A Renewed Focus Within Risk Management
Managing customer data, correctly storing it and being able to retrieve it when necessary should all be elementary when it comes to a bank’s processes. However, the hard-hitting headlines and damning statistics of late show that banks have so far failed to address these basic issues. A recent report published by PricewaterhouseCoopers found that 54% of the 600 financial institutions surveyed do not have an accurate inventory of where personal data for employees and customers is collected, transmitted or stored. Furthermore, in a fragmented landscape where data is created and stored in different silos incompatible with other systems, risk managers do not have a wide-ranging view of data. As a result, they cannot comprehensively monitor all areas or lines of business.
As demonstrated by the events of the past year and a half, this lack of visibility of important data leaves financial institutions exposed to enormous risk that could endanger their entire operations. A recently published report, Rethinking Risk: Lessons Learned from the Credit Crisis, by the research firm Gartner, highlights the importance of data management in managing risk exposures, stating that the effective use of metrics to monitor and measure risk requires dependable data. In addition, it has been proved that poor data visibility reduces the chances of achieving a holistic customer view, removing a valuable tool from a bank’s organisational intelligence armoury.
But all of this may be about to change. Risk has acquired a negative connotation and the crisis currently plaguing the financial world means that 2009 is likely to mark a renewed focus of banks reassessing the basics. As well as this internal push, new regulations and mandates tailored to the current financial climate are forcing banks to address the issue of risk management. An example of this are the recent Financial Services Authority (FSA) proposals for speeding up the payout of compensation in the event of collapse, which offers banks the chance to get their houses in order. If the FSA’s recommendations come into force, the most obvious impact they will have is a fostering of consumer confidence in that payouts, if a bank were to fail, will not only be immediate but, more importantly, accurate. Therefore, customers will be less likely to withdraw their money from a bank that is at risk of collapse, which will in turn avoid a run on the bank and any additional liquidity issues. From the perspective of the banks, the implementation of the FSA’s proposals would mean financial institutions for the first time would be mandated for holding a single customer view. A recent report published by analysts at Tower Group, Back to Basics, Into the Future: Risk Management and Growth through Enterprise Intelligence, acknowledges the importance of a holistic view of risk data to the very human role of identifying and addressing early indicators that threaten the institution.
For some banks this new approach will require investment in IT infrastructures but it will be a step in the right direction to capitalise on the potential of stored data. A holistic customer view can give a bank’s branch and call centre staff better cross- and up-selling capabilities through a reduced operational effort. In addition, it can significantly improve customer service levels as well as feed into marketing and other communication initiatives. The forward thinking financial institutions realise that achieving a better understanding of customer risk profiles can also improve banks’ commercial and operational decision making, adding considerable business benefits above and beyond mere compliance itself. Having a periodic, comprehensive view of portfolio positions will, from a customer’s point of view, translate into better informed investment decisions and an avoidance of unintended risk taking. From a bank’s standpoint, being in the know about a customer’s risk profile can facilitate increased operational efficiency through improved commercial and operational decision making.
The coming year will also see a shift in perceptions of compliance, with banks no longer seeing it as a burden but rather an opportunity to reinforce control strategies and achieve better transparency. Financial institutions that can tightly control their operations in a timely manner have a greater chance of a chance of preventing failures similar to the ones seen in the recent crisis. In this, having a holistic risk management strategy and tighter control over data in place will not only become a necessary strategy for survival and responsible growth but an effective business tool. As such, banks will not only be followers of regulations but will actively comply with them as part of a wider enterprise strategy. Furthermore, a more hands-on approach to compliance presents financial institutions with an opportunity to restore consumer confidence and the UK banking industry’s reputation. This can only help bring stability to a banking system that is desperately in need of a new equilibrium.
The FSA consultation paper on its proposals to beef up the Financial Services Compensation Scheme will be open for responses until the beginning of April 2009. Regardless of whether it will come into force or not, a cultural shift needs to take place. Financial institutions have yet to reach a stage of maturity or enlightenment over recent events and experiences that have marked the end of risky, aggressive customer acquisition and growth tactics. As a result, banks are moving to embrace a new business strategy as the foundation for success and some have already started the process of changing their approach to risk management and embedding it into their wider enterprise intelligence. Those that take advantage of the potential of stored data and adopt a single customer view as part of their business intelligence strategies will not only have a greater chance of emerging from the current downturn unscathed but may also find themselves rewarded with increased customer loyalty and brand stability going forward.
While the FSA proposals will involve the stretching of banks’ already tight budgets and, in some cases, complex IT projects, the gains that could come from it are undeniable. Whether financial institutions are up for the challenge remains to be seen. However, what we can be certain of is that all eyes will be on their next move and how they will go about confining their former approach to risk management to the pages of history.