Financial institutions have changed significantly over the last decade – from utilizing technology in new ways to stay competitive and drive efficiencies, to adapting business practices in light of the global financial crisis and recent narrow interest margin markets.
As these businesses evolve, they’re faced with a new range of exposures that can result in significant and lasting commercial costs, and traditional exposures come to light in a different context. Crime has also changed for these businesses, with a growing number of attacks against financial institutions taking place online and through digital means.
To better understand this changing landscape, we’ve outlined the top risks facing financial institutions today:
Social engineering and funds transfer fraud
Some of the most frequent cyber claims made by businesses in the past year involved funds transfer fraud and some form of social engineering. Funds transfer fraud is often carried about by criminals leveraging fraudulent emails or phone calls to request the transfer of funds from a legitimate account to their own. In some cases, fraudsters will pose as a senior executive appearing to give urgent instructions to a junior employee. While financial institutions have greater control processes, including separation of responsibilities, both banks and their clients are at risk of falling victim to these types of attacks, and as long as they continue to prove successful, we expect this threat to grow in both frequency and severity. Financial institutions should consider employee training on these newer forms of fraud, including how to identify phishing emails. Banks should also be concerned about their customers’ susceptibility to social engineering fraud, and should consider education campaigns where relevant.
Adherence to post-crisis regulation
Following the mortgage crisis in 2007-2008 and the subsequent global financial crisis, the regulatory burden for banks has increased significantly. This brings additional costs when meeting these new requirements, along with higher potential penalties if an institution fails to comply. In many instances, resultant fines and penalties following regulatory failures are uninsured or uninsurable. Financial institutions should seek cover where regulatory enquiry costs and expenses are covered.
Falling prey to predatory banking
Financial institutions have found themselves in a narrow interest margin environment, which means the pressure on banks to generate revenue from non-interest earnings is intense. In some cases, the desire to drive revenue through new or existing products has led to instances of selling inappropriate products to consumers, resulting in significant consumer claims. Institutions must ensure that their products are suitable and that they meet the needs of the consumer and the consumer’s expectations. It’s also important for institutions to ensure their remuneration policies do not inadvertently encourage the miss-selling of products. The fallout from consumer protection scandals can be costly not only from a legal and regulatory standpoint, but also in terms of damage to the brand.
Predatory banking is only one type of behaviour that can bring reputational harm to financial institutions. Large institutions can suffer backlash for a variety of misdeeds made public, for instance the failure in anti-money laundering controls by Wells Fargo or HSBC, who were hammered in the media for their behavior. On a smaller scale, for regional and community-based institutions, the power of social media can mean that reputational damage spreads far faster than ever before.
Nearly a decade later, the effects of the global financial crisis are still being felt by financial institutions around the world. Recent concerns over Deutsche Bank’s operational cut backs and stock price decline have shown there is still uncertainty around the performance of even the biggest financial organizations. Additionally, recent instability in Europe – particularly in Italy and Spain, as well as the still incomplete Brexit negotiation – could have effect elsewhere, including the US, where European headquartered institutions such as Deutsche Bank, Barclays and HSBC are systemically significant institutions.
Challenger banks and new technology
The traditional banking model is increasingly challenged by newcomers trying to use technology to replace existing processes and disrupt the status quo. In the UK and Europe, challenger banks are gaining steam and traction among younger generations and early adopters. In the US, there are few online-only challenger banks, but there is increasing competition from payment processors, online non-bank lenders and other providers who are edging their way towards areas conventionally controlled by banks. The risk for traditional institutions will not only be economic, but they will also need to provide more services to their clients to ensure they are competitive and relevant, and they may need to reassess their cyber exposure as they put more systems online.