Technology in financial services: Saviour or destroyer?


Technology in financial services: Saviour or destroyer?

Tracking technology-induced risks to global finance

Deloitte research has trained a spotlight on insidious risks that have accompanied the adoption of new technologies in financial services. Ignoring these risks presents the danger of financial system collapse; finding their sources is the key to mitigation and, potentially, salvation.

Digital transformation entails unforeseen risks

The abundant technology benefitting our global financial system is also capable of consuming it. Systemic risks have sprung up right alongside technological advancements, and have taken root. The sheer velocity of digital transformation is enough to raise red flags, but a host of other developments are contributing to risks in financial services: increased value-chain disruption; augmented regulatory pressure; heightened focus on environmental, social, and governance (ESG) matters; democratisation of data; and increased malicious activity.

Deloitte and the World Economic Forum (WEF)’s recent report, “Beneath the surface: Technology-driven systemic risks and the continued need for innovation”, pays exhaustive attention to technology’s push-pull relationship with the financial world. By exposing the many short- and long-term risks affecting every element of finance, the report’s ultimate aim is to forecast the implications of technology’s increased use, arriving at mitigation options that defuse those risks. Paradoxically, technology itself is often the best option, if properly exploited.

In Deloitte’s publication “The tip of the iceberg: Technology’s impact on systemic risk in financial services", we break down the major findings of the Deloitte-WEF report. We pinpoint areas where the financial system must acknowledge its weaknesses and address the loss and uncertainty stemming from a variety of systemic risks.

Risky business and tech trade-offs

Deloitte’s research identified the major risks that present a clear danger of converging and taking over the financial system. They fall into six themes, listed below with technological solutions that can mitigate each.

1. Digital interdependencies
It only takes one broken link in a chain to cause catastrophe. Our highly digitally interconnected financial system features many complex and vulnerable supply chains, elevating risk. Think about all the technology service providers that quietly and inherently link together financial institutions. A Zero Trust methodology could help, as could mapping geographic networks and using quantum mechanics to secure banks’ cryptographic key exchanges.

2. Shared model vulnerabilities
Our traditional models are failing us when it comes to interpretation and prediction: The outcomes are inconsistent. But the risk isn’t. This situation is compounded by algorithmic and model deficiencies, credit risk management constraints and data protection shortcomings. What’s the remedy? Federated analysis can help financial institutions share intelligence, generating better data analysis and insights from disparate locations. Also useful would be open-source catastrophe modelling for insurers and re-insurers, and quantum-based Monte Carlo simulations for credit and portfolio management risk.

3. Gaps in entity-based regulation
The door to innovation has been thrown wide open when it comes to non-bank financial offerings, and we now face a plethora of activities that are unregulated, or whose regulation is applied unclearly and with a lack of oversight. Just take a look at game-changing innovations like cryptocurrency, which can leave consumers unprotected and confuse loss liability. To address these issues – along with decentralised finance and the expansion of digital assets – financial services demand regulations that cover specific activity-related risks, rather than entities. Other solutions include digital coordination of regulations through a centralised, rules-based clearinghouse, as well as digital regulatory reporting.

4. Conflicting national priorities
The free and safe flow of data is being suppressed by nations’ misaligned priorities and practices. This means the suppression of actionable intelligence that can help prevent cybercrime, illicit finance and espionage. International harmony isn’t going to happen, but we can manoeuvre around the obstacle. Financial supervisors can use blockchain technology to safeguard and unblock data flow. Transaction monitoring can become decentralised. And machine learning can take the lead on cyber threat hunting and attribution.

5. Emerging sources of influence
The democratisation of capital markets has transpired through cheap digital platforms and brokerages, where average citizens trade stock, share financial information and even spread misinformation. This wild-west scenario is playing out without comprehensive regulatory oversight, endangering people and the market itself. ‘Social listening’ can help flag any material changes in stock price or indications of manipulation. We could also be mandating online learning to protect retail investors, and smoothing out market volatility via multilateral social information alerts triggered by public- and private-sector players.

6. New drivers of financial exclusion
Mirroring the inequities of the world at large, exclusion and biases persist throughout the financial system, ranging from unaffordable products and loans to digital platforms and processes that are not uniformly understood, used or accessed. Beyond the typical risks (overlending, customer alienation, stagnated economic development, etc), there are malicious actors seeking out the disadvantaged to conduct cyber compromise. Technology can step in here, too: alternative credit, based on consumer risk profiles built smartly and securely; explainable algorithms to compensate for biases and predict rates or fees of products and services; and biometric authentication that negates the need for official identification.

Technology: The problem is the solution

They say the first step is admitting you have a problem. Acknowledging the dark side of our embrace of technology means business leaders and policymakers can focus on the source of the risks that have infiltrated the financial services realm. If the public and private sectors can work together to focus on these sources – structural and composition, technology utilisation, economic and fiscal, cyber and data, and societal and climate – there is great and tangible hope to overcome many of the risks.

Cooperation can yield a common understanding of risk, which allows system stakeholders to make collective plans and rules that extend to unlikely events and non-financial players. And collaboration shouldn’t start and end at national borders. By transcending industry perimeters and company walls, institutions can enable the easy exchange of risk-based data. Valuable data leads to invaluable insights, which can feed and influence the output of technological solutions. With that kind of collective effort, it’s possible to envision the problem becoming the solution.

Technology has the staggering untapped potential to mitigate the very risks it ushered in. To unlock that potential, forward-thinking leaders need to commit to holistic, system-wide improvements. Without them, we face the very real possibility of our global financial system being overwhelmed as the risks multiply and congregate.

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