2. Harnessing technology and data innovation
Big data, analytics, machine learning and cognitive computing can be powerful tools that help banks digitalize risk management operations and introduce new approaches to risk modeling that together reduce costs and strengthen balance sheets.
For example, analytics-based risk assessment can optimize asset and liability composition, allowing banks to better structure their balance sheets to support profitability. Analytics can also improve fraud detection and credit quality insight while anticipating problems among customer segments and within business lines. They can also enhance the analysis of credit risk by giving insights into which products and services should be offered to different client segments, limiting banks’ credit exposure in a downturn and preventing capital dilution in a recession.
Analytics can also be used to support the development of downturn scenario models, including loan portfolio contraction and expansion, evaluation and monitoring of default rates, and risk appetite modeling. In partnership with machine learning, analytics are also used by high performers to better assess money laundering risks. And many banks are broadening their use of biometrics and natural language processing to verify identities and using cognitive computing to improve transaction monitoring and investigation.
3. Partnering to reduce risks and costs
But in many cases, the application of new technologies is in parts of the business that are critical and yet non-differentiating – for example, in know-your-customer (KYC) or financial crime detection. Partnering with a managed services provider in these areas, as well as tax, financial and legal services, can be a more cost-effective option that enables banks to realize the radical cost reduction required to hit return-on-equity (ROE) targets.
Managed services providers with the right mix of technology investment, and the talent and processes to deploy them, can typically generate a greater return on investment than a bank trying to invest across all its non-core functions. And, critically, banks can free up their own resources to focus on creating the strategic opportunities that will add value and grow revenue.