Risk management is a necessity in fintech, as well as a legal obligation. However, the depth and quality of this management can become a significant competitive advantage. As digital financial services continue to disrupt traditional banking models, fintech companies are increasingly operating across borders, facing complex regional regulations and diverse market conditions
Olegs Cernisevs, CTO, Blackcatcard
Doctor of Science and Blackcatcard CTO Olegs Cernisevs sheds light on the pivotal role of key risk indicators (KRIs) in driving sustainable growth for fintech companies within the European Union (EU), with findings from his doctoral research.
The new fintech paradigm: balancing innovation and risk
Fintech has shaken up the financial sector, but with this innovation comes a unique set of risks.
I have found that traditional financial institutions often rely on outdated metrics that fail to capture the dynamic nature of fintech operations. In contrast, fintech companies must adopt a forward-looking approach that integrates KRIs with traditional key performance indicators (KPIs) to ensure robust financial governance.
Key risk indicators: what every fintech leader should track
Governance risks: These risks arise when a company’s rules, processes, and mechanisms fail to function properly, particularly in relation to directors’ decisions. Governance risks are tied to the company’s ability to comply with relevant laws and regulations.
Operational risks: This type of risk occurs when a company suffers a loss due to inadequate or failed internal processes, people, systems, or external events.
Human resources risks: These risks relate to the impact that human resources can have on a company’s operations, including issues related to staffing, training, and employee retention.
Health and safety risks: The risk that a company may be exposed to health and safety hazards, potentially leading to harm, injury, or illness among employees in specific workplaces.
Financial risks: The risk of losing money on investments or business projects, which can threaten a company’s financial stability.
Cyber risks: This risk includes threats such as hardware and software failures, spam, viruses, malicious attacks, and other IT-related issues that can compromise a company’s digital infrastructure.
Capital adequacy risks: These are risks associated with the firm’s capital position, focusing on whether there is sufficient capital to support both current and future business activities, as well as the accessibility of additional capital if required.
Environmental/external risks: Risks that arise from economic events beyond the control of the company’s internal structure, such as changes in the market or economic downturns.
Law and regulation risks: The risk of financial, reputational, or litigation damage resulting from a failure to monitor, control, and reduce regulatory compliance risks.
Strategic risks: The risk of loss due to poorly addressed strategic goals, failed execution of policies and processes, or an inability to respond to macroeconomic and industry dynamics.
Financial crime risks: Risks associated with the failure to prevent financial crimes such as money laundering and market abuse.
Applying insights: practical steps for fintech leaders
Integrate KRIs with KPIs: Rather than treating risk management as a separate function, fintech leaders should integrate KRIs into their overall performance measurement frameworks. This holistic approach ensures that risk management is aligned with business objectives.
Regional customisation: The EU’s diverse regulatory environment means that a one-size-fits-all approach won’t work. Fintech companies should customise their risk metrics based on the specific regulatory requirements and market conditions of each region they operate in.
Invest in cybersecurity: Given the high stakes of data breaches, fintech leaders must prioritise investments in cybersecurity. Regularly updating KRIs related to cybersecurity can help identify vulnerabilities before they become critical.
Continuous monitoring and adaptation: The fintech landscape is fast-paced and constantly changing. Regularly revisiting and adjusting KRIs in response to new threats and opportunities is essential for staying ahead of the curve.
The competitive edge of effective risk management
My research highlights that effective risk management is not just about compliance – it’s about gaining a competitive edge in the rapidly evolving fintech industry.
By adopting a comprehensive approach to KRIs, fintech leaders can ensure their companies are not only compliant but also resilient and poised for sustainable growth in the complex EU market.
For fintech businesses, understanding and applying these insights could mean the difference between leading the market and falling behind. As the industry continues to innovate, those who effectively manage their risks will be the ones who thrive.
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