The banking industry has undergone many changes throughout the years, and one of the most recent trends is the rise of digital banks. According to reports, the market size of global digital banking, which was estimated at $803.8 billion in 2018, is projected to increase to $ 1,610 billion by 2027, at a CAGR of 8.9%.
Digital banks operate entirely online, providing services such as loans, deposits, and payments, as well as investments and other banking activities, all without any physical locations. As technology has advanced, digital banking has become increasingly popular, providing customers with a more convenient and secure way to manage their finances.
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However, while the convenience of digital banking is undeniable, it has also brought with it the need for more comprehensive risk management strategies. With the rapid growth of digital banking, risk management is becoming increasingly important, as banks need to ensure that all transactions are secure and that customer data is protected. The collapse of Silicon Valley Bank, a big name in the banking sector for start-ups and SMEs, and a leader in digital banking capabilities, presents more reason to implement solid risk management strategies.
In this blog, we will explore the various risk management strategies that digital banks must utilize to protect their customers and remain compliant. We will also discuss the importance of risk management, the types of risks digital banks must manage, and the best practices for managing these risks.
The Importance of Risk Management
Risk management is an essential part of any banking institution, and digital banks are no exception. Risk management is the process of identifying, evaluating, and mitigating the risks associated with a business. This includes identifying potential threats, assessing their likelihood and impact, and developing strategies to minimize or eliminate the risks.
For digital banks, the risks can range from the vulnerability of customer data to fraud and cyber-attacks. These risks are constantly evolving, and it is essential for digital banks to stay ahead of the curve in order to protect their customers and remain compliant. Without a robust risk management strategy, digital banks are more vulnerable to losses, litigation, and reputational damage.
Types of Risks for Digital Banks
In order to effectively manage their risk exposure, digital banks must have a comprehensive understanding of all the risks they face. Some of the most common types of risks that digital banks must manage to include:
- Cybersecurity Risk: Due to how they operate, digital banks are incredibly susceptible to cyber-attacks and data breaches. According to a study, the financial sector is 300 times more likely to be targeted than any other sector. Risks associated with cyber security include the possible loss of confidential customer information, service interruptions, and monetary losses due to theft or fraud.
- Compliance Risk: Many laws and regulations, such as those relating to know-your-customer (KYC) and anti-money laundering (AML), must be complied with by digital banks. If these rules are broken, there may be financial consequences or reputational harm.
- Operational Risk: It is the risk of suffering losses as a result of subpar or ineffective internal procedures, mistakes made by people, or uncontrollable outside circumstances. System malfunctions, disturbances brought on by technology, or inadequate management techniques can all lead to operational risk.
- Credit Risk: According to Deloitte, 62 percent of financial institutions intend to prioritize credit risk management by 2023. If digital banks lend money to clients who can’t pay back their loans, they run the risk of having bad credit. Credit risk may develop as a result of subpar underwriting procedures, flawed risk evaluations, or unfavourable economic conditions.
Best Practices for Risk Management
Digital banks must take a comprehensive approach to risk management in order to protect their customers, remain compliant, and ensure the security of their operations. One option to manage retail credit risk is Corestrat’s Intelligent Decision Studio (IDS). IDS is a suite of products that help digital banks manage risks and automate several credit decisioning processes in less time and with fewer costs than other solutions. .
Here are some of the best practices for risk management in digital banks:
- Develop a Comprehensive Risk Management Framework (RMF): A complete risk management framework that details the organization’s objectives, duties, and risk tolerance needs to be developed by digital banks. In addition, banks will be required by regulators to include in the RMF the decisioning policies, methods, and recommendations for detecting, evaluating, and managing risks.
- Conduct Regular Risk Assessments: Digital banks should routinely assess their risks to keep track of new threats and gauge the effectiveness of their risk management strategies. In addition, banks must perform risk assessments at least once a year or whenever significant alterations to the business occur.
- Implement Strong Cybersecurity Measures: Strong cybersecurity measures should be put in place by digital banks to safeguard their infrastructure and consumer data. This covers two-factor authentication, encryption, firewalls, ethical hacking / intrusion detection systems.
- Ensure Compliance with Regulations: Digital banks should make sure that they adhere to all applicable laws, rules, and standards, including those governing data privacy, KYC (Know Your Customer), and AML (Anti Money Laundering).
- Establish Strong Internal Controls: Strong internal controls should be set up by digital banks to guarantee that operational risks are successfully reduced. This entails the division of labour, frequent audits, and effective fraud prevention and detection systems.
Corestrat’s Digital Lending Automation and Decision Management Suite can be two excellent products for digital banks to identify potential fraud, optimise credit decisions, and quickly generate required documentation for regulatory compliance requirements
- Train and Educate Employees: Employees of digital banks should receive risk management best practices training and education. To do this, banks should provide frequent training sessions on operational risk management, compliance, and cybersecurity.
Conclusion
Risk management is an integral aspect of any banking organisation, and digital banks are no different. Digital banks must adopt a thorough risk management plan, implement policies and procedures, invest in security and monitoring technologies, and frequently review risks. Digital banks can guarantee consumer protection and uphold regulatory compliance by taking these measures.
With the help of Corestrat’s Digital Lending Automation, Model.ai, and Decision Management Suite, digital banks can identify potential risks and manage them effectively.
If you have any queries or looking for more information, please write to us at [email protected] or fill out this form to have one of our risk management experts get in touch with you.