex in recent years. Risk teams are under immense pressure to increase efficiencies, modernize technology, implement processes, evaluate procedures, and remain compliant with regulations.
Here are some common challenges institutions face with their risk management processes:
The process is never truly complete. Assessing risk is an ongoing process consisting of numerous moving parts that need continuous monitoring to run effectively and smoothly.
Risk management involves more than a single-person or even a team. Without a centralized or digitized process in place, errors can occur as the process moves from one person or team to another. Important bits of information fall through the cracks, teams duplicate work, or missed items require completed tasks to be re-done.
Vulnerable to Bias. Without a documented process based on objective factors, your institution's assessment can be vulnerable to actual or perceived bias by the individuals involved. There have been many lawsuits as a result of this, and not only does it hurt your bottom line but your institution's reputation, as well. To avoid this, a good risk management process emphasizes objective factors in the decision-making process. Additionally, if you have a formalized documented objective process all clients are required to go through, it protects your organization in the event of perceived bias in this process.
Difficult to Scale: With all the intricacies of the risk assessment process, it can be extremely difficult to scale as the business grows. Complex processes do not scale well specifically during evaluation of potential clients or assessment of current ones. A lack of a digitized, automated process can be a limiting factor for a financial institution’s growth.
The sum of all parts. When it comes to risk management, each challenge compounds the next, causing huge strain on both personnel and resources. Aligning processes is not always a quick or easy undertaking. Poorly implemented financial risk management works against your very objectives. On paper, it almost seems like a lose-lose situation: good risk management will require the investment of time and resources, however ignoring the risk can significantly hurt your institution.
The Role of Technology & Automation in Financial Risk Management
To help institutions combat the clear challenges that come with streamlining and scaling the risk management process, a slew of tools have hit the market in recent years promising to help ease the burden of managing the process itself. With the right digital infrastructure in place, financial institutions can flourish by understanding data faster and making better risk decisions with ease.
Digitization tools can break down silos and connect people to one another while also removing bias that can cause flawed decisioning. If analysts are having to spend more time reading and consuming emails instead of looking data, or if people are finding themselves doing tasks that are not directly contributing to scalable growth, a fluid, flexible risk management tool can help remove the stand-alone, mundane work environment that existed with a more manual process.
Most importantly, digital tools are more consistent and reliable at capturing documentation and information right where it needs to live, which helps to protect your institution against avoidable legal claims. Imagine a bank with five or six different fraud risk detection engines running during their onboarding process, but each of them outputs a varying range of scores and continuous alerts.
While helpful and powerful information is being generated, institutions need to have the technology in place to organize this data into a process or establish a way of reviewing it effectively and at scale. Without this ability to manage data at scale the institution may be at increased risk because they can be shown to have known about issues, but not properly addressed them. From a regulatory perspective that lack of connection between the awareness and the action taken can seriously damage an institution.
Essentially, risk management technology plays a key role in improving organization-wide activities. Better communication means the less likely details become lost from person-to-person and step-to-step in the process. Instead, when questions arise, information is easily located and disseminated, allowing for thoughtful and confident decisioning. Over time as processes rinse and repeat, a layer of automation alleviates the amount of time spent in mundane – yet critical – tasks, so that the focus remains on growth and scalability rather than being continuously stuck in a spin cycle.
Even though digitization is common in our modernized world, not all financial risk management technology addresses the challenges with thoughtful solutions, so we encourage financial institutions to think about their organizational values and select a technology that both aligns with their values and can be flexible as needs change.
Challenges with Risk Management Technology
When it comes to truly managing and mitigating risk, your effectiveness is only as strong as your processes. If the process or steps are not clearly defined for problem resolution, all you are doing is revealing fundamental issues without solutions.
Of course, simply having shiny tools will not solve all problems. Many different tools and technologies promise the world while not actually delivering any tangible value or are too overly rigid that they end up creating more work instead of less. When organizations run into problems with one tool, they often supplement the weak areas with a different tool. This compounding effect further exacerbates the problem as even more types of alerts are now coming from different tools, causing a phenomenon commonly known as “alarm fatigue” – meaning you are so used to the alerts they almost fade into the background.
As alerts compound, it becomes more likely that alerts are not making it to the right people at the right time. And because an institution was alerted yet failed to act, it can leave them more liable than if they did not have a risk management tool at all. A system does not need to exist simply as an overwhelming alert machine. With the right programming, a good system will both create alerts for perceived issues and trigger an automated process that resolves the root cause for your alert.
The other challenge with digitized systems is that they can become overly rigid. Rigidity can be positive when a process is really strongly defined. However, the challenge with risk assessment processes in financial institutions is that each have their own lens. Regulation, compliance and risk assessment matters necessarily have subjectivity and as such, each institution has their own way of looking at and managing risk. This could be because of jurisdiction matters, customer types, products and services offered, the type of organization, the risk appetite from the board, the types of employees, the culture – all of these change your way of doing business. This wide range of differences is part of what drives the variation in digital technologies. However, these systems often become rigid and people get locked into thinking that a particular process must be done this way. By introducing that little bit of flexibility through technology institutions can shape the process to fit their specific and ever-changing needs.
Risk Management: Finding the Balance
In the same way it is important to understand the level of risk an institution is willing to take on, it is equally important to understand the limitations of digitized systems in that risk assessment process. There is no silver bullet that fixes the process completely due in part to the fact that the very process of risk management has a dizzying number of factors. Even if such a system were to exist, would it work for everyone? Limitation can, in certain cases, turn out to be a good thing, but there are instances where a financial institution wants to take that huge, life-changing risk – and that can come down to having the right digital technologies to better assess, act, and manage risk successfully.
As with everything else in the financial services space, risk management will continue to evolve as consumer behavior and new technologies hit the market. It's critical for leaders to recognize these shifts and adapt their strategy accordingly to stay competitive.
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