Banks must effectively balance business opportunities with risk and compliance requirements. New products and services might never achieve profitability if they cause excessive risk. On the other hand, too many second-line-of-defense requirements can bury product development.
How can banks adequately mitigate risk without internal brakes bringing new business prospects to a halt?
Sustainable success exists at the intersection of sometimes conflicting objectives:
Internally and externally, banks must be able to fully support their decisions regarding their market offerings. Going too far beyond acceptable risk boundaries could result in a hard stop from stakeholders.
Managing risk factors starts with the first line of defense including the second line early in product or service development. Why isn’t this already common practice?
One reason is that a one-size-fits-all risk management approach mandates optimal conditions and excessive end-stage requirements. This level of preparation for young ideas can become too big a burden and stall progress. In this situation, innovators often see the second line as an obstacle instead of an ally.
What can banks do? One solution is shifting to a culture of support centered on creating franchise and customer value. A strong framework with a sliding scale for minimum acceptable maturity can give the second line the ability to say “yes” quickly, incrementally, and confidently.
Minimum acceptable maturity starts with early and ongoing collaboration. A well-coordinated risk and compliance team can help the first line stay within the bank’s capabilities while:
This cooperation can lead to a proof of concept that rolls out to a limited audience. Focusing on a fraction of the bank’s customers means the potential for risk is smaller. Then, appropriately scaled monitoring and reporting can expand as offering risks increase over time.
From this foundation, risk and compliance functions can support sustainability by outlining appropriate business risks. The business line can help fund stronger risk and compliance efforts. Both sides add progressive value as products and services reach their maturity in a cost-effective and agile manner.
The second line can be more than an ad hoc response to problems. Instead, with a standardized schedule for engagement and an optimized governance model, the process can become predictive.
With a proactive approach, risk management won’t have to rely on new or elaborate systems to respond to new products. Rather, the second line of defense can set expectations within organizational protocols of assessments, approvals, and monitoring. Mitigation can then become a matter of adjusting well-established, essential functions such as:
When expectations flow from a core of collaborative, healthy risk management, banks can rely on existing frameworks to support long-term sustainability. Such existing systems include operational risk management, third-party risk management, IT risk, and cybersecurity programs, to even the earliest-stage products and services.
When it’s time for a greater audience and sales growth, risk and compliance efforts can scale to match the next stage of the offering. A minimum acceptable maturity approach can establish sustainability for new initiatives and help the bank consistently grow stronger over time.
Offerings that can only launch with perfect risk conditions often lose their competitive edge. Those without enough consideration for risk can face regulatory scrutiny and overexposure.
Balancing business opportunities and risk management with a minimum acceptable maturity approach can lead to better sustainability of new products and services.
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