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June 24, 2016
Managing risk in the digital age
By: Steven Culp

Risk management—once seen as a pure safeguarding function—now has a more proactive role to play. As new risks, in particular digital disruption, emerge, the risk function will be crucial not only to defend against threats, but also to support growth and success in a digital future.

Following a number of high-profile scandals, banks are faced with a tough regulatory environment and a harsh economic climate. Managing risk is crucial if they are to maintain success in this context. In addition to managing risk, however, it is now also important to adopt a proactive stance, pre-empting change and capitalising on—rather than capitulating to—digital disruption. Successfully balancing defensive and proactive stances requires viewing risk management as an enabler of growth, and collaborating across the business to strengthen the effectiveness of risk functions.

The Accenture 2015 Global Risk Management Study, surveying 150 senior management executives from the banking sector, finds an industry changing its attitude towards risk management, but with work still to do. 79 percent of banking respondents agree that their risk function is an important or crucial enabler of growth. Moreover, a recent Accenture report indicates that 92 percent of financial services executives considering risk when forecasting and budgeting, and 87 percent factoring risk into M&A and financing discussions.1 There are clear signs then that risk management is coming out of its silo—a promising and necessary move if banks are to fight off the threat from digital disruptors trying to take their business.

Nowhere is the demand for a robust, strategic approach to risk management more apparent than in the digital transformation of the banking sector. Entirely new business models are emerging, and many institutions are already feeling the threat of digital disruption. That threat is not academic: Lending Club Corporation, a US-based peer-to-peer lending platform, was valued at more than $5bn on its initial public offering (IPO) at the end of last year, and Accenture research in the same year found almost three quarters of North American 18-34 year olds ready to bank with a technology, telecom or retail company given the chance.

There is risk, then, in not being proactive. Banks which are already leveraging new technologies are set to seize the initiative—by gaining trust and embedding risk strategies across the business, recruiting digital talent and improving IT architectures. As Ash Gupta, Chief Risk Officer and President, Risk and Information Management at American Express Company, points out—risk management is critical in this stewardship, not as a way to say "Yes" or "No" to new ideas, business models or products, but to say "how" banks can best go about delivering those aims.

With digital technologies emerging, growing and mutating at extraordinary speeds, answering "how" will be crucial time and again. Already, cyber risks, social media monitoring and data management are all crucial considerations of the modern bank. Ignacio Bernal of Spain’s Bilbao Vizcaya Argentaria S.A. (BBVA), a bank widely seen as being at the forefront of digital development, has warned that the industry is competing with the major tech firms when looking for talent in areas such as big data analysis, cloud computing or mobile. Finding talent in those roles is an increasingly pressing task, as assessing risk is now a question of dissecting unstructured data—such as call logs, emails and social media output—as well as structured data, and of understanding the complexities of cyber risk. Bidding to understand and counter these new risks, more than 80 percent of banking respondents to the Accenture 2015 Global Risk Management Study say they plan to increase their investment into risk management over the next two years.

Mastering digital risk management, from both a defensive and proactive standpoint, will be in our view a key feature in any bank’s future prospects. Defensively, recruiting talent to ward off cyber threats and competition from disruptive outsiders can be vital. From a proactive perspective, increased progress will increasingly hinge on a highly focused, customer-centric approach, for which the leveraging of new digital technologies could be central. As well as delivering more targeted and relevant customer differentiation, digital can help banks bring down costs, and improve distribution. In this demanding environment, the biggest risk may be doing nothing.

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