In the financial services industry, the changes associated with digital transformation are far-reaching.
Banks have witnessed a marked decrease in branch usage as digital banking tools and banking-as-a-service (BaaS) companies have increasingly become the norm and the drive to adopting more and more sophisticated digital technologies is moving from ‘nice to have’ to ‘must have’.
Fintechs are tasked with ensuring the security of the digital products and subscription services they offer so that they are not plagued by fraud and other malicious behavior.
And mainstream businesses are getting more comfortable with adding financial products to their catalogue.
In order to adjust to this new reality, organizations must continue to adapt, and adapt quickly. More importantly, they must identify and manage the risks they face in their digital transformation journey.
What Does Digital Transformation Entail?
In simple terms, digital transformation involves adapting with the times. This typically means adopting new technology, either as a replacement for manual services or for older tech that might now be outdated.
In the fintech space, an API-first approach is critical. This is where BaaS platforms come in.
BaaS providers are playing a key role in the finance industry’s digital transformation and offer unprecedented transparency. Specifically, they allow banks to further extend their reach so third parties can use them to launch new services.
The end-to-end BaaS process is ideal for modern and agile digital businesses that want to get with the times, so to speak. Fintechs can penetrate the BaaS space to share their data and infrastructure with consumers in the most secure manner, helping the very people they serve become digital natives.
An API-first strategy sounds efficient, right? And it is—but there’s more to it than that.
While organizations can leverage BaaS to access unprecedented banking solutions, the benefits don’t end there. There are a number of risks linked to online banking and the digitalization of finance in general. BaaS can help to mitigate these risks.
Which Fintech Risks Are Most Prevalent in the Digital Age?
Many IT departments struggle to find a sense of balance as they adopt emerging tech. How can community banks, for instance, deploy new digital tools quickly and maintain compliance with basic risk management frameworks?
The first step is to identify the main risks they face. This article will examine three types of risks financial services organizations might prioritize during digital transformation: compliance risks, financial risks, and security risks.
Financial executives have long struggled with compliance risk—that is, exposure to financial loss and potential legal consequences as a result of not following a rule or regulation.
In other words, compliance risk consists of the legal and financial penalties that may come from failing to abide by relevant legislature and other internal or external ordinances. Here are some common examples of compliance risk:
- Regulatory Uncertainty
When the political climate is unstable, organizations might not fully grasp the compliance risks they face. This is because they might not realize which new laws could take effect.
- Data Protection
Fintechs and telecom companies must safeguard consumer information at all costs. Privacy regulations are evolving frequently, and not staying abreast of changes presents a substantial compliance risk.
- Quality Issues
All the company’s products and services must abide by a specific set of standards. Failure to comply with these standards may result in penalties.
- Conflicts of Interest & Corruption
Just as brokers and bankers must refrain from acting in their own best interest, organizations must do their due diligence in making sure their employees steer clear of bribery and fraud.
An increase in compliance ownership is paramount to addressing the above compliance risks — but what should this entail?
First and foremost, banks would do well to stop viewing their compliance departments as advisers, and instead have them focus exclusively on risk management and basic monitoring. This means stepping away from simply offering advice on rules, regulations, and laws, and instead taking an active role in overseeing the company’s control framework.
Being on the front line, applying specific processes and tools to ensure compliance, is vital. In addition, compliance departments would do well to translate various laws, rules, and regulations across all aspects of their business — analyzing how each one might translate into their operations.
To ensure compliance, banks need to assess their compliance programs on a regular basis. In addition, the company in question must consistently evaluate its strengths and shortcomings to understand its overall risk culture. This will help to ensure compliance during digital transformation. And a BaaS provider can help.
- Regulatory Uncertainty
As you likely noted above, the financial risks fintech organizations and ecommerce companies face are largely associated with compliance issues. By ensuring compliance with all rules and regulations, a financial institution can significantly reduce the threat of financial penalties.
This is especially critical for ecommerce businesses that have to deal with ever growing credit card and online fraud, as well as navigate sales tax and regulatory requirements across a range of states and territories. Noncompliance can lead to deficiencies that might not only result in penalties, but in other consequences that can severely impact operations and cash flow.
Correspondingly, a common financial risk that fintechs and banks face is the failure to invest in the right technology. Committing to a digital solution that doesn’t help to properly mitigate compliance, fraud and security issues can simply end up being a waste of money and place the organization at risk.
Again, this is where a complete and proven BaaS solution may come in.
Every time you collect consumer information or collect cardholder data to accept online payments, you face increased security risks.
We’ve already discussed the importance of digital compliance, but we can’t emphasize enough how vital cybersecurity is as financial organizations adopt new tech.
This is in large part because with less face-to-face interaction in the financial services industry, hackers have increasingly begun turning to synthetic identity fraud and even account takeovers. Banks and Fintechs can mitigate these risks by maintaining a strong internal control environment.
As the OCC reveals, “Technological innovations are helping banks comply wh the complex regulatory framework and enhance cybersecurity to more effectively protect bank and consumer data and privacy.”
BaaS platforms are one such technological innovation. And this is where digitizing internal processes may come in. Yielding more data, and using artificial intelligence to monitor user behavior and quickly identify potential fraud, can help increase security in today’s digital landscape.
By managing the compliance, financial, and security risks you face, your organization can better oversee its digital transformation. Next, we’ll summarize how the right BaaS platform can help.
Here’s How BaaS Can Help Mitigate These Risks
Using a banking-as-a-service platform to mitigate the digital risks you face will bring peace of mind to your company and protect your organization from compliance and security deficiencies.
It’s simple, really: An API-driven solution will allow your company to integrate financial services into its own brand experience — whatever that may be. It’ll take the pressure off of you, and allow the provider to leverage their expertise to put you in a position of success.
So, consider taking the weight off your own shoulders and trusting the experts. In addition to setting up your online bank, the right BaaS provider will also help you monitor your site to detect problems and fix them in real time. Protecting your organization from prevalent compliance, financial, and security issues is simply an added bonus.
While many find enabling financial services challenging, Alviere’s PCI-DSS, SOC 1 & SOC 2 certified platform makes this process easy. Please contact us with questions or for more information on we can help you in your digital transformation.