- A new report from the World Economic Forum explores how the acceleration of technology in financial services is bringing new risks.
- These risks accumulate and begin to form systemic risks.
- Here are three areas of action essential to mitigation approaches.
The advancement of technology in financial services has undoubtedly been a net positive over the past decades. For businesses, technology and innovation have helped streamline operations and deliver new digital financial products and services to customers at low cost. Consumers have therefore benefited from a combination of improved access to financial services, convenience and greater selection. At the same time, as with any innovation, the increased use of technology gives rise to new risks, risks which, if left unchecked, can become systemic and undermine the stability of the global financial system.
What are these risks and how can we approach mitigation? This is the subject of a report recently published by the World Economic Forum, in collaboration with Deloitte. The report, Below the surface: systemic risks associated with technology and the continued need for innovation, engaged over 150 experts through interviews and seven virtual global workshops over the past year. Attendees included senior executives from financial services, technology companies, academia and the public sector.
As pointed out in the report, to fully understand the systemic risks induced by the technology that are developing, it is useful to start by examining the sources of risk first. That is, situations that create losses or generate uncertainty in the ecosystem of financial services. A simple example would be lagging cybersecurity tools and methods. Although not systemic in themselves, the sources of risk can accumulate on top of each other to form systemic risks.
Sources of risk can be classified into five key categories. Three of them – Economic and Fiscal, Cyber and Data, and Societal and Climate – directly contribute to the formation of systemic risk. The other two – Structural and Composition and Use of Technology – are fundamental and cross-cutting in nature.
Several pressing themes of systemic risk are emerging rapidly as the accumulation of sources of risk within and between categories increases. One of these risk themes is that of digital interdependencies. As the financial services ecosystem becomes increasingly digitally interconnected, any entity that plays a critical role in enabling financial services can cause ecosystem disruption and cascading implications. Also taking into account the consolidation of providers that offer core capabilities (e.g. cloud service providers) and complex supply chains that limit visibility to nodes in a network, one can understand the severity of the problem. risk.
Another emerging technology-driven systemic risk theme is emerging sources of influence. Social media platforms offer new opportunities to stimulate activities and behaviors that pose risks to consumer protection and market stability. Individual actors and malware (e.g. bots, deepfakes) can influence sentiment and, therefore, investment behavior and other financial decisions. Given the scope and scale of these platforms, combined with the speed of information sharing and limited protection mechanisms, the implications are significant.
Other emerging themes regarding system risks include vulnerabilities in risk models, gaps in entity-based regulation, conflicting national priorities and emerging drivers of financial exclusion. While these risks may suggest a bleak future for our increasingly digital financial system, there is also a lot of good news: strategic and immediate action can help with risk prevention, intervention and resolution. Here are three ways we should approach mitigation, ideally simultaneously:
1. Entity level efforts
Individual entities must take measures against the emergence of new systemic risks, with deep consideration for their role in the ecosystem and the relationship to each risk. While entities cannot fully resolve risk independently, responsible actions to protect one’s organization will also benefit the ecosystem as a whole.
Building on traditional approaches to risk mitigation, entities can explore new tools and applications that improve current practices. Many opportunities to increase efforts are developing – for example, the implementation of geospatial network mapping to strengthen the mitigation of digital interdependencies. It is an emerging application that enables an entity to better detect and manage vulnerabilities as they arise. Organizations can connect geospatial data with network maps to monitor their physical and digital footprints. This helps to quickly identify service disruptions or cyber attacks interfering with operations, enabling real-time response.
2. Multilateral efforts
Since systemic risks are challenges that affect the entire ecosystem, multi-stakeholder cooperation is essential to find solutions. There is an appetite and ability to expand current collaborative efforts. These can be public-private, private-private and / or public-public.
Many of these opportunities can be easily envisioned. Take, for example, multilateral scenario planning. Public and private sector actors can collectively create enhanced scenario planning exercises and develop in-depth stress tests with a broader ecosystem focus.
In addition to expanding efforts around more easily conceivable collaborations, it is also important to explore the potential of more ambitious, inventive mitigation applications. Imagine, for example, that ecosystem actors develop a multilateral financial market warning system: big tech and regulators collaborate on an advanced false information detection system with a shared live feed, which is then used for the identification of “alert events” and more broadly. market warnings. Deep learning techniques could form the basis of such a system, as they are robust and well equipped to cope with complex patterns of interaction between social networks and financial markets.
While the increased use of technology in financial services gives rise to new risks, technology is also an appropriate tool for mitigation. We have already seen this through the examples above, where technology is embedded in the entity level and multilateral opportunities described.
There are many technological possibilities to support mitigation. Yet, as the previous examples also demonstrate, we must consider that there is always a human component to the implementation of technology. To fully mitigate the risks that surface today, and those that will inevitably take shape as unintended consequences arise from even more recent innovations, collective action will be essential.
The World Economic Forum report delves into the individual and collective approaches needed for successful convergence of mitigation efforts. With strategic planning and cooperation, along with a healthy dose of optimism, technology can continue to be a powerful and beneficial force in financial services.