For as long as we have had finance, we have had financial crime. In today’s internet age, thieves can rob consumers and organizations from anywhere in the world. Cybercriminals have been a reality since the birth of online finance, and as security has grown more advanced, criminals have become more sophisticated in response, thereby forcing a much greater emphasis on risk management solutions.
In many ways, this has changed the nature of risk management, particularly for the online financial industry.
What is Risk Management: The identification and assessment of potential risks and the application of resources for the purpose of minimizing, monitoring, and controlling the probability and impact of said risks, which can be associated with uncertain financial markets, project failures, legal liabilities, credit risk, accidents, natural disasters or, most likely in our case, deliberate attacks such as those made by cybercriminals.
It is important to effectively prioritize all identified risks because, ideally, those with the greatest probability and/or most damaging level of impact are those that are ranked highest and are dealt with the most quickly and effectively. A risk management solution needs to be able to adequately assess the overall threat to the company’s well-being and enact an appropriately balanced amount of resources to each threat based on its seriousness.
Risk Management Strategies
Avoiding the threat – Eliminate, withdraw from or not become involved in risk.
At the most basic level, avoidance is simply what it sounds like: not performing the activity that carries the risk. For example, performing a credit card transaction online involves the risk that the credit card information could be intercepted by a fraudster. That risk can be avoided by not performing the transaction in the first place. The flipside is that any potential gain, such as the goods or services being purchased by the customer or the profit being gained by the merchant and/or payment provider, is being forfeited. This is the flipside of strategy #4, Retention.
Reduction – Reducing the negative effect or probability of the threat.
Reduction is the preferred risk management solution in the online finance industry. It’s a balance between #1 and #4, involving accepting some level of risk while reducing the likelihood of risk and potential damage associated with it. Reduction acknowledges that sometimes risks must be taken to achieve a greater reward.
Sharing – Transferring the threat to another party.
Risk sharing or risk transfer involves outsourcing some of the risk, for example by taking out an insurance policy, thereby placing some of the burden of potential losses on the insurance company. In the financial industry, this is an unpopular risk management solution because sharing some of the risk with your business partners can damage your long-term relationship and your apparent trustworthiness in their eyes.
Retention – Accepting some or all of the consequences of a particular threat.
It’s important to accept some level of risk in order to turn a profit, but retention is the extreme of this, wherein a company accepts the losses associated with risky business practice as “the cost of doing business.” This is an unsustainable risk management strategy in the financial industry because businesses perceived as risky attract more fraudsters, creating a snowball effect that costs the business financial as well as reputational.
More Related In-depth Article:
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