Embracing Innovation, Mitigating Risk: Integrating FinTechs into Your Bank’s Risk Management Operations

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One of today’s most discussed topics is FinTech. At its core, fintech refers to banking technology that can help deliver better banking experiences, allowing them to compete with modern contenders. Innovations include lending platforms, payment systems, investment tools, blockchain technology, digital currencies, and more. The shift towards digital banking is reshaping the banking sector, offering customers a more integrated and comprehensive suite of services. However, the allure of fintech is not without its challenges. 

This article discusses regulatory, fraud, and compliance risks and offers insights on how community banks can mitigate them. Community banks that successfully integrate fintech in their operations do so by implementing robust risk management framework to protect consumers and capitalize on digital benefits while avoiding its risks.  

Understanding the FinTech Risks for Financial Institutions fintech risk management

The risks that FinTech poses to community banks can be broadly categorized into three main areas: compromised privacy and data security, increased susceptibility to fraud and scams, and concerns that tech firms entering the financial regulatory sector may lack adequate knowledge and operational efficiency. These challenges introduce significant business risks, including managing changing market conditions, regulatory compliance, cybersecurity, and governance issues, which necessitate identifying and mitigating IT security vulnerabilities and aligning information technology with business objectives. The digitization of traditional banking products into digital banking services further complicates these risks by introducing new vectors for cyber threats and fraud. 

Concerns about data security are well-grounded, highlighted by the Equifax breach in 2017, which exposed 143 million customers to the risks of identity theft and fraud. Community banks, often fraught with dated and siloed IT systems, are already vulnerable to data breaches. It’s crucial for banks to identify risks specifically related to data breaches, understanding the cybersecurity landscape to develop effective mitigation strategies. 

While there are many cyber tools to protect systems against such threats, experts anticipate an ongoing “arms race” between security measures and criminal tactics, with no ultimate technological solution in sight. Risk analysis plays a critical role in this context, involving the evaluation and ranking of risks to develop adaptive security measures that provide maximum coverage of known and unknown risks. Additionally, consumers face risks from inadequate control over permissioned access to their data, leaving them susceptible to breaches or loss. 

Banks fear potential legal repercussions and reputational damage, even if the fault lies with FinTech partners. Moreover, online and mobile banking channels experience significantly higher rates of fraud, compared to traditional branch-based services. As FinTechs rapidly multiply, it’s important to note that not all providers are licensed or monitored through traditional regulatory means. Some may have an insufficient infrastructure to assure cybersecurity and regulatory compliance. 

Challenges Executives Face with Digital Banking FinTech Innovation Rates 

Another challenge with FinTech innovation is the need for established financial institutions to keep up with emerging trends while managing risk and maintaining robust compliance mechanisms for financial regulations. This includes adhering to data protection laws, anti-money laundering (AML), and know-your-customer (KYC) requirements. Managing risk involves adapting to changing market conditions, ensuring regulatory compliance, identifying vulnerabilities, and creating a smarter security framework to protect against potential cyberattack risks. FinTech companies must invest in robust cybersecurity infrastructure and adhere to stringent data security protocols to maintain customer trust. banking technology risk

Given that many financial institutions operate on legacy systems, FinTech providers must devise strategies to seamlessly integrate innovative technologies with minimal disruption to business operations. To accomplish this, these companies need to hire employees who are proficient not only in programming languages and data analysis, but also in financial regulations, compliance, and managing risk. This includes understanding the importance of leveraging a governance, risk, and compliance framework to navigate the challenges presented by rapid FinTech innovation. Unfortunately, the pool of qualified candidates is diminishing, resulting in intense competition for experienced professionals who are knowledgeable about the latest technologies, emerging threats, and security measures. 

This situation necessitates that executives make well-informed decisions about whether it’s more financially prudent to acquire existing solutions or develop their in-house capabilities. Emphasizing the risk management process is crucial in adapting to FinTech innovations, ensuring that organizations can effectively identify, assess, and manage risks in this rapidly evolving sector. 

Creating a FinTech Risk Management Standard Plan 

As community banks invest in digital products and services, they must also invest in proper risk management. Specifically, banks should establish a resilient risk culture built on trust, transparency, and accountability, where employees have a comprehensive understanding and sense of responsibility for risk management, including strategies to mitigate risk and engage in risk mitigation.

In the best of models, CROs (chief risk officer) build a comprehensive framework to identify, assess, and mitigate compliance risks, incorporating risk management standard practices. This framework emphasizes the role of standards in effective risk management, ensuring that efforts to mitigate risk are aligned with industry best practices. Management adopts a continuous process improvement stance, where they implement feedback and data analytics to predict and identify risk, including the adoption of risk reduction measures as part of their risk management plans. Transparent and accountable communication channels enable risk-related information to flow seamlessly between departments and hierarchies. Automation and data analytics facilitate risk identification and assessment as the bank’s risk culture evolves alongside its digital initiatives. 

As highlighted in this 2023 article, community banks that adopt FinTech strategies could increase their revenue by nearly 4%. That’s as long as they mitigate risks by developing clear risk management strategies, investing in the right personnel and processes, conducting regular audits of their activities and performances, and consistently analyzing and acting on risk metrics. 

Risk Management Strategies for Modernizing Community Banks bank risk management

In the last few years, community banks have been responding to the changing environment by modernizing their online platforms with technological innovations. These introduce their own risks which include regulatory, fraud, and compliance risks. 

Risks can be mitigated by establishing and strengthening an integrated risk management approach throughout the organization, which includes strategies like risk avoidance, risk reduction, and risk sharing. Risk avoidance emphasizes minimizing potential losses by not engaging in activities that could negatively impact the organization, such as avoiding certain investments or product lines. Meanwhile, risk reduction aims to minimize losses through integrated risk management approaches, ensuring that even if risks cannot be completely eliminated, their impact is significantly lessened. This involves continuously educating and training bank staff, ensuring clear reporting lines, evaluating cyber resilience and security posture, and integrating risk management into strategic planning. Additionally, risk sharing can be achieved by consulting with external experts, allowing banks to manage risks by sharing them with third parties, such as through insurance. Due to the rapidly changing nature of these risks, banks should regularly consult with external experts to gain timely insights. 

Hartman Can Help your Bank Develop and Implement a Banking Technology FinTech strategy 

Choosing to lead your bank into a partnership with FinTech represents a significant opportunity. Still, it requires a well-defined strategy from the start, especially when it comes to risk management.  

Hartman Executive Advisors can help you align your IT strategy with your business objectives and take a strategic approach to risk management. This ensures a consistent, systemic, and integrated approach to minimize, monitor, and control the impact of negative events while maximizing positive outcomes. Our team of bank experts assist in creating a compelling business case, conducting thorough due diligence, and implementing your plan effectively and efficiently. 

Ready to take your technology to the next level? Contact the experts at Hartman Executive Advisors for a free consultation today. 

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