Here’s how risks associated with digital banking be mitigated

By Puja Sharma

Even before the pandemic, banks had attracted several customers to their digital platforms. Despite this, customer concerns and hesitation were preventing this transformational journey. COVID-19 accelerated Digitech adoption. Currently, both payment and lending products and services are being offered by digital banks. Although we see a willingness to adapt, as growth increases, so does the risk associated with various systems and technology. To address these concerns, we will discuss common risks within banks’ digital domains, and the steps they have taken to mitigate these risks. Let us take you through the risk and management practices followed by banks in digital banking procedures.

Types of Banking risks

Reputational Risk: A clear division of duties and corporate values is ingrained by banks into the internal banking structure. By taking extra precautions right away, the risk is managed while maintaining customer confidence. Operational risks cause customers to become distrustful as a result of reputational risks. Consequently, banking operations with built-in strong systems that can handle digital operations effectively and are user-friendly.

This establishes an organisational culture and gives it a top priority, ensuring strict adherence to risk management in banking. Due to their trust in the system, customers remain loyal to a bank. Banking reputation risk is a result of subpar services, fraud, and corruption. A bank may lose business, experience increased liquidity issues, or even experience a bank run in extreme circumstances if customers lose faith in the institution.

Strategic Risk: Banking risk is exacerbated by the poor layout of a strategy directed mostly towards prevention, with little or no attention to anticipated risks. Reputed banks, therefore, recognise the impact and power of strategy, formalising the banking process to alleviate strategic risks in banking. As discussed earlier, banking operations are regulated by a board of directors and senior management who establish a framework, taking into view fundamental and evolving transformation in financial services and integrating risk management strategies in banking operations.

Key Trends

When we talk of the key trends in digital banking that may pose risks to the banking structure, we must understand just like other risk factors these could be hidden and may not appear in plain sight of the bank employee. Reputed bank employees are trained to take an intuitive approach to every aspect of their organisational operations to spot any signs of risk, threatening customer interest or the bank’s reputation.

Changing financial ecosystem: As banks rely more on digital technology, customer data is their greatest asset. Most reputed banks take firm measures in scanning, regulating, and monitoring their hosting system. However, with third-party payment options, banks must identify these suppliers, and know how much customer data they have.

Automated operations: Digitalization of process has reduced the degree of errors caused by humans earlier. With the digital-first concept, other risk related to systems arises and banks management must be vigil about the ever-changing digital methodologies which gives rise to new risks frequently.

Customer expectations: With advancing technologies and various products being tailored as per customer demands, online new risk portfolios can arise for some banks, whereas other financial institutes may use a product without testing. Therefore, proper testing processes and stricter system checks to avoid any revenue leakage should be a part of the defined policies and processes of the bank.

Adopting newer technologies is still a challenge: New banking technologies are rapidly emerging every day, and so are tampering mechanisms. Data infrastructure proves to be a mine of information, and internally more goes into analysis than management.

Moving forward, Banks need to follow innovative measures in financial analysis and forecasting to meet the demands of customer experience. Risk management in banking is closely associated with regulatory compliance that involves countless resource-intensive, error-prone document verifications. Machine learning (ML) and Artificial Intelligence (AI) automate and largely take care of this change management system. But risk management in banking needs a central regulatory system which is why banks can use Model Risk Management (MRM) structures to bring risk factors down.