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.
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.
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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