Bon appétit: banks get risk appetite right

Banking is a risky business. Financial institutions are selling trust – difficult to earn and, once lost, very hard to regain. Consider, for example, the fraudulent accounts scandal at a major West Coast bank, which is still trying to rebuild trust years after the transgression took place.

To avoid discredit, unexpected penalties and personal jeopardy to executives accountable for misconduct in their responsibilities, banks build risk appetite – the amount and type of risk they’re willing to take to meet strategic objectives – into their data metabolism, with heightened alertness to ensuring trustworthy outcomes in the regulated environments in which they operate. Their data strategy must be robust, rigorously tested and vigorously challenged in technical and architectural review processes, demonstrating the business value of an objective – increasing hyper-personalisation initiatives, pushing out end-to-end automation or cross-selling services, for example. Review processes aren’t a one-time effort, either, but rather occur from idea initiation to implementation, and then forward on an ongoing basis.

One issue, though, is that banks’ risk appetite, determined in large part by their sophisticated data strategies and processes, has often kept them from adopting leading-edge technologies. For instance, many of them have been slow to adopt cloud computing, open banking and blockchain technology.  

Manage trust and reduce risk with IT services partners

In an increasingly digital world – one where not only fintechs but non-bank financial institutions are new competitors – many traditional banks would benefit from having support to ensure that they can embrace and fully maximise new technology-driven opportunities, while staunchly complying with industry auditing standards and regulations. The consequences of not doing so can be devastating: recall that 11 financial institutions using apps such as WhatsApp and iMessage were fined more than $2.5 billion for violating recordkeeping laws by failing to maintain and preserve electronic communications.

An IT services vendor with expertise in the banking industry can be a valuable partner in managing trust and reducing risk for financial institutions. DXC Technology is such a vendor. Our expansive knowledge about the role of technology in creating business value in the industry can be invaluable.

Take the example of a bank that may be unsure whether it makes more sense to simply refresh an aged, on-site data warehouse, though that means forfeiting a strategic play by not embracing new technologies; or instead to do a lift-and-shift, which gives the benefits of a cloud consumption model but retains the clunky database; or, finally, to take on a top-to-bottom technology refresh as part of a move to the cloud. DXC can leverage its vetted relationships with companies such as Snowflake, which provides a scalable and flexible data warehouse solution built on a cloud-native architecture, and Databricks, which provides a cloud-compatible open analytics platform, to deploy proven operating frameworks for a wholesale technology refresh on the cloud. As part of this, DXC would provide a risk appetite breakdown of costs in relationship to the value of refreshing the technology on the cloud, take on the risk of stepping up to a new application and platform (from design phrase through to build and subsequent deployments) and provide support and training for bank administrators who will manage the solution in the long term, as well as warranty and maintenance as required.

Determining risk appetite for emerging technologies

It’s equally important for a services provider to support a financial institution by considering the risk of applying truly emerging technology versus its likely benefits, doing a thorough, data-informed review to determine whether there is a positive return from the deployment, and managing change functions to embed any newly introduced program processes into the bank’s operating model.

Consider how DXC might help a bank make smart choices when it comes to exploiting accelerating Generative AI technology. We’ve reached the point of convergence between mature analytics skills, specialised hardware platforms, neural networks and new types of algorithms to drive millions of GenAI processing activities at high speed, and banks question where this can fit in their business to make a substantial difference. Here’s the point where a trusted partner brings the proper questions to the risk appetite table, from considering the cost of training data models to the potential risk of leveraging foundational models in the cloud as it relates to potentially delocalising customer data. Determining the answers to such queries quickly make it very clear what – if any – use cases align with the bank’s risk appetite.

On the other hand, an experienced service provider partner can help the bank finesse a proper and proven business case for applied AI in a regulated environment – for use in code generation, for example, which provides up to a 40 per cent boost in productivity. Such opportunities are an extension of cases of applied AI that are already in use at banks, such as pattern recognition, to identify unusual transfers or payments.

Banks should not underestimate the value of working with partners who can bring the benefit of knowledge and experience gained from working with multiple companies in the sector to their own risk appetite-related explorations. DXC is positioned to demonstrate its ability to provide everything financial institutions need to instantiate platforms and fast-forward flexibility – and do it at scale when and where it makes sense for the organisation’s risk appetite profile.