Technological innovation in financial services is essential to staying in the game. But so is a considered approach to managing risk, writes Kevin Moodley and Christopher O’Flaherty from BDO South Africa.

Fintech, regtech, wealthtech, proptech – it feels like every industry is looking to leverage technology to differentiate themselves, and with good reason. As a disruptive market force, technology can level the industry playing field, allowing new challenger brands to compete meaningfully against established ones.

But new technology comes with risks and needs to be implemented with a strong business case and safety nets to be sustainable.

The stakes are only increasing as the world becomes more reliant on the Internet of Things (IoT).

In 2015, for example, Ukraine’s power grid was brought down through a spear-phishing attack leaving more than 230 000 people in darkness. In 2010, a malicious computer worm, Stuxnet, attacked Iran’s nuclear program by causing its fast-spinning centrifuges to tear themselves apart.

In extreme cases, hackers may even begin to target medical devices like pacemakers or insulin delivery devices via NFC or wireless to hold victims to ransom (or simply because they can).

Sometimes, however, the bigger risk is not taking an opportunity.

Imagine, for instance, that a new financial services competitor just launched in the market. They’re a digital-first operation that uses AI and machine learning to automate many of the tasks you perform manually. This helps them keep costs down. They’ve also designed their ecosystem so that their customers are in control, in touch and connected to their products and services through multiple touchpoints.

This keeps them relevant. And since innovation never stands still, they’ve built an agile way of working so they can respond to new trends in the market quickly without compromising security and regulatory compliance.
This is the kind of competitor that financial services businesses need to be ready for, and it highlights the urgency of innovation and forward-thinking during a time when many companies have realised that remote working and product delivery isn’t just viable but sometimes preferable.

This is where many businesses get stuck. They want to capitalise on the opportunities of emerging technology but are conscious that there are risks and costs too.

Sometimes, this comes down to an internal struggle between key decisionmakers: the technical team want innovation immediately, the finance team want to know why it costs so much, and risk team wants months to assess and mitigate any negative impact on the business.

In the middle sit the board of directors who must discharge their governance duties and mediate between all the stakeholders. It’s not always about role and function.

Sometimes it’s simply about language and communication: technical teams need to articulate their proposition in common business language, and risk teams need to understand that mapping out all the risk scenarios for a technological investment could take far too long that a particular innovation will be out of date before it even it begins.

This is why it’s crucial to find a “multi-lingual” partner who can speak business, technical and risk. There will always be limitations to adopting a single point of view.

For example, we see companies in the insurance sector use drones to assess claims because it’s faster and more accurate. A technical partner may push the adoption of this technology because it’s innovative and future-fit. A finance partner may look at how much cheaper certain drone-makers are regardless of risk. And a risk person will point out that while certain vendor price points are more attractive, these vendors build their software so that sensitive data gets sent back to the manufacturer’s head office.

Risk without innovation can cause a business to stagnate; and innovation without a risk oversight function can lead to data, regulatory and reputational losses if not managed carefully. An external partner, however, with cross-sector expertise can help these business functions collaborate to make the best decision going forward.