The speed and scale of digitalisation in the financial services sector is contributing to the emergence of new non-financial risks, a new report has revealed.
Sustainable Financial Services in the Digital Age, a joint report from UK Finance and Parker Fitzgerald, comes only days before the introduction of the European Union's General Data Privacy Regulation (GDPR) and highlights the need for firms to consider their exposure to risk and operational resilience in today’s digital age.
The report outlines how adopting new technologies, including artificial intelligence and machine learning, cloud computing and blockchain technology, will allow the financial services sector to develop new services and platforms to significantly reduce operational costs.
However, a failure to address emerging risks, as well as internal risk management processes, could lead to operational and systemic threats across the sector.
At the core of sustainable digital finance is the management of operational risk and safeguarding of data.
For example, the growth of digital outsourcing via the cloud will allow companies to uncover new sources of efficiency, but this creates cyber vulnerabilities and emerging risks further ingrained within the business supply chain.
The report calls on the industry to collaborate with technology suppliers as well as domestic and cross-border regulators to create a risk framework that embraces the benefits of digital transformation with the following recommendations:
- Placing the safeguarding of data at the core of sustainable digital finance
- Closing the gap between incumbents’ digital aspirations and the reality of legacy IT estates
- Reviewing the integrity of fintech ‘component solutions’ being integrated into the supply chain
Dan Crisp, director of technology and digital at UK Finance, said: “Given today’s ever-increasing threat of cyber-attacks and data protection violations, it’s vital that the financial services sector prioritises operational resilience – just having a firewall simply doesn’t cut it.
“The speed and scale of digital transformation makes it essential for new technologies to be integrated safely within existing operating models while minimising risk.
“This isn’t a zero-sum game; these risks are not isolated to specific organisations and financial services firms can harness innovation while simultaneously tackling these new challenges, through the analysis of operating models and building new risk frameworks.
“The industry is working hard to develop technology and water-tight risk programmes, but only collaboration with policymakers and regulators, both domestic and cross-border, will facilitate success.”
Matthew Hayday, leading partner, global technology services at Parker Fitzgerald, said that digital transformation is “both inevitable and necessary” for the financial industry.
He added: “To safeguard their organisations through the digital transformation journey, financial firms need to close the gap between their digital aspirations and the reality of their legacy IT estates.
“Key activities include reducing reliance on legacy systems, de-cluttering redundant systems, and using analytics to predict and quantify the impact of non-financial risks.
“Of particular importance to financial firms is understanding how future regulations can affect their digital transformation strategies, how key technologies can be safely adopted within their operating models, and how their risk frameworks can be adapted to take account of new risks and threat vectors arising from cyber and technology risk, as well as data privacy and protection considerations amplified by PSD2 and GDPR.”
UK Finance represents the finance and banking industry operating in the UK, bringing together most of the activities previously carried out by the Asset Based Finance Association, the British Bankers’ Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association.