Top 6 Banking and Risk Management Predictions for 2021
People risks, banking digitization, cyberattacks and AI are among the issues that will garner the most attention in the coming year.
Friday, January 15, 2021
By Brenda Boultwood
It's all things digital for financial services. The COVID-19 pandemic has accelerated the pace and acceptance of change in financial services, and new methods of banking and managing risk will therefore be required in the coming year.
Technology, in the form of online banking, artificial intelligence, cybersecurity and the work-from-home trend, will undoubtedly play a big role. But what key trends and changes will take center stage? Peering into our crystal ball, we offer six predictions for banking and risk management in 2021:
Banking is being rapidly modernized, and traditional banks that continue business as usual will be left behind.
Integrated platforms are the future of banks. Challenger retail banks now offer online everything - even through application programming interfaces (APIs) that aggregate the best of fintech products and services for their customers. Fintechs, moreover, have developed financial health platforms that provide consumers with real-time advice on everything from savings to spending affordability assessments.
Wholesale banking services will be provided as “banking as a service,” or digitized end-to-end experience, for products such as custody services, ACH payments and small business lending.
The pandemic has accelerated the transition to a cashless economy, and retail transactions are increasingly shifting to digital payment platforms like PayPal and Venmo. As consumers broaden their online purchases, payment mechanisms may be consolidated - and credit cards may soon be a victim of this disintermediation.
Through the modern digital platforms, retail and wholesale customers may even get things that were never available through traditional banks: expense management, and advice on spending and treasury investments. The impacts of this shift on capital formation and pricing are unknown, but we're starting to see a regulatory response.
People risks will continue to rise, and the risk hiring landscape will evolve, placing a greater emphasis on diversity, ESG and technology.
Whether we're talking about work-from-home employees or essential workers facing customers, the pandemic has increased people risks. In 2021, these risks must be managed through active monitoring, high-quality definitions of objectives and tasks, and results-based performance measures.
The highest people risks will result from unclear objectives, and the banks that are successful will be on the ones that not only rethink the talent they seek to recruit but also constantly retrain their incumbent employees.
On the employment front, financial institutions will prize software engineering skills more highly than even MBA credentials, while job candidates (particularly millennials and Gen X and Z) will favor prospective employers that place an emphasis on ESG, generosity and giving.
While firms will certainly be more conscious about diversity, do not immediately expect a nicer, kinder corporate organization. Indeed, it will take years for racial and gender biases to give way to “results appreciation.”
Supply-side operational risks (including cyber and fraud) will be weaved into market risk models, and digital asset tokenization and blockchain ledgers will become the basis for corporate supply chains.
For banks, these trends should yield reduced working capital requirements, decreased counterparty risks (as a result of fewer interactions with intermediaries), and greater transparency for customers.
The crypto asset class, meanwhile, will certainly become a more accepted means of payment and a more alluring alternative investment asset - though it will perhaps struggle to achieve status as an official currency.
Credit risk will be transformed by the “buy now, pay later” trend, which is heavily reliant on customer authentication management and real-time credit assessment.
To assess credit risk, banks have traditionally collected historical payment data (e.g., monthly rent, mortgage and credit card payments) and backward-looking credit scores. But e-commerce firms now have the data and tools needed to analyze transactions - and measure credit risk - instantly. Indeed, they can perform speedy micro analyses of borrowers, via immediately assessing spending patterns and payment history across a number of platforms.
Fintechs and regtechs will rely more heavily on artificial intelligence.
AI provides the analytics that will reduce dependency on a second line of defense across functional support groups. This should ultimately lead to better decision-making and more effective management delegation.
More frequent cyberattacks will place banks on the frontline of cross-border warfare, with geopolitical risks embedded in cyber threats.
Innovative strategies will be needed to both deter and mitigate such attacks, and we may see banks engage in more public-private partnerships as one potential remedy. They're also likely to keep a close eye on the effectiveness of the Ransomware Task Force (RTF) - a group of 19 firms that is expected to develop a standardized framework for dealing with ransomware attacks across verticals.
Chief risk officers have traditionally thought about risk identification in terms of the products and markets of the banks that employ them. But the pandemic has accelerated the transition to the digitization of financial services, greatly altering traditional viewpoints on risk assessment and management.
Fintech, in fact, has become part of the cultural mainstream, with rappers name-checking certain mobile payment apps. Going forward, as the structure of banking changes, CROs and bank executives will need to look more outward to determine whether a bank's strategy remains effective.
Do high school students wear your bank's swag? Is the name of your bank quoted in hip-hop songs? If not, you've probably been left behind.
Brenda Boultwood is an independent risk management consultant and company advisor. She is the former senior vice president and chief risk officer at Constellation Energy, and has served as a board member at both the Committee of Chief Risk Officers (CCRO) and GARP. Previously, she was a senior vice president of industry solutions at MetricStream, where she was responsible for a portfolio of key industry verticals, including energy and utilities, federal agencies, strategic banking and financial services. Before that, she worked in a number of risk management, business roles and as the global head of strategy, Alternative Investment Services, at JPMorgan Chase, where she developed the strategy for the company's hedge fund services, private equity fund services, leveraged loan services and global derivative services. She currently serves on the board of directors at the Anne Arundel Workforce Development Corporation.