How risk analysis transforms the financial sector

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By Conor Larkin, Management Consultant Harnham

Today’s businesses and financial services face enormous pressure to operate efficiently and cost-effectively, while simultaneously combating cybercrime, improving operational and cyber resilience, and meeting changing regulations.

For this reason, the financial sector is becoming a powerful driver of innovation and is beginning to seize the opportunities offered by new techniques and disruptive technologies such as risk analytics and AI to improve its systems and capabilities.

Financial institutions are rich in data and information assets, making them the perfect candidate for using models and analytics to leverage that data to, for example, make more informed decisions, streamline process and calculate future risks.

In recent months, Harnham has witnessed a renewed interest in risk analysis in the financial space. According to research, the risk analytics market is expected to be worth around $54.95 billion by 2027. This buzz can be attributed to a perfect storm of factors coming together at the same time.

Growth in business procedures and increase in deliverables are driving the demand for techniques such as risk measurement while increasing incidents of cyber attacks combined with increasing digitalization is further catalyzing the risk analytics market. Not to mention the impact of different macroeconomic elements, such as the exit from the pandemic, the vestiges of Brexit and the rise in inflation rates.

All of these factors have combined to position Risk Analytics and its services not only investment-worthy for businesses and enterprises, but also vital for financial growth and stability. Investing in security is no longer a luxury reserved for big companies with deep pockets, it has become an industry-wide concern.

The new digital world

The widespread digitization seen across industries, spurred by the unprecedented shift to remote and cloud-based working, has re-emerged concerns about security as an issue affecting entire teams. Digitization provides growth opportunities for businesses, but if not managed securely, it can provide opportunities for criminals to be exploited.

Because the change in work practices has been so sudden, some may still catch up on the safety side and not work as safely as they could be.

Headlines highlighting a ‘fraud epidemic’ have been doing the rounds, with reports of fraud and cybercrime in the UK rising from 3,983 cases to 8,614 in a year. Fraudsters are becoming more inventive and quick action must be taken to stay one step ahead.

Giving fraudsters a hard time

However, financial institutions are not just resting on their laurels, they are busy fighting back by innovating and investing in their fraud and risk analysis departments. Fraud analytics plays a vital role in any business when it comes to profit and loss, and risk analytics strives to understand the drivers of fraud in order to ultimately prevent it.

Previous fraud detection systems were designed around a set of rules that modern fraudsters can easily circumvent. Innovations such as Machine Learning (ML) have provided solutions to this through its pattern recognition capabilities.

Systems can be programmed to sift through large sets of data to detect and flag anomalies, irregular activity, and identify potentially fraudulent financial transactions, which will then be reviewed by a human professional. This not only speeds up a long and mundane process, but also reduces the risk of human error.

Additionally, the financial industry recognizes the value that risk modeling and ML can bring, which goes far beyond security. Analytics practitioners have a wide range of capabilities and techniques, such as “predictive analytics”, which provides advanced models to forecast and predict the future, and “prescriptive analytics” which uses machine learning algorithms to provide interpretations and recommendations to better inform decision-making.

These techniques not only enable financial firms to gain deeper and more valuable insights from their data, but also to deploy these processes at industrial scale.

Unregulated products emerge

The influx of new, unregulated products and technologies into the financial market has added fuel to the fire for opportunistic fraudsters. 2.3 million people in the UK are now thought to own a crypto asset, creating a playground for scammers looking to abuse the unregulated technology.

As new products and unregulated technologies such as crypto-assets, decentralized finance and non-fungible tokens (NFTs) rapidly expand into the market, regulators are constantly racing to catch up and may find themselves falling behind. obliged to establish rules. and settlements as they arise.

Data reveals a staggering £146,222,332 has been lost to cryptocurrency fraud since the start of this year, and unless regulators are able to keep up with the ever-changing nature of crypto, it will increase.

As a result, we expect to see many regulatory changes come into effect, to strengthen risk protections for consumers and also within financial institutions. Regulation drives demand in areas such as risk analysis and drives policy changes within departments.

Finance teams know better than anyone what’s at stake when it comes to security and the importance of staying one step ahead. The sector is fighting the rise of cyber threats by thinking outside the box and investing in innovative technologies such as Risk Analytics.

At the same time, the rise of innovation and digitization within the financial industry presents risk departments with new opportunities to better measure and mitigate risk and deploy automatic algorithms to automate tedious and mundane processes. The year promises to be exciting for risk analysis in finance.

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