Processes that Expose Your Bank to Risk

Banks and other financial institutions such as credit unions, lenders, and financial service providers face a rich and expansive risk landscape. This necessitates the development of a comprehensive risk mitigation strategy that is architected around the banking institution’s unique operational processes, strategies, and procedural processes.

But before you can begin developing a winning risk management strategy, the financial institution’s stakeholders and leadership must identify and analyze the processes that expose the bank to risk. 

Risk Management in a Bank and Other Financial Institutions

Risk management can be extremely difficult in a banking environment due to the very nature of the financial business space. Dealing with money means you’re open to risks that arise from lending practices, liquidity risks, and financial market-related activities. These risk management issues arise due to the actions (or inactions) of third parties and uncontrollable events such as events within the global financial market. This makes these risks and threats rather difficult to predict and even avoid. 

Financial dealings also make banks a prime target amongst bad actors. For example, you’re going to have cyber criminals who are seeking to tap into a banking institution’s technologies in a manner that allows them to exploit vulnerabilities. Banks can certainly adopt measures and deploy strategies that minimize and mitigate these criminal risks, but the rapid evolutions in technology translate into challenges that complicate the financial risk management landscape. What’s more, cybercriminals tend to be very inventive and agile, which means that we’re constantly seeing new cybersecurity threats arise. This creates a situation where risk management experts are faced with the prospect of hitting a moving target, so to speak, as they strive to address cyber threats. 

Identifying Processes That Expose Your Bank to Risk 

In a bank setting, effective risk mitigation and threat neutralization start with the identification of processes that expose your bank to risk. Companies in the financial sector may find threats and vulnerabilities in some of the following processes. 

• Lending – Lines of credit, loans, and other forms of lending are associated with an unavoidable element of risk. Credit risk management can be impacted by loan defaults and economic conditions that may prompt borrowers to miss payments or file for bankruptcy. Processes surrounding borrower screening are a key area of focus for banks seeking to mitigate risk. 
• Liquidation – Liquidity risk arises in connection with a bank’s ability to access funds in order to fulfill obligations, such as a customer’s ability to withdraw money from an account. These liquidation-related activities are heavily impacted by factors such as consumer confidence too since signs of a problem can prompt customers to withdraw funds. This can lead to a snowball effect of sorts if a bank is unable to liquidate funds effectively. By refining processes associated with liquidity, you can neutralize much of the related risk. 
• Operations – Operational processes, including those that occur on a daily basis in the course of a financial institution’s everyday business dealings, expose banks to a variety of risks and threats. There is the issue of human error such as a teller handing a customer the wrong bill denomination. You have dishonest and bad actors who could be involved in theft or fraud. These are just a couple of examples of the many operational processes that can lead to losses. 
• Data and Technology – Data handling processes can be associated with major regulatory compliance issues, resulting in fines and penalties that can total hundreds of millions of dollars. For instance, nearly a dozen major financial institutions were fined a combined sum of almost $2 billion dollars after it was found that employees were using unauthorized messaging apps such as WhatsApp and iMessage to communicate with clients. As a result, the banks failed to meet the requirements for record-keeping laws, leading to fines from the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). This is a great example of how a business process associated with technology such as a bank’s messaging practices can represent a major risk management issue. Processes surrounding messaging data retention also play into this risk equation. 

Developing a Risk Management Program to Address Vulnerable Processes

A comprehensive risk management strategy is critical to success for banks both large and small. The most efficient method for addressing the processes that expose your bank to risk begins with the identification of threats and vulnerabilities. Then, you must pinpoint the process(es) that are associated with those risk factors and take the time to evaluate the dynamics that are leading to these risk management challenges. What factors or events are causing these issues? 

Once the root cause is identified for each issue, banks can work to develop a plan for risk mitigation. Ideally, a threat should be eliminated completely, although in many cases, some degree of risk is inherent and unavoidable. In these situations, a bank may find itself in a situation where full threat neutralization is not a reasonable objective. Instead, a more reasonable goal may involve the minimization and reduction of any losses that could arise in connection with a risky process. Again, though, this requires an in-depth understanding of the risky process dynamics and the events and root causes that are occurring in connection with those vulnerabilities. 

Technologies for Process Risk Management in Banks and Financial Institutions

Process automation can represent an extremely effective option for financial institutions that are seeking to mitigate risks arising from essential business processes and workflows. By automating processes that would otherwise be performed by a staff member, you can eliminate the risks that may occur as a direct result of human error. 

What’s more, workflow and process automation allows banks and other financial institutions to minimize the risks that are associated with data exposure. Financial data is considered very sensitive in nature and there are numerous regulations that govern data management and data handling in general. By minimizing the number of people who access this sensitive financial data through the automation of key processes, banks can effectively reduce risk. 

Risk management software platforms can also bring a great advantage to banks since they provide key tools and functionalities that are essential for effective risk management — especially for a business type that faces such a diverse and abundant variety of threats. 

Leveraging Digital Transformation to Address Processes that Expose Your Bank to Risk

A custom enterprise digital transformation project will position your bank to combat risk management challenges. This is achieved through the development of technologies and digital solutions that are custom-tailored to a financial institution’s exact processes and workflows. This customization is essential for successful risk management, especially when you consider the unique nature of the threats and vulnerabilities that financial institutions tend to face.  

Risk management software development is one of our specialties here at iTech, with platforms developed to suit a bank’s exact business process flows. iTech’s talented digital transformation developers work with financial institution leaders and stakeholders to identify risks and related challenges. Then, we create an enterprise development strategy, with technology such as risk management software systems that empower banks and other financial institutions with the tools they need to effectively manage the processes that give rise to even the most pressing threats and vulnerabilities. We invite you to contact the iTech team today to begin a discussion about your bank’s processes and related risk management needs.