A former insurance CEO once said that if you want to
understand risk in financial services, you should start by looking at the
products you are offering. I have been exploring how incumbents in financial
services, and specifically risk management, should change to embrace FinTech. Inevitably
then the subject of ‘digital transformation’ comes up. I have been speaking
with various colleagues and friends recently and I realised that there are rather
different forms of digital transformations with different implications for risk
management and the business. Here is my take on the various types.
1.
Data-driven
Someone in the business takes the initiative and starts collating,
curating and using the many data sources in the business to address specific
analytical issues and enhance the quality of decision making. This represents a bottom-up transformation
with potential transformational features.
In this case, buy-in is unlikely to be an issue. The main risk
management challenge may arise from the scaling up of this initiative. For example,
scaling up may involve using external data rather than internal data or
bringing new technology to store the data, e.g. a data lake, which needs to be integrated
into existing systems. It is also important that the consideration of
analytical issues in the business factors in the need to maintain (and enhance,
where necessary) an understanding of the risk profile of the business. For
example, if additional data allows the business to modify its underwriting
approach in a significant way, you should also consider how the (different)
exposures would be monitored. There are a couple of examples here.
2.
Enhancing Customer Journeys
This can be about how customers are serviced, given their existing
journeys, and might
include enhancing the front-end applications or rolling out new IT equipment to
service customers. Alternatively, the transformation may be about changing or
enhancing aspects of customer journeys. This might include, for example, introducing
chat-bots as part of customer journeys (e.g. claims management) or applying an
artificial intelligence-based tool to a specific process (e.g. underwriting).
This type of transformation has become the most visible form
of digital transformation thanks to the various accelerators that incumbents in
financial services have created. The challenge of buy-in is typically addressed
by specifying that the accelerator should partner external providers with
business leaders for whom the technology may be relevant. The impact on the
risk profile of the business is also dependent on the specific transformation
and should be considered from the outset.
3.
IT-enabler
There are cases where the legacy systems become the main
challenge and where the adoption of cloud-based services can be part of the
answer. There are several approaches here, ranging from incremental steps to a ‘big-bang’
approach. One interesting idea is focusing on reducing the functionality of the
legacy system and replicating that outside using new technology.
These transformations may be motivated by concerns about
operational resilience in the short term but might also support the transformations
outlined above and enable more effective risk management.
4.
Digital ‘Non-transformation’
This involves applying new technologies in the context of a
new product line where there is no transformation as such. This clearly avoids
the transformation in the short term but it can also provide the business with
the means to build confidence in specific technologies (AI, blockchain) and the
capability to execute and bring on board new technologies.
These types of digital transformations are not mutually
exclusive, but it is important to be clear that they are different. Equally,
they are not substitutes for each other and
the real challenge is prioritising between them. This will inevitably vary between
businesses, though I believe that there are standard considerations shaping the priorities such as the need to change the culture in
order to mobilize the business for the digital era and the state of the core IT
infrastructure, including the need to leverage technology as an enabler.
What do you think about these categories?
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