Evolving profiles of financial risk management in the era of digitization: The tomorrow that began in the past

• Author: Gourab Chakraborty
• Date: 01 May 2020
• DOI: http://doi.org/10.1002/pa.2034
• Published date: 01 May 2020

PRACTITIONER PAPER

Evolving profiles of financial risk management in the era of

digitization: The tomorrow that began in the past

Gourab Chakraborty

Department of Management, Institute for

Financial Management and Research (IFMR),

University of Madras, Chennai, India

Correspondence

Gourab Chakraborty, Department of

Management, Institute for Financial

Management and Research (IFMR), University

of Madras, Chennai, India.

Email: gourab.chakraborty@ifmr.ac.in

The initial phases of digitization have automatized the front-end of banks and finan-

cial institutions (FIs). This paper documents the automation of the back-end in the

current wave of digitization. In particular, it highlights the use of technology in

streamlining risk management and its potential to provide competitive advantage to

the FIs embracing digitization. For instance, automated “big data”credit scoring tools

built on predictive analytics and machine learning algorithms are employed to exam-

ine several credit propositions. This can accurately construct the credit worthiness

and risk profile of public, even without any credit history. These developments can

widen the access of credit and other financial services to the society. However, on a

cautionary note, this study emphasizes that although digitization of back-end financial

transactions carries substantive advantages, the FIs must be guarded against cyber,

outsourcing, financial exclusion, and macrofinance risks that can manifest with this

automation. In this backdrop, the need for robust yet agile regulations and supervi-

sory counsel to control and exploit the digitization towards optimal benefits for banks

and FIs and society at large, acquires salience. Furthermore, regulators and supervi-

sory authorities can mitigate the digitization risks and prevent any public fallout by

leveraging the use of digitization itself.

1|INTRODUCTION

A hypothetical economy without any alternatives and where all events

are identical over time cannot accommodate change and cannot exist

in reality. In fact, change in general and chaos in particular are embed-

ded in natural phenomena and in human civilization. Change carries

with it the notion of risk since the realized outcome in the future may

differ from the desired one. Put differently, risk is necessary for any

economic exchange. A riskless transaction puts one of the counter-

parties at disadvantage and disinclined to enter into the transaction

(Peters, 1991). History chronicles the existence of risk and its assess-

ment in the past. While assessment encompasses measurement, the

former does not necessarily lead to the latter. According to Oestigaard

(2014), in the ancient times and until two quarters ago, humans were

passive before nature and consigned the idea of future as whims of

divine forces. Prior to that, Bernstein (1998) attributed this behavior

to the absence or lack of risk measurement. At best, devoid of

quantification, risk lies in the realm of subjective opinion. In fact, a

remarkable hallmark of modern times is the proficiency in risk mea-

surement, which distinguishes it from the past.

In the aftermath of the global financial crisis (GFC) (2008),

Coleman (2009) pointed out that risk is roughly understood as the

likelihood of not realizing the goals. Despite a simple connotation as

this, the corporations around the globe are straining to recognize

advanced systems or processes to control and conduct the risk. The

issues compound in a macroeconomic, regulatory, and business envi-

ronment characterized by vulnerability, uncertainty, complexity, and

ambiguity (VUCA) (Mike Doheny, 2012).

In the following sections, this article will attempt to provide a

simple helicopter view of the risk management process and highlight

how the incorporation of digitization can remove the deficiencies and

enhance the efficiency of the process. Thereafter, this work docu-

ments the risks spawned by digitization and the evolution of the regu-

latory framework to govern this digitization.

Received: 23 August 2019 Revised: 18 September 2019 Accepted: 5 October 2019

DOI: 10.1002/pa.2034

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https://doi.org/10.1002/pa.2034