How financial institutions can leverage operational resilience to balance digitization with customer demand

Financial institutions with a solid capacity for operational resilience stand a better chance dealing with unexpected disruptions.

In brief

• Operational resilience is key to managing risks emerging from rapid digitalization, evolving ecosystems and potential cyber threats, in addition to fulfilling customer expectations.
• Investment in operational resilience, though challenging, can lead to increased stakeholder confidence, continuous innovation, cost optimization and efficient risk management, promising valuable returns and increased efficiency.

With today’s complex banking systems and evolving digital environment, financial institutions (FIs) increasingly come face-to-face with escalating operational complexities. These complexities result in unexpected system outages because of increased cybersecurity threats, rising dependence on third parties and ever-increasing customer expectations. These issues demand that FIs build their capacity for operational resilience, in order to quickly adapt and restore the critical operations of important business services, in the event of disruptions.

In 2021 the Basel Committee introduced the Principles on Operational Resilience, setting the global regulatory standard for operational resilience. Operational resilience revolves around the concept of accepting the inevitability of disruptions and strengthening the capabilities of FIs to identify, adapt, recover, and learn from disruptions. This forward-looking strategy prevents customer harm and maintains industry trust, thus safeguarding an FI’s reputation with its customers, regulators and industry stakeholders.

However, one might question how operational resilience is linked to business continuity and its relevance in the context of today’s age of digitization. Business continuity involves identifying an FI’s most crucial operations or services as well as the threats that could disrupt these services, and developing strategies to ensure that these services continue during and after a disruption. Operational resilience takes this a step further: it goes beyond merely protecting single services or operations and looks at the broader picture, considering the entire ecosystem within which the FI operates, including its third parties, IT infrastructure, customers, and even its reputation. Operational resilience recognizes the interconnectedness of FI’s and the increased complexity of potential threats.

An uptick in noticeable operational disruptions among FIs has led to an increased emphasis on the criticality of operational resilience, marking its importance as high as that of financial resilience. Key influencers such as rising client expectations, increased operational complexities, rapid technological advancements and the evolution of regulatory expectations have played a substantial role in amplifying this requirement.

On that note, Bank Negara Malaysia (BNM), the nation's central bank, has exhibited a clear understanding of this crucial requirement. To promote resilience within the financial sector, BNM integrated guidelines to tackle operational disruptions into their Business Continuity Management (BCM) policy document. Recommendations such as conducting business impact analysis and deploying risk mitigation strategies in this document are evidence of BNM's progressive move toward a more resilient financial sector.

Investigative reports of incidents occurring across the region, like the data centre outage experienced by a significant FI in Singapore, further underline the importance of operational resilience in maintaining business continuity and customer trust. This incident demonstrates why comprehensive supervisory evaluations of FIs' operational resilience and timely updates to crisis management strategies are crucial for these institutions.

Malaysia may currently lack a standalone Operational Resilience policy document, but the integration of guidelines into existing policies showcase a significant initiative among the regulators in the ASEAN region. This progressive inclusion only validates the importance of operational resilience in the rapidly evolving landscape of the financial industry.

Here are the significant benefits that FIs can realise by adopting operational resilience:

• Increased stakeholder confidence: By taking operational resilience positions, FIs demonstrate that they are reliable market leaders, thereby boosting investor, shareholder, and customer confidence, as it assures the safeguarding of investments, reflects strategic foresight, and provides for reliable customer service even amidst disruptions;
• Innovation: Operational resilience accelerates innovation in FIs by fostering adaptability, enabling the swift adoption of new technologies, allowing agile strategic planning, and cultivating a culture that embraces calculated risks, resulting in a vigorous and innovative approach to business transformation and growth; and
• Cost optimization: Enabling proactive risk management and process optimisation significantly reduces the financial impact of potential disruptions, leading to cost-savings, enhanced operational efficiency, strategic fund allocation, and the boosting of stakeholder trust.

Cultivating an operationally-resilient financial sector in Malaysia requires teamwork from all stakeholders. Regulators, financial institutions and essential technology service providers must each play its part, to ensure standards are upheld, vulnerabilities are mitigated and a culture of resilience is practised.

In summary, the advancement towards operational resilience undoubtedly presents a multitude of challenges for all stakeholders. However, the potential upside on this investment, the improved stakeholder confidence and increased operational efficiency make this journey not only necessary but deeply rewarding. As FIs refine and realise this goal, they will be better prepared to navigate the complexities of our ever-advancing digital world, proving that a resilient operation, in turn, fosters a resilient economy.