3 Strategies for Managing Risk amid Digital Disruption
Geopolitical uncertainty poses a major risk to the Western world through 2020. Brexit, the United States presidential election, and digital innovation are creating unprecedented ripple effects in the market. Trade policy decisions may be taking place today, but their wider consequences may not be well-understood for years to come.
To add another curveball, the very nature of currency is changing. As of November 2017, accounting firm PricewaterhouseCoopers accepts payment in bitcoin for its advisory services. Telecommunications companies are teaming up with financial services companies to serve new customer segments in the developing, cash-based economies.
“With over 261.1 million people, Indonesia has the fourth largest population and is the largest Muslim market in the world,” wrote Leesa Shrader for CGAP in 2013. “It has emerged as one of the strongest economies in the world, but with only a quarter of the population fully banked and with 22.1% of the population living under the poverty line. Progress in branchless banking has been slow thus far, but a large market opportunity exists and new movements hold promise for change.”
Since this article was published, companies like Juvo have helped telecommunications leaders turn underutilized resources into new monetization streams. The company gives underbanked populations pathways to establishing credit and has already reached 500 million people around the world.
With the world changing, many new types of risk are likely to arise. For example, telecommunications leaders are splitting networks to be device-specific—such as phone, smartphone data, and low-bandwidth Internet of Things. What will be the security implications? As the United States changes its assessments of global risk, what will be the impact to business relationships? What is the likelihood of disruption?
There are no forecasting models that give credit, risk, and finance professionals the tools to answer these questions completely, but data can help answer many burning questions about risk. Companies will need to adopt strategies for evolving with the open market. Here are three strategies that finance, credit, and risk leaders can adopt.
1. Get ahead of cybersecurity risks
In its annual Global Information Security Survey for 2017-2018, Ernst and Young (E&Y) found that while organizations continue to prioritize cybersecurity and are making good progress, they are still more worried about the threat landscape. For context, take a look at this recent study from the University of California at San Diego, the University of Twente, and Saarland University. The report found that a third of the Internet is under attack at any given time—an analysis that the researchers admit is likely an underestimate.
Security creates risk and uncertainty, in the sense that businesses can’t predict the unexpected.
These areas of focus will help organizations create barriers against common attacks, advanced attacks, and emerging attacks—all threats that sophisticated attackers carry out using vulnerabilities in existing technology. Risk leaders will need to build security risks into their key focal areas and forecasts.
2. Evaluate the interplay between credit, political, and economic risk
Traditionally, risk leaders have looked at a variety of inputs—such as business credit data—to determine whether a partner is a stable company. But geopolitical shifts have created big question marks. When making a strategic business decision, organizations need to understand that the world is in flux.
“Looking ahead to 2018, downside risks to our growth forecasts and the business environment remain heavily influenced by political factors,” explains Warwick Knowles, Senior Economist at Dun & Bradstreet.
What are some of these political factors? Knowles elaborates:
- Government policies related to environmental, trade, investment, and anti-corruption
- Changes to political systems and economic agendas that result in policy shifts
- Influence of interest groups and their respective roles in policy-making
- Decentralization, which includes moves towards independence in specific territorial areas
- The presence of radical groups in a region
- External threats, including increased political tensions between countries
Politics influence all companies of all sizes. On the customer acquisition side, trade relationships have the potential to impact growth strategies. Supply chains can also be vulnerable.
“The countries that have been downgraded because of political factors in 2017 are Poland, Romania (twice), Albania, Iran, Qatar, Bahrain, Chile, and India,” says Knowles. “In addition, Oman and Jordan were downgraded amid a combination of political and economic factors. This indicates that political uncertainty has become more widespread; in 2011, for example, the vast majority of ‘political’ downgrades were in the Middle East and North Africa (MENA) region.”
Country risk assessment ratings can influence growth, as well as supply chain steadiness. Research is available for finance and credit leaders here.
3. Understand that predictors of risk are changing
Significant changes that have taken place in the banking sector in the last decade, particularly in response to regulations imposed after the global financial crisis. Looking at the emerging trends within this industry gives financial leaders more context into the emerging landscape in other areas. According to McKinsey, six trends will shape the role of the risk function in future:
1. Deeper, Broader Regulation
Regulation will broaden and deepen due to public sentiment, which is growing less tolerant of bank failures. Financial institutions must already adhere to US regulations around bribery, fraud, and tax collection, while future risk equations might also need to take account of regulations related to employment practices, environmental standards, and financial inclusion.
2. Expanded Customer Expectations
Customer expectations, in tandem with technology. Banks are under pressure to provide intuitive seamless experiences, as well as access to services at any time on any device. Data privacy and security policies will influence risk.
3. Machine Learning Techniques to Manage Risk
Risk management techniques are helping companies make better decisions at lower cost. Big data, machine learning, and crowdsourcing techniques open doors to market insights that were not previously available.
4. Emerging Cybersecurity and Contagion Risks
New risks are emerging. These include cybersecurity risks, and contagion risks. Cyberthreats are outpacing open market innovation—‘cyber-stability’ is a contradiction in terms. Meanwhile economic models are becoming obsolete—one large Asia-Pacific bank lost 4 billion dollars when applying interest-rate models with incorrect assumptions and data-entry errors. Negative market developments can cause ripple effects throughout entire organizations.
5. The Risk of Bias
Biases are becoming more evident. Every risk decision is subject to bias, McKinsey points out. For instance, credit offers—even when following standards—embody their own judgment calls. “Some energy utilities are trying to eliminate bias by redesigning the processes they follow in making major investment decisions, for example,” says McKinsey.
6. Cost-Savings Pressures
Cost savings pressures will continue. Banks continue to experience a steep reduction in margins. Risk functions need to pay close attention to costs, ensuring that profits and losses remain stable.
McKinsey further explains how risk functions can follow lessons that banks have learned, here.
Innovate or stagnate. As the definition of risk evolves, finance leaders need to be ready to adapt to changing environments and take full advantage of the promises of digital transformation. Yet, the complexity of this transformation, amid geopolitical uncertainty, demands a fresh look at how businesses interpret, prioritize, and navigate risk with data.