The continual rise of digital-only challenger banks disrupting the financial services industry is something that doesn’t go unnoticed.  Their efficiency and agility for integrating new systems can certainly give them an edge over industry incumbents but challengers also face their own challenges.

Blazing a new trail can leave these firms vulnerable to risk and their reportedly ‘aggressive growth’ has led to a lot of scrutinies. Much of the concern surrounds how challenger banks manage their risk effectively. So how do challengers “fully capture risk”? How do they protect themselves and their customer experience?

In this article we take a look at 4 key risks challengers should consider and manage in order to protect themselves and demonstrate adequate risk monitoring.

Key Challenger Bank Risks

Here are four risks challengers should consider when building a risk map. Importantly, growing firms need to go beyond listing and identifying risks they also need to find ways of protecting themselves from what they have identified could be a threat.

  1. Regulation And Compliance

Accountability is greater for challenger banks, having not been on the scene long enough to ensure the same weight and prestige as traditional banks. Yet, challengers are very much real working banks that must be regulated and authorised and keep up with the pace of regulatory change.

It is essential therefore, that challengers have a solution in place that can help them manage risk and demonstrate compliance. The solution albeit, technology, insurance or legal expertise must build resiliency and provide support in the event of a regulatory investigation so that any issues can be suitably addressed.

  1. Financial Crime

Financial crime is a crucial issue for a challenger bank. Whether it is cyber fraud, money laundering, terrorist financing, rogue trading, bribery or corruption, the impact financial crimes can be devastating.

So how do challengers sustain growth whilst adhering to regulation and preventing financial crimes? RegTech can transform how organisations defend themselves with transaction monitoring and surveillance capabilities to help fight financial criminals. Protection can also be sought through Professional Indemnity (PI) and Directors and Officers Insurance that will cover defence costs in financial claims.

  1. Data Breach

With a poor risk strategy, challenger banks are in danger of decreasing customer trust through fraud occurrences like data breaches. Technological solutions can be extremely effective in fraud-prevention thanks to screening and detection methods that reduce false-positives and the risk of ID theft. Both the compliance and security this solution can provide minimises the risk of data breaches, protecting a challenger’s finances, reputation, and future.

If a firm does experience a breach of customer data, then insurers can cover event management costs and resulting liability. Legal experts can support with advice on what is insurable by law.

  1. Theft

Whether customer funds are compromised due to APPs or social engineering fraud the results can be hugely damaging for any enterprise. If such an incident occurs then a bank would have to cover the investigation costs, and if deemed liable will be subject to further financial and reputational loss.

Challengers can employ RegTech to help ensure data security and privacy. Theft of identity can be countered with a two-way authentication process and a system which allows users to protect, control and own their KYC data. Insurance protection can cover different loss scenarios including loss in the customer environment.

Managing Risk Effectively

Regulations, compliance, corporate responsibility and cybersecurity are just some of the issues challengers need to consider and manage. Protection is all about finding the right solution and because circumstances often change for fast-growing businesses, solutions need to be regularly reviewed and options revisited.

1RS provides a cost-effective technological solution that helps financial institutions meet such challenges whilst maintaining a frictionless customer experience. Speak to 1RS to discuss how you can manage your risk more effectively.