Technology advances in the financial services industry continue to bring tremendous innovation. But increased systemic risks come along with those gains, hurting the risk profiles of everyone in the sector, according to Megan Long (pictured), a senior consultant at Monitor Deloitte Canada focused on strategy and innovation in financial services.
Long is a co-author of Deloitte’s latest report “Beneath the surface: Technology-driven systemic risks and the continued need for innovation,” a closer look at the issue conducted with the World Economic Forum.
According to Long, new technology benefits and resulting risks are more prevalent in the financial industry than one might consider.
“The ecosystem, as we explored in our report, is really the financial services domain as a whole,” Long said. “The key players within that ecosystem not only include the … private sector players [but] … regulators and policymakers on that public sector side.”
She noted generators of technology benefits and unintended risk players include major cloud/ software-as-a-service (SaaS) providers such as Google, Amazon and Microsoft – companies that “help enable a digital financial services world” and dominate the sector globally.
“Technology has been immensely helpful to the acceleration of quantum activity and adoption of digital capabilities across the ecosystem, from a financial inclusion perspective [and more]. We know that digital capabilities and technological capabilities are on the top priority list for any private sector player within financial services,” Long said. “The flip side of that is the fact that the same investments in the pursuit of those efficiencies and the individual institutional benefits are having inadvertent risks. They’re not necessarily helpful to the ecosystem. They’re harmful.”
One of the reasons why is because technology ends up creating many more connections that magnify risk, Long explained.
“The adoption of technology has accelerated vulnerabilities in financial services, given the interconnections that the technology creates … both domestic and global,” Long said. “I would say the risk profile has really evolved in more of a negative sense and needs to be addressed as a result, which is where you get the duality of the power of technology to not only create problems but to help solve them.”
In other words, the broader use of technology in the financial center has added plenty of irony to the global marketplace.
As Long explained, the report looks at the broader financial industry, including areas such as banking and insurance, with “macro findings” across financial services.
The sources of risk are widespread, according to the report. Beyond increased interconnectivity, spotty regulatory oversight for new entities or business models, and the consolidation of entities that offer critical services are big ones. Technology deficiencies also hurt. Everything including supply chain problems, asset price volatility, spotty cybersecurity, the lack of data privacy controls and geopolitical tensions are also culprits.
One way to address these risk areas is for a focus on bridging the gap between private and public sector players in identifying and confronting risk problems, Long explained.
“A lot of it comes down to speaking a consistent language on risks. You can’t introduce complex technologies into the equation if the root [risk] problem isn’t understood,” Long said.
In other words, she said, financial industry parties involved in digital interconnectedness may have major concerns about the vulnerabilities that exist. But their public sector counterparts may not fully understand, and that is a reality that must be addressed to reduce the risks that technology brings.
“How can we incorporate open-source catastrophe modeling or complex tech solutions or innovations to help solve that?” Long asked. “One of the first steps is a reclassification and a consistent taxonomy for risk across the public and private sector.”
Put differently, the solution might involve a book or repository of the top risks that players need to be concerned about, and “it needs to be widely understood” by the regulator setting policies, as well as private sector policies putting risk mitigation and prevention tactics to work daily, she said.
Some insurtech or fintech start-ups can play a part in the solution, particularly those that focus on future forecasting and risk scenarios, Long said. One company that Deloitte said stands out in this regard is cyber analytics provider CyberCube.
“We find CyberCube is a very interesting case study, for a player that actually provides data signals and models to fuel cyber risk quantification,” Long said. She added this is useful “for a variety of mitigation opportunities” in areas including reinsurance placement, underwriting decisions in the insurance industry, and portfolio management optimization.
Modernizing data infrastructure, stress tests, revamps of risk simulations and resilience planning can also help mitigate the risks that digitization brings to global finance, Long said.
“While technology has opened many doors, it really has accelerated a lot of vulnerabilities within the ecosystem,” Long said. “But at the same time, financial services is well equipped to start preventing … and proactively mitigating those problems.”
She added that insurers, for example, might face far-reaching effects from catastrophic events in one area of the world, but risk modeling and resilience planning enables “the impacts to be mitigated.”
