Digital transformation and risk appetite in the financial services sector

Digital transformation is currently a much-discussed topic in many organisations, particularly in the financial services sector, and many organisations have made digital transformation an integral part of their business strategy.

They are either planning to implement or have already implemented emerging technologies (e.g. blockchain, big data analytics, the Internet of Things, cloud computing, artificial intelligence, augmented/virtual reality, drones, etc.) to be able to meet changing customer expectations, boost their business performance, and create a business advantage over competitors. The implementation of emerging technologies encompasses a whole range of new and digital risks, it will therefore inevitably change the behaviour of organisations in terms of how many and specifically what risks they are willing to take.

Digital transformation affects risk appetite

The ‘PwC 2019 Risk in Review Study’ discloses that 63% of organisations globally are actively balancing risk management and risk appetite during the implementation of digital initiatives. A total of 21% are planning to do so within the next two years.

These statistics show that more than 80% of organisations are revising or will revise their risk appetite due to the implementation of digital initiatives. Integrating emerging technologies introduces new digital risks, while reducing operational losses through automation and ‘traditional’ risk appetite statements often do not adequately reflect this change. As a result of additional Corporate Governance requirements in terms of the role of the Board of Directors in risk oversight, the Board of Directors must be able to rely on an effective risk appetite framework. A framework that allows the Board to both monitor its risk exposures and make risk-based decisions effectively while transforming digitally.

The survey also indicates that 46% of organisations globally are willing to take greater risks than before implementing digital initiatives, 37% stated that there is no impact on their risk appetite, 7% are willing to take fewer risks than in the past, and 8% are not sure whether the digital initiatives are having an impact on their risk appetite at all.

What impact has your organisation’s digital roadmap had on its risk appetite?

Source: PwC 2019 Global Risk, Internal Audit and Compliance Survey

These figures imply that over 50% of organisations have changed their risk profiles in the course of implementing emerging technologies.

The fact that organisations are willing to take more risks that come with the integration of emerging technologies, could be due to the following factors:

• Reduced operational losses: The automation of processes, in particular repetitive and administrative tasks and controls, reduces human errors.
• Reduced compliance related losses: Emerging technologies enable surveillance capabilities to detect inappropriate behaviour of employees such as fraud, for instance.
• Reduced credit losses: Analytical technologies are able to process larger and more complex data bases, which in turn improves prediction of credit defaults and increases the accuracy of credit models.

However, some organisations (7%) stated in the survey that they actually want to take fewer risks because of the digital transformation journey. The explanation could be that these organisations need to keep up with digital trends in order to remain competitive but are still uncertain about how to address the new digital risks.