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You  think  mobile  screens  have  gotten  smaller?

Wait till you see flexible screens. They will get much bigger than you can imagine ! I like screens that I can adjust the size as needed by simply stretching or contracting with fingers and the screen can auto adjust resolution, brightness, and contrast while maintaining the aspect ratio !!

Comprehensive view on risk can give new perspectives on priorities for risk management

9/2/2013

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Common knowledge sources define risk as probability of occurrence of an adverse event and financial risk as probability of loss or less than expected return. We have classified financial risks extensively as credit risk, rate risk, market risk and so on. However, analyzing the fundamental parameters that influence risk can lead to new perspectives and help establish appropriate priorities for risk management. Key parameters I suggest for consideration in describing risk:

Cascade of Originators: party most likely to be responsible for the occurrence of an adverse event (e.g. a consumer complaining to CFPB, employee committing fraud or keeping incorrect books). Due to increasingly connected world and complex business relationships, seemingly harmless action by one party can set a chain of events that affect other parties one of whom may end up being the originator of the risk. Understanding the originator or sequence of originators of the risk can go a long way in identifying root causes and suitable monitoring/ review methods for proactive risk mitigation.

Cascade of vulnerable parties: party who is affected the most should the risk ensue. It is often the case that a risk affects many parties due to intertwined relationships; so understanding the likely chain of vulnerable parties is critical. Although all risks affect the firm in the end, intermediate vulnerable parties after the risk ensues can affect the impact from the risk on the firm. For example, due to recent CFPB regulation changes, a consumer affected by a risk caused by a financial institution can cause lot more damage to the institution than another risk that does not affect any consumer and is not watched by any regulator.

Mitigation Owners:
In general, it is important to centralize risk mitigation responsibilities. However, this approach has a downside as it can lead to escalating costs and inability to scale up to meet the demand for comprehensive risk management and timely risk mitigation. In cases where multiple groups or owners are involved in risk mitigation for a business entity or process, it is important to document the responsibilities of each owner/ group and ensure there is no overlap as well as cracks through which risks can slip through.

Impact on firm: Almost all risks have a direct or indirect financial impact on the firm. However, understanding the sequence of likely impacts can help proactive risk mitigation. A consumer or whistle blower complaint on social media that spreads like wild fire can affect brand image and lead to more serious reputation and financial risk (e.g. customer defection) to a firm than regulatory action.

Compliance: Whether the risk affects compliance to Government regulations or industry practices or enterprise standards can affect the impact on the firm significantly. Almost all firms take regulatory compliance seriously and work on fixing holes that may lead to non compliance. However, if enterprise standards are formulated and monitored properly, they should serve as early warning signals for possible regulatory compliance breach and can help identify risks proactively before firm reputation is affected due to regulatory action.

Prioritizing various risks from the above viewpoints can go a long way in developing proactive risk identification and mitigation methods that address the big problems first and help save firm reputation and bottom line.

In addition to risk definition and classification, there is a lot of work to be done in risk identification as well. So many companies still send full account numbers without masking all but last 4 digits or passwords through email. Thorough audit of business processes and systems is essential to catch such problems.

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Evolution of credit and debit cards due to regulations

7/8/2011

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Since the CARD act came into existence last year, payment businesses have been worried about loss of revenue. Coupled with other regulations such as Durbin amendment and Reg E, financial impact on payment businesses can be more drastic. According to estimates from Boston Consulting Group, the revenue loss can be as high as 29% or 25 Billion $ in US (Winning after the Storm, Global Payments 2011, Boston Consulting Group, Feb 2011). 

No amount of regulation can stop product innovation in the marketplace. For example, Reg E impacts debit cards as it requires consumers to opt-in for overdraft protection while using debit cards for everyday debit card transactions. Although the regulation does not limit amount of fees that could be charged, there is talk of best practices in implementing daily limits on number of overdraft transactions or dollar limits. Naturally, several industry players are concerned about loss of overdraft fees for debit cards. However, debit cards are not the only form of payment instruments; there are credit cards and other forms of payment instruments (e.g. checks), not to mention the new instruments yet to be invented that are not subject to such regulations at least as of now. The industry will innovate in packaging debit card-like features into other products and unfortunately, regulation will keep playing catch-up.


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    I am a Management Consultant in Banking and Financial Services. Check out my "home" and "about" pages for more details.

    Note: Opinions expressed here are my views. They do not represent the views of my employers, present or former.

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