- A new report from the World Economic Forum explores how the acceleration of technology in financial services is driving new risks.
- These risks are accumulating and beginning to form systemic risks.
- Here are three action areas critical to mitigation approaches.
The advancement of technology in financial services has undoubtedly been a net positive over the past decades. For firms, technology and innovation have helped to streamline operations and offer new digital financial products and services to customers at low cost. Consumers, then, have benefitted through a combination of improved access to financial services, convenience, and greater selection. At the same time, as with all innovation, the increased use of technology is giving rise to new risks, risks that if unchecked, can become systemic and put into question the stability of the global financial system.
What are these risks and how can we approach mitigation? This is the focus of a newly-launched report by the World Economic Forum, in collaboration with Deloitte. The report, Beneath the Surface: Technology-driven systemic risks and the continued need for innovation, engaged over 150 experts through interviews and seven virtual global workshops over the past year. Participants included senior leaders from financial services, technology firms, academia and the public sector.
As highlighted in the report, to fully understand the technology-driven systemic risks that are developing, it is useful to begin by first considering the sources of risk. That is, situations that create loss or drive uncertainty in the financial services ecosystem. A straightforward example of this would be lagging cybersecurity tools and methods. While not systemic on their own, sources of risk may build upon one another to form systemic risks.
Sources of risk can be mapped into five key categories. Three of these – Economic and Fiscal, Cyber and Data, and Societal and Climate – directly contribute to the formation of systemic risk. The other two – Structural and Composition and Technology Utilization – are foundational and cross-cutting in nature.
The formation of systemic risk
Image: World Economic Forum
Several pressing systemic risk themes are quickly arising as the accumulation of sources of risk within and across categories grows. One such risk theme is Digital Interdependencies. As the financial services ecosystem becomes increasingly digitally interconnected, any entity that plays a critical role in enabling financial services can cause ecosystem disruptions and cascading implications. Taking into consideration, as well, the consolidation of vendors that offer core capabilities (e.g., cloud service providers), and complex supply …….