Have you hugged your risk managers today?
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Risk management is enjoying a lot of attention these days. And I don't just mean the person at your institution that holds the title of Chief Risk Officer or the equivalent. I mean everyone that thinks like a risk manager, that asks the tough questions, "How will this new product/service/payment channel impact the risk profile of this institution?
I'd argue that one illustration of how shoddy risk management impacts financial institutions is the graph below. The Wall Street Journal has a great interactive map showing bank failures since 2008. As of July 2010 there are over 250 (Click on the map to see more). The lax risk management I'm referring to of course is related to the influx of new products around mortgages.
I was reminded of this by a recent article in BAI Banking Strategies titled, Online Account Opening Needed To Fuel Growth. The article rightly pointed out that many banks are going back to basics, building revenue by adding checking accounts and other more traditional products. However, the recommendation of the article is to embrace the online channel and open accounts for customers outside of a more constrained geographical footprint. In my opinion this has the potential to materially impact the risk presented to the financial institution.
It made me think about a couple of data points from my research. Namely that accounts opened online are 5x riskier than accounts opened through more traditional channels and that check fraud topped $1 billion dollars in 2008. The online channel represents a huge opportunity, but blindly chasing the revenue opportunity without regard to how an FI will manage the resulting risk can end badly. If the opinions of the risk managers at your institution haven't been considered when evaluating strategic decisions such as pursuing online growth, it's time to make room at the table and embrace them.