Building The Risk Function Of The Future

The financial services industry has undergone significant disruption in the last decade, with increasing regulatory pressure, rapid advances in technology, and the emergence of FinTech. All of these place pressure on incumbents to act quickly. The COVID-19 pandemic has added to the challenge: Margins are being squeezed by rising credit losses, and the low-interest-rate environment is putting further pressure on profitability.

All organizations are busy reminding themselves, as the saying goes, never to waste a good crisis. Risk functions are no different. While they have often lagged behind other parts of the financial services business in their ambition and agility, there is now a growing sense of urgency to re-evaluate the future of risk management and question how it can best serve organizations in the future. As the pace of change accelerates, it may no longer be enough to be a fast follower. Risk functions that use this crisis to learn and position themselves for the future will gain momentum in the recovery and help their firms to emerge from the crisis faster and in a stronger state.

To envision the future of risk management, Oliver Wyman engaged with 40 senior risk leaders across the Asia-Pacific region, compiling their visions and opinions on how risk functions in financial services need to evolve over the next decade. We identified two persistent themes at the front of risk leaders’ minds, which are expected to dominate the risk functions of the future:

• The digital opportunity: Driving broad adoption of new digital tools to vastly expand the scope of data-driven decision-making, improve efficiency, and deliver superior customer experience

• The talent imperative: Attracting and developing the right talent for a digital future, in light of the increasing digital content of financial services work and sharp competition with FinTechs

The changes in the work of risk management imply that current operating models must evolve. Over time we expect traditional barriers to erode between analytics related to risk and that for more general topics such as pricing, customer preference, and the propensity to leave, acquire new products, or otherwise restructure financial arrangements. In some cases, particularly in smaller firms such as monolines and those with more focused commercial offerings, organizational boundaries may not exist between risk classes such as credit, market, and non-financial. Risk analytics itself will, in many cases, just be one part of the analysis conducted by a combined data science team.

However, this is not the world where large incumbent universal banks will land immediately. For larger institutions, three models are likely define the path of evolution into the future.

• Short term – Evolved traditional model

• Medium term – Tech-enabled progression

• Long term – Fundamental disruption

From our discussions with risk leaders, it is evident that larger firms have focused more on talent and organization. Smaller firms have made greater digital advances. This finding is consistent with smaller firms’ commensurately simpler ranges of product offerings making them more ready and able to implement widespread change to underlying technology .