A Teenage Perspective is The Fastest Way to Understand Your Risk Appetite
Author: Michael Cohn
Originally Published on 10/23/18 — Updated on 12/29/21
Enterprise Risk Control: Defining Risk Appetite “Bumpers”
Many institutions still face difficulties discussing, articulating, and documenting their risk appetite. It is similar to articulating and documenting your culture. However, establishing parameters or ‘bumpers’ to support a risk appetite statement can guide how we wish to operate the institution. Defining and evaluating three key bumpers provides the start to a successful risk appetite statement:
- Customer Experience
- Personal Financial Management
Risk Appetite “Bumper” #1 – Customer Experience
I recently helped my three teenage children open basic checking accounts. What an eye-opening experience! The process kicked off with a 45-minute branch visit, highlighted by a discussion about why we don’t need checks.
On the plus side, we walked out with a working debit card. But, it would be 24 hours before we could access the internet banking platform. My teenagers asked me why we couldn’t just open an account online with an institution that could:
- Complete the full online experience,
- Immediately enable internet and mobile banking, and
- Deliver the debit card the next day.
In this case, teenagers understand the omnichannel banking experience better than the bank! Unfortunately, this illustrates the fact that that some institutions continue to have a stalled innovation and digital strategy. Standing between three teenagers and a financial institution, I can only surmise that perhaps the fear of using the technology vs. the availability of resources could be the roadblock.
“Bumper” #2 – Payments
Peer-to-Peer payments are no longer just for younger consumers settling their restaurant bills. If the institution has a project team to evaluate the market dynamics, go-to-market strategy, and compliance issues surrounding PayPal or Venmo integration, our appetite for new product introduction is low, considering the technology is arguably ten years old.
The Zelle consortium and platform is an attempt by the banking industry to combat PayPal and Venmo. Momentum is building with the next wave of institutions as early adopters petition the consortium for inclusion. Don’t allow a lower risk appetite for new products to delay your application to the consortium and prevent you from providing time-critical peer-to-peer solutions.
“Bumper” #3 – Personal Financial Management
Consumers are increasingly looking for financial advice in conjunction with banking products. If:
- Our branch and online platforms can open basic DDA and retail loan products, and
- We define success by signing up new accounts and loans.
Then once again, our risk appetite to try new product/service models is low. The innovative approach focuses on total personal financial management. For example, does your customer need to replace their banking relationship or borrow money? If so, they likely have a financial profile that includes several financial products.
Understand their total need. Teach them how to use personal financial management tools. Then, make these tools available on your digital platforms. This is what leads to a higher level of service and customer loyalty! Want to earn the business of modern customers? The plain-vanilla offerings of the past won’t work!
Creating your Risk Appetite Statement
Having a higher risk appetite does not mean placing the institution’s capital at risk. However, it does mean a willingness to experiment with new ideas.
The fastest way to understand your risk appetite is through specific metrics that the management team will use as “bumpers” to keep the organization safe. These include:
- Customer experience,
- Payments, and
- Personal financial management.
The fastest way to see that technology is not moving fast enough is to ask my teenage children. Risk assessment software, offered for banks, needs to consider the customers of today AND tomorrow.
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