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June 10, 2022

HIGHLIGHTS

  • Banking and financial services organizations have mediated between sources of funds and borrowers, and face two-sided risks.
  • TCS’ Global Financial Leadership Study reveals gaps and priorities in banks’ risk assessment capabilities.
  • AI and shared services can provide the necessary flexibility and adaptability for effective risk control.

 

An expanding role: Risk takes center stage

In recent years, finance leaders in banking and financial services organizations (BFS) have expanded their role to help steer strategic business initiatives like digital transformation. Risk evaluation too continues to rise in priority for finance leaders. While controls have long been central to the finance function, recent geopolitical and supply chain challenges have highlighted the importance of incorporating broader risk management within financial planning and analysis (FP&A) processes.

Volatile business conditions, undesirable as they are, present the opportunity to evaluate and adapt risk and controls processes. From time immemorial, banking and financial services organizations have quintessentially mediated between sources of funds and borrowers for those funds. Implicit to their mediation function, BFS organizations navigate varied forms of financial and non-financial risks to ensure adherence to their obligations and that of their borrowers.

Two-sided risk: Identifying the gap areas

To manage these two-sided risks, they put in place sufficient checks, balances and controls within their business ecosystem. And for a long time, these have been sufficient. Now, however, many finance teams within BFS firms require greater flexibility and more robust modeling to better address potential business impacts. According to TCS’ Global Financial Leadership Study, there is work to be done to improve adaptability within risk and control functions. The study surveyed 750 CFOs and senior finance leaders from across the globe, with annual revenue of at least $5 billion, to discover how they are transforming financial planning and analysis processes for high-change environments. Banking and financial organizations accounted for 75 (10%) of the total respondents across 14 sectors.

Assessment capabilities: Central to the idea of greater adaptability is the notion of risk itself.

Finance leaders have typically used traditional risk measures of inflation, pricing, product mix, labor costs, and perhaps political and economic stability for more remote portions of the globe. The past two years have broadened awareness of risk calculation and forecasting implications. Still, 68% of BFS respondents surveyed report they can consistently identify sources of risk without significant error, just slightly lower than the 71% of total respondents who reported the same. This slight gap widens when it comes to overall risk assessment capabilities—only 43% of BFS organizations report having them to a significant or full extent compared to 54% of total respondents.

Factoring risk: Not all identified risks carry the same weight for factoring into planning.

The likelihood of severity or occurrence of a particular risk and its potential for impact will vary significantly according to business requirements.

For example, an upcoming TCS study shows the top three kinds of events with the most negative business impact in the past two years for BFS were:

  • Economic changes such as interest rates, inflation, and exchange rates.
  • Cybercriminal events such as hacking, phishing, ransomware, and distributed denial-of-service.
  • Global political developments involving treaty negotiations, wars, global economics, and the like.

However, these BFS risk officers foresee cybercriminal activity requiring even more of their risk analysis and mitigation attention between now and 2025, relegating more purely economic factors to second place in the pantheon of risks they will be focused on. Nor will risks materialize and proceed exactly as forecast. Multiple scenarios should be considered along with the financial implications of business decisions, with clearly articulated and agreed-upon countermeasures for each response.

Rigid practices: Finance leaders should have ample flexibility to adapt to changing circumstances.

Excessive rigidity can hinder appropriate responses to shifting conditions. A lack of adaptability is already a source of unease for BFS organizations. TCS’ Global Financial Leadership Study revealed that BFS organizations ranked rigid risk evaluation practices as one of the top three concerns for the FP&A function. In a market that is likely to remain fluid and dynamic, rigidity could leave organizations vulnerable.

Rigidity may even hamper organizations’ ability to stay on top of the rapidly evolving regulatory environment, as well as to manage evolving demands. As one of the most regulation-driven industries, finance teams within BFS organizations have extensive experience with compliance-based activities.

Given the familiarity, it’s notable that 59% of FP&A teams within BFS organizations surveyed in TCS’ Global Financial Leadership Study say they have the ability to embed preventive controls to a full or significant extent, compared to just 45% of the total respondents. This is an opportunity for enhanced attention and focus, particularly considering that only 44% of BFS organizations report they have the ability to standardize compliance processes to a full or significant extent. Augmenting risk management with applicable controls strengthens organizational defenses and reporting measures, but compliance-based financial activities should complement—not obstruct—strategy-related processes.

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The path forward: Risk control is a perennial endeavor

Mainstreaming risk and control across planning and forecasting activities in BFS organizations will take significant organizational rigor and continued focus. Ideally, evaluating risk and control practices should not be considered a one-time exercise but a perennially recursive endeavor. Acquiring new capabilities may require upskilling of business and technical acumen. Scenario modelling, which is expected to play an increasingly larger role in the finance function, is in the early stages of maturity for BFS firms. Just 43% of BFS respondents report that they have these capabilities to a full or significant extent.

Many finance leaders in BFS organizations have already increased their investments in advanced technologies to make existing FP&A processes faster and more agile. In the next 12 months, 73% of BFS firms plan to harness the power of artificial intelligence (AI) and machine learning, while 74% plan to invest in data and analytics technologies. Further, many organizations see an expanded role for shared services functions—whether internal or outsourced—along with their investment in technology. Of the BFS firms surveyed, 41% of BFS firms plan to invest in technologies and competencies for shared services to shore up gaps in FP&A capabilities. Throughout the pandemic, the finance function enhanced its position as a growth enabler and strategic partner to the rest of the organization. Improving risk-assessment capabilities can help ensure that the function is better placed to protect the business.

Jm Kumar is a senior business consultant for banking and financial services with TCS. His area of focus includes finance, reporting, and compliance.

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