Strategic Intelligence Scanning

McKinsey & Company collaborated with the Institute of International Finance (IIF) and more than 50 institutions around the world, including banks, regulators, and fintechs, to explore critical questions on the future of risk management. They to created a report aimed to answer these questions and shares insights to help organizations navigate a digital transformation of the risk function—now and in the long term.

Data, analytics, and the digital tools to harness these things are transforming all aspects of life, including business and industry. Four main forces are behind the push to develop technology related to risk management for average organizations.

1. Customers and their ever-rising expectations. Today's consumers and businesses are accustomed to personalization through social media and to rapid fulfillment through e-commerce. They expect the same kind of near-instantaneous service and customized products.
2. Greater competitive pressure: aggressive fintechs, some prominent nonbank lenders, and early-adopting incumbents have enhanced their customer offerings, largely automated their processes, and made their risk models more precise. 
3. Cost pressures come from another direction too: regulatory constraints and low interest rates have, in many cases, brought the average return on equity below or close to the cost of capital. While these cycles may turn, the pressure is likely to remain.
4. The fourth trend is related to emerging and evolving risk types that arise from new business models. For instance, digital channels present new kinds of risk (including the greater exposure of digital assets). The rise of analytics requires risk managers to pay close attention to model risk, and the greater level of interconnectedness among businesses requires vigilance on contagion risk.

Risk systems have significant IT and data constraints. IT systems are often patchwork, which means that data quality is often poor. Eighty-six percent and 63 percent of risk managers viewed legacy IT systems and a lack of easily accessible high-quality data, respectively, as the main challenges to digitizing risk. The working group noted the contradiction involved in encouraging people to seek additional and creative data sources while not mining fully trusted internal data as a result of the challenges of legacy IT systems.

Risk leaders are inherently and appropriately conservative, given their mandate. They will need to adopt and adapt concepts like iterative design, "fail fast," and multivendor teams. Forty-six percent of risk managers viewed culture as a main challenge in digitizing. Risk staff often lack the most up-to-date knowledge of analytics and next-generation technologies that will be needed in a more digital state. Forty-three percent of risk managers saw talent as a key challenge in digitizing. The working group actively debated how to attract and retain talent both proficient in risk and comfortable with digital technologies.