Risks Of Evolving Technology Platforms In The Financial Services Industry

by: Enlight Research, LLC


Inaccurate data, inconsistent reporting and system glitches in tech platforms pose significant risks for banks.

Many banks have been hesitant to adopt cloud computing and storage services due to security and regulatory concerns, yet pressure from decreased profits and budget changes is likely to result.

Regulatory guidelines have recently been released by the Federal Financial Institutions Examination Council (FFEIC) to aid banks in addressing risk areas.

By Jennifer Lunde

Increasing reliance of financial service providers on technology brings forth greater potential for inaccurate data, inconsistent reporting, and system glitches that could pose risks for bank operations, strategy, and reputation. As such, changing technology platforms are quickly emerging as a primary challenge facing banks. More specifically, these technologies can include the emergence of mobile banking interfaces, evolution of technology-oriented marketing platforms (such as social media tools), and development of new technology platforms like cloud computing.

Mobile Banking

Chief among emerging technologies in the financial realm are mobile banking applications and online banking interfaces. These platforms provide opportunities for smaller, local banks to compete with larger financial institutions and maintain relationships with customers beyond the local vicinity. That being said, banks will need to place an increased focus on app development and maintenance, as banks will risk client loss if customers are frustrated with poor app performance.

Beyond technology developments, financial institutions face challenges in risk mitigation and security initiatives related to these developments. Security concerns are a main impediment in adopting mobile banking technology from a consumer perspective as well as an institutional perspective. A 2009 KPMG study revealed that 48 percent of those surveyed that had not participated in online banking did not do so because of security and privacy concerns. Before successfully engaging consumers through this platform, financial services providers must overcome security risks to build trust with clients.

Infrastructure is already in place to support mobile banking; cheaper smartphones and Wi-Fi are becoming ubiquitous, meaning that developing mechanisms for approaching this challenge is essential for long-term success in the financial services industry.

Cloud Technology

Cloud technology is a means of outsourcing information, data storage, and transactions to vendors that host remote data centers only accessible via the Web. Many banks have been hesitant to adopt cloud computing and storage services due to security and regulatory concerns, yet pressure from decreased profits and budget changes is likely to result in a significant shift towards cloud use in the near future. Technology consulting firm Gartner has predicted that poor returns on equity will result in more than 60 percent of banks worldwide utilizing the cloud to support the majority of their transactions by 2016.

Before this technology becomes universal, banks will have to overcome fears about data security and regulatory policy. Misunderstandings and ambiguities regarding cloud computing and storage may drive some of these concerns about adoption.

A recent report issued by a subcommittee of the FFIEC encouraged financial institutions to take caution when engaging with third-party cloud services companies and suggested that private or hybrid cloud providers may be more trustworthy alternatives and may mitigate some concerns about security breaches. Understanding the options available in the marketplace may help banks overcome some cloud-related risks and challenges.

Challenges in a regulatory context stem from the nebulous nature of the cloud. As data centers are globally hosted, it can be near impossible to determine whether banks are in compliance with local rules and regulations. Difficulty follows when providers are often unwilling to give regulators information about data center locations as this can compromise the security of the servers. Though efforts are being made to establish legal standards for governing cloud outsourcing and storage, such policies are not in place yet. Perhaps as this technology becomes more popular, federal and global governing boards will take steps to generate policy that will protect providers, banks, and customer data.

Moving to the cloud can take significant time in highly regulated industries handling customer data, as in the financial services industry. However, for those looking to begin the transition, application development and testing is a low-risk activity that can easily be transferred to the cloud while security measures and policies are in the process.

Marketing Platforms

Considering the recent economic recession and volatile economy, building credibility and trust with clients is a significant challenge facing banks and financial organizations. In conjunction with the rise of social media interfaces as marketing platforms, banks are increasingly faced with providing additional time, attention, and funding to support these initiatives as to better connect with customers.

Without investing in well developed and comprehensive social media strategy, companies are more likely to be at risk from their social media presence. Regulatory guidelines have recently been released by the Federal Financial Institutions Examination Council (FFEIC) to aid banks in addressing risk areas. The overall takeaway of these guidelines is that banks must establish programs and policies to ensure understanding of the risks associated with social media interactions. Although created to enhance social media endeavors of financial institutions, these regulations may present challenges and risks with regards to (lack of) compliance.

As social media interfaces will continue to evolve and hold a prominent role in marketing strategy in coming years, banks must be prepared and equipped to face the associated challenges to reap the benefits of these platforms.

Looking Forward

Though emerging technologies present risks and challenges for financial institutions, understanding strategies for implementation can improve customer relations and establish opportunities for long-term success. As these platforms are constantly evolving, banks must be cognizant of updates in technology and be willing to modify strategies and policies accordingly.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.