From rising customer expectations, to digital disruption, to threats from non-traditional competitors, the same forces that reshape the banking industry demand new thinking and approaches from risk management teams. Enter forward-looking risk executives, who are leading a pivot to toward business enablement, innovation and consumer trust, without losing sight of their primary objective of protecting the enterprise.
What drives this? Banks need their risk management teams to identify and embrace upside risk opportunity even as they mitigate downside risks. In other words, pro-growth business strategies must embed risk at their forefront by building trust with consumers. This represents a big shift from the aftermath of the financial crisis, which defined the risk and regulatory agenda for a generation.
Striking this balance requires the inlay of risk management principles and insights into strategic decision-making. It also means risk teams must develop digital capabilities to harness risk intelligence across the enterprise. Such a vision—supported with the right talent, operating model and processes, and technology —is adaptive and well suited to address new risks from digital disruption and the imperative to build consumer trust.
Trust through transparency
Trust forms the bedrock for value creation in financial services. It is built and sustained through combining strong risk management (financial and operational), focus on customers’ best interests (suitability of products, privacy and protection of personal data), security and resiliency.
Today’s consumers want personalized offerings based on their immediate or near-term needs—for example, a home equity line of credit for a growing family, or a small business commercial loan. And they want these products delivered via highly transparent processes. Consumers largely trust digital leaders in other industries because they deliver that transparency alongside high-quality customer experiences. Trust has become a new currency to derive value and loyalty.
Traditional risk management frameworks do not enable businesses to innovate and pursue opportunities as fast as their nimblest competitors. An adaptive approach builds risk intelligence into key processes and supporting technologies; businesses can move fast and stay safe at every touch point and across every phase of the customer journey. Risk management strategies must also be established for all emerging technologies: the cloud, mobile apps and interfaces with third parties, including fintech collaborations.
Only firms that evolve their risk thinking as adaptive and oriented to consumer trust will succeed. They will also need the right operating model and integrated risk approach, automated processes, strong technology and advanced toolsets—including artificial intelligence (AI) and machine learning—to excel at delivering what customers want, while staying within the risk appetite at all times.
Chart the right path forward
Technology isn’t the only element of effective risk management. Tomorrow’s risk management functions will also merit attention for other skills and capabilities. Consider the following five objectives when you chart a vision for the future of risk management:
1. Establish an adaptive risk governance framework
This requires changes to traditional risk management models, though not necessarily drastic ones. For example, the need to control individual customer moments and long-term journeys requires front-line business managers embrace a comprehensive, end-to-end view of financial and non-financial risks. Embed business functions with risk and compliance functions to keep up with product and service innovations as you manage and monitor real-time risk, along with predictive business models and significant third-party interactions. Risk teams should provide insights and expectations to help businesses monitor overall effectiveness.
2. Stack the team with the right skill sets
You will also need new skills: both “soft” and “hard.” Firms need dynamic people who can cover across multiple risk topics (e.g., compliance, operational risk, resiliency), as well experts in specific risk types (e.g., cloud, cyber or blockchain). Bringing the right skills to the table at the right time for the specific change will help identify new and emerging risks.
3. Implement product and service management
To achieve the vision of real-time product development with embedded risk controls, you must leverage technology that observes client actions in real time, and triggers product and service mechanisms designed with risk rules to instantaneously adjust product features (e.g., price or terms).
Risk should collaborate with businesses on the initial product design to identify a comprehensive set of client attributes and behaviors. Banks must undertake such a step to quickly launch, scale and manage new, risk-informed products and services.
4. Strengthen resiliency
Resiliency, cybersecurity and privacy rank as critical considerations to satisfy customer expectations about reliability, as well as to protect brand reputations and information assets. Infuse resiliency throughout the extended enterprise—including the operations of third- and fourth-party vendors, especially critical vendors. Since preparedness is essential to resiliency, firms should conduct simulations under a variety of disruption or crisis scenarios.
5. Harness data intelligence and architecture
Risk functions need a robust foundational platform that integrates with a broader governance, risk and compliance ecosystem. The goals are to use data more effectively and streamline risk management processes. For example, such platforms can support automated risk monitoring and data models for improved business intelligence and decision making.
Bottom line: trust-driven growth requires a new model
The need to engage customers at key moments and the imperative to build trust are reshaping both the conjoined futures of banking and risk management across financial services. As organizations transform their business models in response to tech-driven disruption and changing customer expectations, risk management functions must also reconfigure their approach and capabilities. While many moving parts exist—technology, processes, people, and organizational/cultural factors among them—risk management leaders must manage in this evolution proactively. The first-order goal of building trust with more demanding customers should serve as a guide on the journey ahead: To ignore it creates a risk in and of itself, straight to the bottom line.
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Cindy Doe and Amy Gennarini are principals, financial services organization, Ernst & Young LLP.