Digital banking transformation creating new systemic risks

Digital banking transformation programmes are creating a new wave of operational and systemic risks for which the industry is ill-prepared, warns UK Finance.

Sustainable Financial Services in the Digital Age, a joint report from UK Finance and Parker Fitzgerald, comes only days ahead of the introduction of the General Data Privacy Regulation (GDPR) and highlights the need for firms to consider their exposure to risk and operational resilience in today’s digital age.

As the industry races to capitalise on advances in open banking, artificial intelligence, cloud computing and distributed ledger technology (DLT), a failure to address emerging risks, as well as internal risk management processes, could lead to operational, as well as systemic, threats across the sector, warns the study.

The report calls on the industry to collaborate with technology suppliers as well as domestic and cross-border regulators to create a risk framework that embraces the benefits of digital transformation with the following recommendations:

    • Placing the safeguarding of data at the core of sustainable digital finance
    • Closing the gap between incumbents’ digital aspirations and the reality of legacy IT estates
    • Reviewing the integrity of fintech ‘component solutions’ being integrated into the supply chain
    • Matthew Hayday, leading partner, global technology services at Parker Fitzgerald comments: “To safeguard their organisations through the digital transformation journey, financial firms need to close the gap between their digital aspirations and the reality of their legacy IT estates. Key activities include reducing reliance on legacy systems, de-cluttering redundant systems, and using analytics to predict and quantify the impact of non-financial risks.”
    • The report coincides with the publication of a survey of over 400 C Suite executives at major banks around world conducted by the Economist Intelligence Unit on behalf of Temenos which finds that just under half of those polled believe that a cyber-attack will cause at least one systemic bank failure in the next two years as the digital transformation of the banking industry continues to automate the sector.
    The report warns that the legacy spaghetti that forms the core to many banks’ IT system is not fit for this new future. It finds that while 71% of banks are focusing their digital investment on cyber security, only 17% are thinking about the risks from third-party relationships as a result of open banking.