Strategic Approach to Operational Risk Management in the BFSI Space

Strategic Approach to Operational Risk Management in the BFSI Space

Strategic Approach to Operational Risk Management in the BFSI Space

Balaji Viswanathan, MD & CEO, Expleo Solutions, 0

Starting his career as banking professional, Balaji gradually traversed onto the technology and business transformation area within the highly regulated BFSI sector. Today, he has over three decades of experience behind him across diverse functions in the Banking and Technology realm. He has successfully applied his expertise to support various industry transformations by employing futuristic technology.

In a recent interaction with CEO Insights, Balaji shared his insights on the importance of risk management in the financial services sector, emerging trends & innovations, and many other interesting aspects. Below are the excerpts from the exclusive interview –

What are your thoughts on the current operational risk management landscape within the financial services ecosystem?
Despite the recent tech advancements that have been the force multiplier for the financial services industry’s exceptional growth lately, business and technology officers realize there is still much to be done in proactively managing financial and operational risks, especially for cybersecurity, credit management and the kind of controls being implemented. Leveraging modern-day technologies has been a real game changer for every BFSI organization in this regard, enabling them to store and analyze data in a secure and orderly manner. However, companies must make sure to maintain the quality of data to precisely identify the risk parameters. In terms of strengthening cybersecurity practices, although large institutions are taking the help of technology providers to curb the security risks, small banks and micro-lending firms that need more capital to use such cutting-edge technologies face much difficulty ensuring that their data remains secure. On the other hand, large corporates are facing more challenges related to integrity than data. Thus, in terms of managing the risks, I believe the financial services industry is now at a very interesting phase, as we move from the bottom of the pyramid to the top.

Elaborate on the importance of effective risk management for today’s business leaders.
Risk management is one aspect that most CEOs today focus more on than business growth. This is because, if not done effectively, it can ultimately result in the business license being cancelled by the concerned authorities. Over the past decade, the number of penalties levied on businesses and the fraud losses incurred by customers have grown by over 1600 percent. Thus, regulators are now more vigilant than ever before about businesses being compliant with all the needed policies and frameworks. While compliance is just one side, the other is the loss of reputation due to the organization not having an effective risk management strategy in place.

Tell us about the recent innovations that are assisting BFSIs in their risk management journeys.
Currently, there is a lot of innovation and R&D around
creating LLMs to identify suspicious transactions and customer profiles. Also, it is relatively easier to create social profiles and identify emerging trends in India than in other countries. Thus, we are witnessing many technology products being launched to assist the BFSIs in their customer assessment and transaction monitoring process. While these AI-integrated products and solutions are indeed helping BFSIs to a great extent, the emergence of Gen AI and its ability to analyze both internal and external data sets has proven to be revolutionary for the finance industry in effectively managing risks.

How are BFSIs leveraging AI/ML to mitigate operational risks and challenges?
Of late, AI/ML technologies have entirely disrupted how most banks and other financial institutions approach integrity-related risks and challenges. Unlike a few years back when the approval process for a credit application took days, today, the entire process is streamlined in such a way that it can be completed in a matter of hours. However, the KYC process is taking a lot of time lately due to BFSIs being extra careful to keep a check on the risks relating to money laundering. But in terms of analyzing the credit risk of the customers, AI/ML are enabling the companies to efficiently categorize the customers by analyzing their historical data such as background, past transactions, income and many other parameters.

AI/ML enables financial institutions to efficiently categorize customers by analyzing their historical data, such as background, past transactions, income and other parameters.

Additionally, these technologies are helping BFSIs create a database of suspicious and money laundering transactions, enabling them to be better prepared by better understanding of how the miscreants use the banking system to launder unaccounted money. Most importantly, the industry is now looking at risks from the overall banking system point-of-view rather than from an individual bank's standpoint. Thus, it will be critical for the industry to properly train the AI models and create the necessary LLMs to effectively identify the money trails and analyze transactional data across statutory authorities, regulators and the BFSIs.

What does the future hold for fraud and risk management in the financial services ecosystem?
In terms of fraud and risk management, we are seeing significant investments being made by the BFSI companies in the area of fraud prevention. Also, there is a lot of innovation happening by the financial service organization from a cybersecurity standpoint to not only ensure the security of their in-house systems & applications, but also prompt the customers about potential threats and phishing transactions. As a result, we are seeing a heightened adoption of forensic analysis by the BFSI sector to identify potential frauds and analyze fraudulent transactions. As we advance, I expect this to increase even further, with many products and solutions being introduced into the market. Additionally, there will be a lot of focus on the larger treasury risks with cryptocurrencies and other forms of securities that are available now. Further, with the number of transactions increasing with each day, BFSIs will look at new, innovative ways to build scalability and resilience across their entire processes.