What does a modern approach to risk management really look like?

What does a modern approach to risk management really look like?

What is the most essential function of a bank’s armoury?

Pre-2020, that may have been a question up for debate. Now, though, the answer is far clearer. As global recovery following the COVID-19 pandemic begins to gather momentum, the absolute necessity of an effective risk management strategy can no longer be contested.

However, this is more than a simple case of financial recovery packages (although naturally these are an important factor too). Instead, banks must also contend with accelerating digital transformation, and with it the new legislative measures and consumer expectations that it fosters. 

There is a delicate balancing act now at play. Financial service providers must now meet customer desire for personalised digital services, while at the same time successfully building out risk profiles for (often brand new) businesses. On top of this, automated onboarding processes mean these must be developed in seconds, not days or weeks.

One key positive? There is now more data available than ever before. Information can be analysed faster, and with fewer errors, meaning deeper and more effective risk decisions can be made at pace. For banks, harnessing it is vital to succeed in the new – and next – normal.

Where are we now?

  • $11 trillion. The estimated total of fiscal support injected into the economy worldwide following the pandemic.
  • £280bn. The amount spent by the UK government on recovery during this time.
  • 40%. The increase in the number of businesses formed from 2019 to 2020.

The stakes, then, are high. With businesses being formed at a rapid rate, each needing some form of financial product or service to get them started, the opportunities for growth are clear. 

These nascent organisations are, by and large, digital-first, or digitally native. Challenger banks and service providers have set a new benchmark around digital experience; only now are incumbent banks beginning to keep pace, but at what cost? 

The big question now is how many of those businesses – alongside other small businesses looking to switch, upgrade or diversify the products they use – are the right customers to work with? 

Or, more specifically: how can you access accurate information around them, before validating and leveraging it for your own risk models?

Step one

Identify the challenges of the risk landscape: Unpacking what an integrated risk solution proactively addresses

Onboarding any customer incurs an element of risk. Regulatory requirements in the UK mean certain criteria are supposed to be met, and all applicable codes are complied with. Today, however, banks are aware that the legally mandated minimum isn’t sufficient – particularly considering the increasing threat of financial crime.

Mitigating this risk successfully is rooted first in insight and understanding, and second through adopting the right solutions to build and monitor these profiles. An integrated risk solution incorporates all of these facets, offering a vantage point from which to view the businesses they work, or may work, with. 

From here, the decision-making process becomes more informed, rational and ultimately more effective.

Key pain points addressed by an integrated risk solution

  • Regulatory risk exposure. Multiple governing bodies, new technology, evolving regulation and legislation – each provides its own opportunity for a bank to be left exposed and non-compliant. 
  • Inaccurate customer data. The SME landscape changes at a pace few other markets can match, so the datasets banks work with need to develop with them too. The moment data becomes out-of-date, it becomes unfit for purpose. From there, risk increases exponentially.
  • Cumbersome manual processes. Legacy systems, with operations based largely around human input and oversight, can no longer meet the demand of new onboarding requirements. Errors are costly, and resources better spent elsewhere in the risk engine are wasted on manual checking tasks.
  • Immediate recognition of intrinsic nature. Building out a true risk profile rests heavily on an ability to identify the true nature of a business. Without being able to do this effectively – and immediately – your onboarding processes become exposed.

Step two

Understand prospects better: How to bring together datasets to build a comprehensive picture of a business, its UBOs and risk profile

Even as recent as five years ago, this optimum vantage point – where banks could verify the identity of potential clients and customers – was only achievable after hours of painstaking research through outdated data. Now, technology exists to enable these datasets to be viewed together, and in real-time – as well as remaining compliant with due diligence screening and Anti-Money Laundering (AML) regulations.

These datasets unlock fresh insights around specific companies, with much of the raw data fed through an API quickly and effectively into one single platform (such as DueDil’s B.I.G.). Evolving regulations, then, are accounted for as data from billions of sources is analysed daily, providing an up-to-date picture of a business and its UBOs to build an accurate risk profile.

This entire process is carried out automatically, too – eliminating many of the manual tasks traditionally associated with this level of in-depth reporting.

Step three

Operate within your risk appetite: Build a complete picture of your customers and prospects to ensure you work with the right level of risk

Typically, risk has been considered an off-the-shelf function for financial organisations. Operations are brought in line with regulations, and the business approaches its onboarding and safeguarding practices from that benchmark. As we’ve discussed, however, a bank’s approach to risk needs to be far more dynamic to keep pace with the ever-evolving landscape around it.

Put simply, this means that the customer and prospect understanding outlined in step two must ultimately inform a tailored risk management strategy.

Real-time data unlocks an ability to review and prioritise action plans at pace, and communicating key trends and metrics around SME risk profiles can be done far easier than previous technology would have allowed.

All of this breeds an agile approach, and one that can fit comfortably within your organisation’s risk appetite.

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