Transformation programs are all the rage throughout banking and capital markets firms. Almost 90% of banks will have launched a digital transformation strategy by the end of 2022. The largest financial institutions invest in these transformation programs, looking to modernize technology, reveal insight from their data, and dramatically improve risk management practices.
Almost 90% of banks will have launched a digital transformation strategy by the end of 2022.
For example, Citigroup will spend billions of dollars modernizing its systems and processes after "leaders had underinvested in key regulatory work and technology." Many other banks are doing the same, looking for ways to leverage modern technologies and the cloud to replace or improve these legacy systems.
These well-intentioned programs must happen, but they all face a widespread problem.
Systemically integral financial institutions face constantly changing risks. While categorically, the industry may look at credit risk, market risk, client and counterparty risk, operational risk, and calculate many risk ratios to report to the board or regulators, there's an overarching pattern. Each new risk that emerges increases the need for new and different data to manage the risk. This pattern of acquiring, managing, and using different data to manage risk repeats itself across all institutions and should be a guiding principle for transformation programs.
How are banks planning for the unknowns of new risks and new data? A simple approach is taking a client-centric view of risk management and a client-centric view of the data strategy. Firms increasingly use client-centric use cases as the North Star of their transformation strategies to better prepare for inevitable unknown risks. The quality of that strategy is influenced by varying regulations and risks, but its success largely depends on complete, accurate, and well-maintained client data. From the data collected and managed about clients to the software and tools used to engage with clients, keeping clients top of mind will guide the prioritization of transformation roadmaps and spend. But it's more than just the clients. It's also the intersection of those clients with risk scenarios.
The quality of a transformation strategy and its success largely depends on complete, accurate, and well-maintained data.
The terrible situation in Ukraine is a near-term example of this risk. How many of your clients have exposure to Ukraine, Russia, or neighboring countries? Do they have employees or operations in those areas, or do they depend on other vendors or suppliers from those regions? Situations like Ukraine are terrible and oftentimes quite unpredictable, but if we've learned anything, the data and systems used to understand these risks and client relationships must support potential situations like this. Ukraine is a very recent and real example, but there are others.
In 2021 margin call defaults by Archegos Capital Management led to firms scrambling to understand their exposure to specific investments, counterparties, and critical individual private investors. The COVID-19 pandemic exposed how quickly the world's supply chains can be stressed and the ripple effect on specific customers and industries. Today we see new investment opportunities emerging in cryptocurrencies and assets, non-fungible tokens, and new ways of engaging in virtual environments, all of which are growing in popularity with clients.
Transform your future world with your client as the North Star.
It wasn't too long ago, in 2008, that the innovation and popularity of certain financial products like credit default swaps led to a systemic credit crisis. Overnight, financial institutions were scrambling to identify details of client and counterparty relationships, holdings and exposure, and many types of risk in most major markets around the world. Was Archegos the last time an institution will get out of bounds, or COVID-19 the last global pandemic, or crypto the last new product that will be created?
By 2030, future regulatory change and scrutiny may heighten, noticeably affecting the way financial institutions’ products or services will be produced, according to a Protiviti report on the top risks of global boards of directors and executives in 2021. These evolving regulations further drive risk management's moving-target nature and the required data.
Firms must have the data, systems, processes, and people in place to properly monitor, identify, and manage risks.
While transformation programs are prevalent throughout financial services, the largest firms are making the biggest bets. The largest banks have hundreds of core systems that open accounts, monitor risk, manage compliance, and support core lending, trading, and other business functions. It’s not that these systems don’t work – they do. However, these systems are oftentimes too rigid to track new types of data, support new products, manage new risks, comply with new regulations, and stay in sync across multiple lines of business. This is where transformation programs, funded with hundreds of millions of dollars, bring forth wide-sweeping, strategic change by investing in new technology, process re-engineering, centers of excellence, and simply better ways to run the business.
Data is always at the center of transformation programs. The financial industry has made data a priority for the past 20 years. Master Data Management (MDM) systems and programs were born and implemented. Chief Data Officers started showing up across different institutions. As firms work to unlock the value of data, data programs, data governance, data standards, data quality, and data lineage all become part of our language. New technologies like artificial intelligence, machine learning, and blockchain promise to revolutionize how data can be used throughout firms and the industry. The progress and promise of data are part of every transformation program, and most are prioritizing client-centric data to make their next leap forward. The larger a bank, the more clients it has and the more data it needs to operate. The more diverse the bank is, the more diverse and interconnected those clients are, and the more risk that must be managed throughout the enterprise.
Institutions today are addressing the moving target of risk management by prioritizing client-centric data as they transform their systems, processes, and operating models. With billions of dollars of risk on the line, and hundreds of millions of dollars designated for transformation budgets, the banks that understand their clients the best will be able to dynamically manage tomorrow's risks today.
Here are seven guiding questions to help you manage client data and risk across the business.
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