Financial institutions (FI) and fintechs face various risks that must be managed to ensure the safety and soundness of their organization and the financial system. Unfortunately, the risk landscape for banks and fintechs is becoming increasingly complex, demanding further attention from organizations. Risk Managers must prepare for today’s risks and those looming on the horizon. 

The seven major risk groups that FI and fintech companies must expertly manage are:

  1. Operational
  2. Credit
  3. Fraud 
  4. Reputational 
  5. Regulatory 
  6. Liquidity
  7. Market 

Of these, fraud is the largest and most damaging to a company’s bottom line. Reliance on the technology, processes, and organizational structures that were adequate in the past is no longer remotely sufficient, considering our shift to the digital space and increasing online presence. 

Financial Institutions’ Risk Management Challenges

There are countless examples of banks overexposed to risk resulting in their closure or near-collapse. Much of this failure can be attributed to Enterprise Risk Management’s highly labor-intensive and technical nature, making it one of the financial sector’s most challenging functions. 

In addition, asking difficult questions about the company’s activities, putting in place risk management practices that can potentially slow business growth, or transforming the culture to greater risk awareness often generates intense internal conflicts and pressure. 

Fintech’s Risk Management Challenges

The boundaries of fintech companies are gradually overlapping with financial institutions, blurring the distinctions between the two. The partnerships provide FIs with new access to leading-edge technology while fintechs gain access to larger customer bases. 

However, fintechs face unique challenges in managing risks with their hybrid nature, including risks similar to banks and those faced by the broader technology industry. Because of fintech’s exotic and wide-ranging services and applications, they open up more opportunities for fraudsters. 

  • Applications like peer-to-peer (P2P) financing platforms bring new exposures that traditional banks do not face. These platforms are often easy targets for criminals to deploy bogus apps to gain access to personally identifiable information. Fraudsters typically deploy botnet attacks, phishing, and card cracking against P2P platforms. 
  • Buy-now-pay-later (BNPL) payment options are increasingly popular with consumers and are becoming rife with fraudulent activity. BNPL platforms by Fintechs utilize complex transactions, often involving four or more transactions. This increased “attack surface” provides fraudsters additional opportunities for penetrating networks.

Finally, when fintechs were in their infancy, regulators were far less focused on their activities. However, they are under increasing scrutiny due to their growth and ever-evolving product portfolio.

Fraud is the Leading Risk

Fraud and cybercrime risk is becoming more likely to impact FIs than any other risk. These incidents are increasing in both number and severity. Fraud not only impacts liquidity and the bottom line but also erodes trust in the bank and leads to a cascading impact on the bank’s overall health. Also, fraud events are time-consuming for personnel, can result in regulatory penalties, and lead to customers taking legal action. Another indirect impact is the fear of cyber fraud inhibiting technology development and causing a dampening of innovation.

Cyber crimes can also impact the financial system in various complex and initially unrecognized connections. As a result, Financial Services remain the most targeted industry, and the increasing sophistication of criminals makes detection and prosecution increasingly difficult. So, protecting customers’ data and assets, along with bank financial resources, from breaches and loss is becoming paramount in Risk Management. 

The following examples highlight the implications of data breaches and the destructiveness of malware:

Capital One 

Over 100 million customers had their data accessed by an attacker due to a weakness in Capital One’s network. A third-party IT provider’s engineer was implicated in the attack, which resulted in a $200 million settlement by the company.

Carbanak Attacks

Beginning in 2013, a cyber fraud gang applied malware to banks, e-payment systems, and other financial service companies, resulting in a combined loss of $1+ billion. The attacks utilized a sophisticated scheme spread through internal networks with various techniques. 

New and Evolving Fraud Risks

Below are some expected new and evolving fraud risks likely to impact financial institutions and fintechs:

  • The possibility of a severe and widespread attack could erode confidence in the Financial Services sector to create financial instability. One scenario is an attack broad enough or debilitating to one or multiple large institutions that it could create liquidity issues across the entire system. 
  • On the heels of the pandemic and the unprecedented increase in fraud, while there may be some slight leveling off in the near term, expectations are for fraud risks to remain elevated. 
  • The continued blending of FI and fintech, and reliance on new technologies and service models, will likely lead to greater use of third-party IT providers, opening up new avenues for fraudsters to attack banks.
  • New AI-based fraud schemes, including utilizing deepfakes for synthetic identity fraud, may create additional risk pressures on banks.

End-to-End Financial Fraud & Risk Management

For financial institutions and fintechs, Risk Management is becoming increasingly difficult because of technological advancement, market, and societal volatility, blurring of lines between industry types, more sophisticated fraudsters, and increasing regulatory requirements. Trying to manage risk through legacy systems is no longer sufficient – new applications are required to automate and closely monitor your Risk Management environment. 

With a continuous risk monitoring framework and system, your organization gains the needed horsepower. It is a critical tool in monitoring your fraud risks, identifying significant uncontrolled risks, and prioritizing audit and risk management procedures for timely mitigation. 

With self-learning, AI-assisted technologies, combined with traditional business rules you control, your Risk and Fraud teams can more timely and cost-effectively monitor your fraud risks.’s comprehensive fraud solutions provide financial institutions and fintechs with a robust application toolset to improve Enterprise Risk Management. To learn more about our enterprise fraud applications, please contact our experts today for a free demo.

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