How is Digital Transformation Changing Risk Management for Financial Institutions?

Digital transformation accounts for the most significant high-tech movement in the business world, with the COVID-19 pandemic driving the advancement of numerous technologies such as the cloud, communications tech, collaboration platforms, AI, and machine learning, amongst many others. But as with all advancements, there are pitfalls and challenges that must be considered and this is especially true when it comes to risk management for financial institutions. 

Companies in the financial sector, such as banks and financial service providers, are subject to strict regulatory oversight and they must simultaneously navigate a complex risk management landscape. That’s because financial institutions routinely confront very serious threats and vulnerabilities from criminals and other bad actors who may seek to exploit high-tech loopholes and flaws. Add in digital transformation projects and you have a complicated, multi-faceted risk management challenge that must be addressed in order to avoid losses. This, of course, begs the question: how is digital transformation changing risk management for financial institutions and others in the banking industry? 

Risk, Vulnerabilities, and Digital Transformation for Financial Institutions

Banks and financial institutions are turning to digital transformation projects in an effort to improve operations and increase profitability. As such, digital transformation projects can take many forms, from the development of a new enterprise software platform and mobile app development to a cloud data storage platform with data management overhaul, or the implementation of a new cloud-based analytics, auditing, and reporting system. 

Digital transformation projects can take many forms and the only real limit is one’s imagination. But while these technologies are designed to solve problems and improve efficiency, they can also open the door to new challenges by creating security loopholes or vulnerabilities. Here are a couple of examples of how digital transformation can lead to risk management challenges. 

• A bank’s latest digital transformation project involves the deployment of a new enterprise messaging platform. The project represents an effort to improve internal communications between colleagues and external communications between staff and clients. However, the messaging app lacks the proper auditing tools, data export tools, and data retention settings. This means the bank is unable to retain messaging data in a manner that aligns with record-keeping laws and regulatory requirements. As a result, the financial institution is vulnerable to fines and penalties — a significant risk management concern. 
• A local credit union pursues a digital transformation project that includes the creation of a new cloud-based data storage system and data management platform, complete with AI and machine learning-driven analytics. However, the developers have failed to implement the right encryption and security measures, leaving this technology vulnerable to data theft and other forms of data compromise. This is a serious risk management concern, especially in the financial space where data integrity and overall security measures are extremely important to consumers. In fact, a lack of trust can destroy a financial institution and its reputation amongst prospective clients. 

These examples illustrate how a digital transformation project can result in some potentially devastating risk management challenges. The financial space is one where a good reputation and trustworthiness are essential ingredients in the recipe for long-term success. Yet financial institutions confront more than their fair share of risk management challenges because they are so aggressively targeted by the criminal element. The result: significant changes in how these companies approach both risk management and technological advancement.

How Has Digital Transformation Changed Risk Management for Banks and Financial Institutions? 

Digital transformation trends have clearly led to changes in the risk management landscape and this is especially true for the financial industry. Just a couple of decades ago, relatively few banks, credit unions, and other financial institutions worried about things such as cybercrime and data security. But today, high-tech vulnerabilities and threats make risk management very complex. In fact, the widespread deployment of new technologies and the increasing popularity of digital transformation projects means that a large portion of a financial institution’s risk management strategy will be centered around its technology. This is very different from what you would have seen just 20 or 30 years ago when risk management strategies were more heavily based on operational risks and non-technological issues.  

Digital transformation is also leading to changes in risk management strategies that focus on regulatory compliance. The early 2000s saw a number of high-profile scandals in the banking and financial space. These events prompted the development of new laws and regulatory bodies in an attempt to improve accountability and transparency. As a result, the financial sector is one of the most heavily regulated industries on the planet. Fines and penalties can be significant, totaling hundreds of millions of dollars and destroying a bank’s reputation with consumers. Regulatory non-compliance is a major risk management concern and digital transformation projects can have a big impact on a company’s ability to maintain compliance. Digital transformation projects may impact encryption and security measures, data audit and export capabilities, and data storage configurations, amongst other things. This can, in turn, affect an institution’s ability to maintain legal and regulatory compliance. This underscores the importance of considering regulatory compliance-related risk management concerns that could arise from your digital transformation project.

Digital transformation is changing the way companies approach risk management, with businesses placing a greater emphasis on technology as a whole and the pitfalls or challenges that may inadvertently arise. Many companies are turning to risk management software platforms in an effort to more effectively manage the threats and their response to the identified vulnerabilities. 

At iTech, risk management software is one of our specialties, as we take a collaborative approach to digital transformation. Our innovative team works with each client to identify challenges and pain points. Then, we architect a digital transformation plan that solves problems, improves efficiency, and drives profitability. We invite you to reach out to the iTech team today to discuss your financial institution’s challenges and goals. Then, we’ll develop a digital transformation strategy that aligns with your risk management plan and your business strategy for the future.