Fintech Innovation: What Does it Mean for FRMs?

Fintechs are among the world’s most innovative companies. Innovation is moving so fast, in fact, that financial regulators are having trouble keeping up – but what are the risks of this disruptive innovation, and how can aspiring financial risk managers and early-career risk practitioners position themselves for success in this environment?

The combination of large-scale innovation and complex economic conditions (like inflation and government-support programs) across the financial system have created “a good environment for risk managers to prove their value,” says Michael Imerman, Assistant Professor of Teaching in Finance at the Paul Merage School of Business at University of California Irvine.

Michael Imerman

When discussing the relationship between innovation and regulation, he offers the analogy of a seesaw. “The onus is on both the innovator and the regulator to maintain that delicate balance. If one comes down too hard, the other side will fly off,” notes Imerman.

Innovation can help increase productivity throughout the economy – but products and services that haven’t been fully vetted sometimes come with unintended consequences, ranging from large fines (e.g., for non-compliance) to reputational risk and even to systemic failure. The required innovation/regulation balance must therefore focus on preserving the benefits of disruptive change while protecting against potentially negative fallout.

Collaboration is Key

Innovations in financial services, observes Imerman, are progressing at a much faster rate than regulations – and it's therefore “crucial to have transparency and bilateral communication.” But is this type of fintech/regulatory collaboration even feasible?

Imerman recently completed a tenure as visiting scholar in the fintech group at the Federal Reserve Bank of San Francisco. This experience left him convinced that regulators have no desire to derail or hamstring innovation. Many regulators have, in fact, opened innovation offices as part of an effort to encourage large organizations and fledgling entrepreneurs alike to work with oversight bodies.

There’s certainly a fine line to walk when constructing regulations that encourage innovation while simultaneously providing guardrails to maintain financial stability and to protect consumers. Of course, this is where FRMs can come in particularly handy.

Imerman sees a need for risk managers who are level-headed and even-keeled. They need strong communication skills – not only to explain tech projects to key internal stakeholders but also to state the company’s case in front of regulators.

Prospects for Risk Managers

Imerman encourages his students to explore a career in financial risk management. For FRMs with the right skills, he says, there are many opportunities emerging from the spike in innovation.

Specifically, Imerman thinks that the recent emphasis on interpretable machine learning could lead to a jump in the hiring of tech-savvy model validators. Black-box models with opaque decision-making are rapidly losing favor because of push-back from both regulators and customers. Risk managers who can understand and explain how these models work to all relevant stakeholders — internal and external — will find their skills in high demand.

Job candidates, Imerman elaborates, don’t necessarily need to be programmers or go to “coding boot camps” – but should at least be conversational in technical language.

The regulatory sector is one place where job-seekers may find additional risk openings. In today’s fast-paced environment, says Imerman, regulators are actually competing for risk talent with the private sector – offering jobs that may prove especially appealing to candidates with a public-service bent.

Tod Ginnis is a content specialist at GARP. He is the author of a GARP blog that is aimed at early-career risk managers and professionals aspiring to earn their Financial Risk Manager (FRM) certification.