The Importance of Digital Risk Management in Uncertain Times

Privacy and convenience risks in digital security

Living in a post digital revolution world, most would agree that we have sacrificed much of our privacy for the sake of convenience. Unfortunately, sacrificing privacy can also mean sacrificing security and that presents a serious challenge for banks who are in the industry of security. As companies went digital, many banks followed suit but focused primarily on digitizing front-end systems where the customer was most likely to see the innovation. Unfortunately, banks have long neglected their risk management procedures and transforming to digital risk management is simply not a priority. According to a McKinsey report, only 10% of survey respondents say that senior managers are making digital security risk management efforts a top priority. As the global financial implications of the novel coronavirus start to take shape, the need for modern digital risk management is more important than ever before.

Digital risk management

Given the unerring nature of banking, those who work in Risk Management must take a conservative approach to adopting new technology to ensure that such tech is infallible. Understandably, this leads to a general aversion to digitizing. According to the report, almost half of risk managers see the culture of their profession as one of the main obstacles to digitizing risk management. This fact, coupled with the fact that many who work in risk management are often not privy to the latest technology available to support their mission, means that there remains an uphill battle in the global effort for the digital transformation of banks’ risk management procedures.

Among the concerning developments to come out of the current coronavirus pandemic is the rise in financial crime. Similar to the surge in scams that occurred after the 2008 financial crisis, criminals are taking advantage of public fear to swindle people looking for reassurance in these uncertain times. Unfortunately, the lack of digital risk management means many banks are ill-equipped to take appropriate measures to counteract fraudsters. Financial institutions should have ‘pandemic plans’ in place to effectively handle the potential increase in AML alerts.

Times like these when cases of money laundering are on the rise, the risk management teams of some banks can find it difficult to cope with the increased workload. For other banks, this crisis means much higher staff rotation or an increase in employees calling out sick. In turn, this results in an inevitable increase in the pace of the workday. For banks that have yet to digitize their risk management procedures, rooting out fraudulent accounts is a highly manual process. Financial institutions often have a patchwork set of procedures that are overly pedantic and make cracking down on money laundering a tedious and inefficient process. Banks that have adopted software solutions that use analytics to assist in their AML initiatives find that revenue is increased. In fact, according to the McKinsey report, 80% of risk managers believe that adopting proven technology will help their institutions make more timely decisions, thus improving efficiency and cost effectiveness.

Embrace artificial intelligence for digitizing risk management

A crucial element to digitizing risk management is to embrace artificial intelligence. Banks that utilize modern technology like artificial intelligence can see increased efficiency across the board. For example, financial institutions at the forefront of digitization are implementing AI into their AML procedures to not only support but enhance their current infrastructure. With cutting-edge AI utilizing machine learning to spot and understand relationships and similarities between financial data, banks can increase their effectiveness at detecting and reporting suspicious activity. Double blind studies have shown banks can decrease their rate of false positives significantly when implementing AI into their AML processes. This increased efficiency can help relieve AML analysts’ workload so they can better tackle the increase in financial crime that we are currently seeing and will inevitably see again in future crises.

Although the world has hit the pause button and times may seem uncertain as we collectively work from home and weather this pandemic, each of us becoming amateur epidemiologists in the process, what is certain is this will pass and we will learn many valuable lessons from the experience. Financial institutions shouldn’t have any remaining doubts about digitizing their risk management procedures. Enhancing digital risk management should be seen not as an unnecessary expenditure, but rather a strategic investment to better position their organization to compete with leading banks that have already made the move towards modernizing their processes. As long as we learn from this unprecedent experience we will come out stronger on the other side.     

Sanah Hamad, Business Development Manager, Comarch