Digitising credit risk management allows banks to withstand new pressures and create value, according to a report by McKinsey and Company. The report also suggests digital risk management will be the industry standard in five years.
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Emerging pressures are “requiring banks to re-evaluate the cost efficiency and sustainability of their risk-management models and processes,” say the management consultants.
Digitisation of risk management will address new internal and external pressures, according to the report, which identifies five trends that are transforming the banking industry:
- Changing customer expectations There is growing customer demand for online and mobile experiences and less reliance on physical distribution, the report said. A trend banks have already responded to by developing their branches to reflect the new expectations.
- Tighter regulatory control requiring greater risk-function effectiveness More stringent monitoring and enforcement from regulatory bodies, with the report citing; “More than $200B in fines since crisis; more than 4,000 MRAs still outstanding from OCC… Regulators are expecting the risk function to take a more active role in the context of new, digitised business models.”
- Growing importance of strong data management and advanced analytics in staying competitive Customers using digital services are generating new data, the report says. This in turn is allowing the development of more effective risk modelling, but also brings new challenges in addressing privacy and security, according to the report.
- New attackers driving business model disruptions The wave of innovative fintech companies is presenting new competition and new opportunities in the digital age. “These start-ups are extending innovation throughout the digital-banking space, creating a competitive threat to traditional banks but also potentially valuable opportunities for partnerships.”
- Increasing pressure, especially from financial technology companies, on costs and returns The aforementioned fintech innovators are, according to the report, putting new pressure on return on equity. “Without the traditional burden of banking operations, branch networks, and legacy IT systems, fintech companies can operate at much lower cost-to-income ratios — below 40 per cent.”
The report says traditional banks are responding to these new pressures, albeit slowly, by digitising credit risk management. The incumbents can protect revenue and create value through automation, connectivity and digital delivery, the report said.
Banks that act now and digitise risk management can attain an enduring competitive advantage. “The digital transformation of existing credit risk tools, processes, and systems can address rising costs, regulatory complexity, and new customer preferences,” say the consultants.
According to the McKinsey and Company report, the process should not be delayed as banks develop a master plan. Instead organisations can “develop a digital approach to one area of credit risk management based on existing technology and business value. Each bank may develop initiatives based on their specific priorities.”
Tangible value can be achieved in just weeks, the report says, but for maximum return “a complete transformation may be required to achieve the bank’s target ambitions.”