Technology has always played an integral role in banking. And that’s never been truer than today.

The pandemic accelerated digital transformation in banks, which are now finally beginning to understand the urgent need to invest in technology, not just to enhance customer experience, but to achieve efficiency, cost effectiveness, and operational agility in other areas of the business – like risk management.

Digital Transformation in Risk Management

Over the past decade banks have revisited their risk frameworks to ensure there is a more defined process in place to comply with ever-expanding regulations. Many banks, however, still use legacy systems that are lacking in the functionality necessary for modern risk and compliance management. While some financial services companies have digitized these functions, the industry, as a whole, lags woefully behind.

Here are three of the biggest obstacles standing in the way of digital transformation of risk management in banks – and what to do to overcome them.

1. Lack of a risk-aware culture

The culture of an organization plays an important part in how effectively risk is managed. For risk management to be truly effective in banking – or any other industry – it must be part of every critical decision throughout the organization.

People at all levels and functions must not only understand the organization’s approach to risk but take personal responsibility for managing risk in everyday decisions.

A digital transformation can build awareness of risk by breaking down silos of people, processes, and systems. The right technology puts real-time risk data in one place where it can be easily shared, discussed, and analyzed by all stakeholders. Responsibilities are clear, and everyone knows who is accountable for what.

Embedding a risk mindset all the way to the edges of the organization offers another important benefit as well. That is, encouraging more ethical behavior, which is an especially high priority for banks.

2. Lack of resources and budget

Risk management has long been focused primarily on reacting to a risk event instead of proactively planning for future threats. As risk within banks continues to evolve, institutions have become more willing to invest in the right risk management tools to take a more proactive approach.

Budget constraints, however, still remain a factor when digitizing risk management in banking. Tighter margins combined with a need to innovate and improve business performance have turned up the pressure to thoroughly justify any technology investment.

Selling this idea to boards and C-suites can be tricky, since many of those who sit in such positions have varying degrees of awareness when it comes to risk management. Your path to success may require you to adjust your business case for digitizing risk according to the experience and objectives of each senior exec. The CFO, for instance, may prioritize a hard-dollar return on investment (ROI). Others might be more interested in the impact on people, time, or systems. The point in making your case is to meet them where they are in terms of priorities and experience.

In the end, you must define and measure the value of digitizing risk management – cost, flexibility, efficiency, effectiveness – in a way that’s meaningful enough to sway those holding the purse strings.

3. Slow outdated legacy systems

Legacy systems present one of the biggest challenges for risk managers seeking to digitize the function.

The complexity of the banking IT infrastructure can make it difficult to connect data held within various siloes and build something internally that works coherently. In addition, IT departments in general often lack the authority themselves to drive major change within organizations. IT frequently is perceived more as a function that helps “keep the lights on” rather than one that spearheads major projects.

As newer players in this space, fintech companies are unencumbered by old and clunky legacy systems. These firms have been able to marry technology and banking in many areas, from digital product portfolios to overall risk capabilities. And they are starting to gain significant ground on more traditional players in the banking industry, especially when it comes to managing risk effectively.

Sticking with old, familiar technology may seem like the easiest and cheapest solution, but it is actually quite costly. Updating a legacy system can be extremely time-consuming and – without specific risk-technology expertise – you still might not have the functionality you need to proactively manage risk.

The Time Has Come for Digitization

With the velocity of risk constantly accelerating, digitizing risk management in banking is a growing necessity that must be included within the organization’s overall strategy for digital transformation.

While much of banks’ attention to date has been on customer-focused technology, don’t forget about back-office functions.

Digitizing risk management and other internal functions at the same pace as outward-facing customer products and services will drive the greatest levels of efficiency and cost savings, both in the short and long term.

For more on Integrated Risk Management, check out our e-book, Conquering the New World of Risk with Integrated Risk Management. Learn more about Riskonnect in the financial services industry.