Fintech Trends: Risk Management

With the addition of more and more regulations after the financial crisis, risk management in banking has been changed tremendously. In fact, “risk-operational processes such as credit administration today account for some 50 percent of the function’s staff”. [1] So what exactly is risk management and why do banks and fintechs need to know about it?

Risk Management

Understanding risk. Many believe that risk management is about avoiding risk, but it’s not. The truth is risk has to be understood – usually measured by the financial impact it has. It’s about making rational decisions that affect the strategy and operation of a company.[2] Recently, regulation has deepened and with it, comes pressure for risk managers. In addition, the traditional model of risk managing is no longer possible because every company has to have more advanced regulatory and legal capabilities. On top of that, customers are becoming more concerned with the overall experience, making risk managers work jointly with operations, product, and other sectors to provide for a highly customer-oriented solution. [3]

Types of Risk

Banks and Fintechs mainly deal with three types of risk. The first one is Credit risk, meaning the borrowed money won’t be repaid or will be repaid late. Credit risk has been the reason for credit scores and valuations. Today, Fintechs are adding additional intelligence such as social media behavioral analysis or spending history to be able to assess the risk in a particular loan. The second type of risk is Market risk. It happens because of the unpredictability of markets – something risk managers try to avoid by having a thorough understanding of the risks they are taking. The final main type of risk is Operational. The category includes human errors, cyber-crime, or emerging technology. It is the broadest sector of risk management that includes a wide range of risks that both Fintechs and banks have to be aware of. [2]

Banks and Fintechs Need to Know

Risk is always there. On one hand banks have a long history of risk management that has to be innovated in order to be capable of keeping up with current trends such as cyber-security. On the other hand, Fintechs which are full of venture capital funding and investors, have to learn to what extent to allow risk, so the financial market can truly be disrupted. Legal, regulatory, and risk management departments at financial companies such as FinLeap will soon become a must. The scarcity of risk managers is also a problem that all financial institutions face – it’s something that is needed but not necessarily taught in school. [4] With the fast-paced industry, Fintechs and Banks will be competing on who can keep up by digitizing some of the core processes, using advanced analytics, bettering the reporting of risk, and most-importantly collaboration so the risk management process is optimized.[1]

Sources:

[1] The Future of Bank Risk Management

[2] What Every Fintech CEO Should Know About Risk Management

[3] The future of bank risk management

[4] Risk Management Skills for the Fintech Era

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Author

Dara Lazarova

Working Student Venture Development at finleap