In our increasingly digital world, financial institutions are becoming more and more reliant on information technology (IT) to conduct their operations. The use of advanced IT systems has revolutionized the way these organizations operate, offering unprecedented levels of efficiency and convenience.
However, this reliance on technology introduces a multitude of IT risks that could significantly disrupt a company’s operations if not properly managed. And not all FIs are prepared—“IT risk may be the one risk that the typical financial services board member may be least prepared to oversee,” as Deloitte describes.
In this article, we explore emerging risks to financial services organizations through their adoption and operation of IT assets and services. We analyze top risks and provide recommendations for board members and executives in terms of the questions they should ask about their own operations and the strategies they can adopt to mitigate IT risks successfully.
What is IT Risk in Financial Services?
In financial services, the term “IT risk” describes the potential for financial loss, customer mistrust, regulatory penalties, or other downturns resulting from failures in IT systems, processes, and controls. It encompasses a wide range of risks, including cyber threats, data breaches, system outages, technology failures, and human error.
IT risk can arise from a number of operational, leadership, and business shortcomings, such as:
- Misalignment between IT and business processes. Failure to align IT strategy with overall company objectives can lead to inefficiencies, redundancies, and miscommunication that may increase the likelihood of IT risks.
- Ill-informed management and IT investment decisions. Making significant investments in IT infrastructure without a clear understanding of the associated risks and implications can put financial services organizations at risk.
- Employee apathy regarding IT best practices. FIs that don’t accommodate employees’ IT needs and encourage them to speak up about IT issues risk employees adopting poor IT practices, employing unapproved IT tools, or creating security blind spots through unsanctioned network access points.
IT risk therefore encompasses a wide range of priorities and challenges, where leadership and executive boards at financial organizations often overlook these elements as business and technology investments carry on. As Deloitte describes, “Boards’ risk-related responsibilities at financial services companies have intensified, with governance of Information Technology (IT) risk becoming increasingly critical.”
Top Information Technology Risks for Financial Institutions
IT risk is difficult to pin down; it can emerge in a wide variety of categories as business needs evolve. Here are some of the top IT risks that financial institutions face today:
- IT resilience and continuity. FIs that have complex IT systems and processes are vulnerable to disruptions caused by cyber breaches, natural disasters, or system failures. Organizations must build robust infrastructure and contingency plans to mitigate these risks.
- Cybersecurity threats. Cybersecurity is a major concern for financial institutions, as hackers target customer data and other sensitive information with increasing frequency and sophistication. Companies need to implement robust security measures to protect against these threats.
- Data privacy and compliance. Financial institutions have access to a vast amount of sensitive customer information, which makes oversight particularly difficult and compliance a constant challenge, especially as regulations evolve. Organizations must comply with strict and new requirements regarding the handling and protection of this data to mitigate risks related to non-compliance, which can put their business in jeopardy.
- Third-party vendor risk. FIs often rely on third-party vendors for IT services and software, which can introduce additional risks stemming from the vendor’s own vulnerabilities. S&P Global found that in Australia, the country’s four largest banks amounting to 76% of its banking industry were at risk due to third parties, Forbes reports.
These are just a few examples of the many IT risks that financial institutions face. To effectively manage these risks, board members and executive leaders must be proactive in identifying potential threats and implementing strategies to mitigate them.
The Five Qualities of Successful IT Risk Management
Fortunately, financial institution executive, IT, cybersecurity, and other leadership teams can adopt effective strategies to identify and manage IT risk effectively. Here are five key qualities of successful IT risk management:
1. Establish robust oversight with a plan for risk auditing.
Boards should implement structures for monitoring and reviewing their institution’s IT risks, including establishing an oversight committee responsible for identifying potential threats and overseeing the implementation of risk mitigation strategies. Creating a formal plan for risk audits can also help to identify vulnerabilities and assess the effectiveness of current risk management measures.
2. Incorporate risk analysis into strategic planning processes.
Integrating IT risk analysis into strategic planning processes allows organizations to proactively identify and address potential risks before they become major issues. This requires strong communication between IT leaders, executives, and the board, as well as a deep understanding of the organization’s overall business objectives.
3. Regularly review third-party vendor relationships and contracts.
As mentioned, third-party vendors can introduce additional IT risks for financial institutions. This can be especially risky as new but important services employ generative AI (GenAI) and other transformative technologies emerge. Therefore, it is crucial to regularly review vendor relationships and contracts to ensure compliance and assess potential risks. This includes conducting due diligence before entering into contracts and implementing risk management measures in vendor agreements.
4. Prioritize employee training and awareness.
Employees are often the first line of defense against cyber threats or other IT risks. They are also often the most likely to introduce IT risk through their everyday work; and without guidance, they can quickly exacerbate risks due to frequent and repeated behaviors. Therefore, it is essential for financial institutions to prioritize ongoing employee training and awareness programs to educate employees on best practices and identify potential risks within the organization.
5. Embrace a culture of continuous improvement and adaptability.
The world of IT is constantly evolving, and so are the risks associated with it. Successful IT risk management requires a mentality of continuous improvement and adaptability to stay ahead of emerging threats. This can include regularly conducting risk assessments, implementing new technologies, and staying up-to-date on industry trends.
Mitigating IT Risk is An Investment
Mitigating IT risk is not simply a protective measure, but a strategic investment in the success and longevity of a financial services organization. Prioritizing IT risk management fortifies the company’s operations, safeguards its crucial data, and upholds its reputation, all of which translate into a competitive advantage in the marketplace.
Effectively navigating the digital landscape and its associated perils enhances customer trust, drives business growth, and ultimately, contributes to the robust financial health of the institution. It’s an investment that goes beyond the balance sheet, strengthening the organization’s resilience in the face of an increasingly complex and volatile digital world.
Option One Technologies Has Your Back
Option One Technologies is the leading IT consulting and managed services provider specializing in the financial services industry. Our team of experts understands the unique IT challenges facing financial institutions and works closely with our clients to develop customized solutions that mitigate risks and drive business growth. Let us help you navigate the ever-changing IT landscape with confidence. Contact us today for more information about our services.