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5 Digital Risk Management Tools Every FRM Should Know About

Thursday, March 24, 2022

By Timothy J. Woods

Rapid advances in technology continue to change how financial risk professionals carry out their work. Artificial intelligence, machine learning, and natural language processing are three leading risk management tools that any Financial Risk Manager (FRM®) can utilize to good effect. FRMs are currently applying tools built with one or more of these technologies in several areas, including fraud detection, anti-money laundering, credit underwriting, and expected credit loss modeling.

In an increasingly digital and data-driven business landscape, these tools are necessary for FRMs to help minimize exposure for their organizations. They also point to new career opportunities. According to the GARP Risk Careers Survey, 18.3% of hiring managers expect to hire risk professionals with technology skills, and 14.2% highlighted the increasing need for cybersecurity skills.

5 Leading Digital Risk Tools for Financial Risk Professionals

There are many technologies that FRMs can use to reduce their organizations' exposure to financial risk. Here are five leading areas of technology that can support effective risk management.

1. Enterprise Risk Management (ERM) Software

Many financial services firms rely on enterprise risk management (ERM) – a holistic methodology for identifying, assessing and mitigating firmwide risks. ERM platforms, also known as risk management information systems, equip FRMs to identify and analyze a wide range of financial risk types. A good ERM system provides FRMs with visibility into areas where undesirable risk could originate, including traditional and unconventional sources, so that they can take appropriate preventative measures.

ERM platforms may include advanced artificial intelligence capabilities related to data analytics, risk aggregation automation, risk assessment and simulation, natural language processing and risk reporting, among other applications. While ERM software is generally regarded as a required tool for many organizations, it is often complemented by more specialized software for managing specific risk areas. Robotics Process Automation (RPA) is one such AI capability that ERM systems can offer to manage labor-intensive and repetitive tasks.

2. Governance, Risk, and Compliance (GRC)

GRC encompasses an organization's governance, enterprise risk management, and adherence to pertinent laws and regulatory obligations. The complex nature of GRC often requires the use of specialized software that combines a range of solutions under one umbrella system. For instance, natural language processing software can help risk departments to overcome the common issue of ambiguous, complex, or unclear human communication. This is a huge advantage for various applications, including fraud prevention and insider trading detection.

A holistic strategy allows organizations to use a single framework (rather than separately held data silos) to implement their GRC plans and enables FRMs to take a more informed approach to identifying and assessing risk – and to more easily share risk-related information and resources with their colleagues in other departments.

It can take considerable time to implement GRC technology because it involves multiple core business processes and departments. However, once it is up and running, it offers FRMs macro-level analysis and granular monitoring capabilities, helping ease the GRC burden.

3. Automated Credit Scoring Technology

Financial organizations engaged in credit provision can benefit from automated credit scoring technology. With use cases that include credit card issuance, personal loans, microloans, and consumer credit initiatives such as buy-now-pay-later, automated credit scoring technology can help FRMs minimize the risk of repayment default and maximize their organizations' commercial success.

Credit scoring automation can use machine learning in the form of customer behavior analytics to assess ongoing customer history updates and derive insights related to applicants for more precise, informed decision-making in the future.

4. Cybersecurity

Cybersecurity is an essential element of any organization's approach to managing technology risk, and it is therefore a must for FRMs to beef up their knowledge of cybersecurity tools and practices.

The transition to digitalization, in combination with evolving market developments and demands, has created numerous opportunities for organizations. However, it has also generated a whole new profile of risk, as hackers and fraudsters are continually coming up with new and sophisticated ways to carry out data breaches, commit financial fraud, and damage enterprises with cyber attacks.

The leading cybersecurity solutions tend to include advanced AI and machine learning capabilities to create strategic defense mechanisms against the threat of malware, cybercrime, and more broadly, to assess all manner of cyber vulnerabilities.

5. Cloud Computing

The transition from on-premise software infrastructure to scalable cloud computing continues to accelerate, with AI algorithms in use to identify patterns and analyze data for ongoing strategic value extraction. Cloud providers have gone to great lengths to address previous corporate concerns over fraud risks, such as data breaches and security threats. FRMs increasingly recognize that continuing with on-premise infrastructure may actually open their organization up to more risk, including security update oversights, data breaches, and technical issues such as system failure or power outages. Cloud providers, on the other hand, provide ongoing maintenance and security updates, and their services tend to scale in line with an organization's needs as well as technological advances.

The first four technologies might all come in the form of cloud technology, but cloud computing deserves its own category given its impact on an enterprise’s operations. Prominent types of cloud computing include various forms of software-as-a-service. Bots-as-a-service, for example, is an area of cognitive conversational voice and chatbot technology that can enable FRMs to monitor conversations, while risk-as-a-service is a type of risk management software that can help FRMs execute complex quantitative calculations.

Minimizing Digital Risk With the Right Technologies

The shift from traditional banking to more data-driven and digital business models has greatly expanded the risks financial risk managers must address. Fortunately, there is a wide range of FRM technology solutions to help them meet these challenges. Without such tools, organizations may be putting themselves at much greater financial risk.

Bear in mind that, while implementing the right types of risk management technology is becoming more important, technology itself can generate security vulnerabilities that may lead to data breaches or fraud. For this reason, it's necessary for FRMs to choose suitable digital risk management tools and ensure that all involved stakeholders use them in accordance with stringent security protocols.

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