Risk Management And Financial Technology: Strategies For Success

The market for financial technology is expanding at a fast pace, and so is the number of companies operating in this field. It is estimated that by 2024, the fintech market will exceed $340 billion, and by 2030, it will reach $1,152 billion. There are currently approximately 30,000 fintech companies around the world, and this number is constantly increasing.

Ongoing development of technology gives fintech companies a bigger sphere of influence and multiplies their profits. However, there is another side of the coin - growing fintech risks.

The more technological, interconnected, and user-focused the fintech companies become, the bigger risks they face.

Given this, fintech risk management has become a crucial part of the strategy for fintech companies. Not only does it anticipate potential threats, but it creates an actionable plan to eliminate them before they become a problem.

Types Of Risks In Fintech Industry

Fintech industry is highly risky, with 75% of fintech startups failing. The primary reason for that are multiple threats faced by fintech companies and lack of a well-developed fintech risk management plan.

Understanding fintech risks is the first step towards business success. Companies that prioritize risk management in financial product development should start with researching potential threats and business vulnerabilities. By understanding the entire landscape of fintech risks, they can develop an efficient fintech risk management framework.

Below I list a comprehensive list of fintech risks that companies should address in their fintech risk management strategy:

• regulatory
• operational
• liability
• communication
• cybersecurity
• financial
• vendor choice
• vendor lock-in
• maintenance 
• client support 
• architecture
• development

Further, we’ll take a closer look at the mentioned risks and consider the best fintech risk management practices.

Regulatory Risks

Regulatory fintech risks are risks that arise from the regulatory environment in which fintech companies operate. Fintech and regulation risks refer to the potential for a fintech company to fail to comply with specific regulations and fall under sanctions from regulatory authorities.

The common fintech compliance regulations are GDPR and PSD2. With their implementation, fintech companies in Europe must adhere to stringent data protection and system security guidelines. National regulatory bodies in different countries, such as the FCA in the UK, the AMF and ACPR in France, BaFin in Germany, and the SEC and CFTC in the US, enforce regulatory requirements that also impact fintech companies.

However, in some fintech areas, there is a lack of stable regulations. It raises many fintech questions and increases the chance of specific fintech risks. For instance, blockchain and data security are two fields that are still in the process of development. Their regulatory frameworks are not yet well-established.

This makes it challenging for fintech companies to identify and mitigate potential risks effectively. I am talking not only about the lack of clear regulatory guidelines. The complexity of these technologies further exacerbates the challenges of managing compliance and regulatory risks.

How to mitigate regulatory risks?

• Ensure that you, as a CEO or business owner, have a deep understanding of the industry regulations and top priorities in the finance sector. This can be done by hiring experienced legal professionals who can navigate the regulatory landscape and help the company stay aware of regulatory changes. This involves conducting thorough due diligence and risk assessments, implementing robust compliance programs. Regularly monitor and test these programs. Ensure that they remain effective.
• Work with regulatory bodies and industry associations to stay up-to-date on regulatory developments and best practices. Collaboration with regulators can help you build trust and credibility with customers and investors. Demonstrate commitment to operating in a compliant and responsible manner.
• Prioritize regulatory and compliance risks as they navigate the complex and rapidly evolving regulatory landscape. By doing so, you can effectively manage risks and drive innovation in the financial services industry.

Operational Risks

Operational fintech risks are the risks related to the day-to-day operations of fintech companies.

Excessive bureaucracy is a common operational risk in fintech. It can slow down decision-making and make it challenging to implement changes quickly. Thus, if a fintech company needs to make a change to its product or service offerings, it may need to navigate a complex and time-consuming approval process before it can be implemented. This can result in missed opportunities and decreased competitiveness in the market.

On the other hand, insufficient bureaucracy can also lead to operational risk in fintech. When processes are not well-documented or standardized, it can be challenging to identify potential issues or track progress effectively. This can lead to mistakes and missed opportunities, as well as make it more difficult to comply with regulatory requirements.

How to mitigate operational risks?

• Build clear, concise, and easy-to-understand processes. Avoid unnecessarily complex procedures or bureaucratic approval processes that may slow down decision-making.
• Describe processes in detail, using clear documentation and standardization. Ensure that all employees are trained on the proper procedures and protocols.
• Monitor the execution of processes regularly, encourage adherence to them, and be sure to penalize non-compliance. This will ensure that processes are followed consistently and effectively.
• Reinforce processes against the human factor through rechecks or other quality control measures. Thanks to that, you will catch any errors or oversights that may have occurred during the execution of the process.
• Build data backup processes, as technology and infrastructure failures can be a significant operational risk. Ensure that backup systems are in place to ensure business continuity in the event of an outage or other disruption.
• Prioritize employee training and education. Your staff must understand their roles and responsibilities in managing operational risks. They should also be well versed in fintech regulation. Periodic training sessions can help employees identify potential risks and take appropriate action to mitigate them.

Liability Risks

Liability fintech risks refer to the potential legal responsibility that a fintech company may face for any losses, damages, or costs incurred by its clients or third parties. For instance, fintech firms face technology failures that could lead to customers being unable to access their services.

These risks can arise from various situations, such as data breaches, contractual breaches, fraud, or any other financial losses. Fintech companies are particularly susceptible to liability risks since they handle large amounts of money and assets.

How to mitigate liability risks?

• Have clear and transparent policies for handling customer data and transactions. Prevent liability risks associated with misunderstandings or miscommunications about how you use data.
• Obtain appropriate insurance. Consider investing in insurance that covers third-party liability, business interruption, and reputational damage. Additionally, you should establish a strong incident breach response process to manage any potential breaches effectively.
• Continuously monitor and assess potential liability risks associated with operations. Make sure to emphasize liability risk management in financial technology and take appropriate steps to mitigate those risks.

Communication Risks

Communication risks mean misunderstandings or errors in communication that can impact business operations and relationships. In the fintech industry, communication risks can arise in various situations. For example, when there is a lack of clarity or transparency in communication with clients, when there is a language barrier between employees and customers, or when communication breakdowns occur between different departments within the company.

Additionally, unpredictable events or disruptions in communication channels are also possible. For instance, power outages. Another fintech risk to consider is the loss of information during any communication, which can lead to errors and misunderstandings.

Finally, the links of subordination between different individuals or departments within a fintech company can also create communication risks. They can lead to a lack of transparency or misaligned goals.

How to mitigate communication risks?

• Create clear guidelines for how information is communicated within the organization to help reduce errors or misunderstandings.
• Ensure that all communication channels used are secure and encrypted to prevent unauthorized access.
• Have backup communication channels or redundant systems in place. They help mitigate the impact of unexpected events or disruptions.
• Encourage transparency and open communication within the organization to reduce the potential for misaligned goals.
• Regularly test and evaluate communication protocols and systems. Identify areas of weakness and improve overall risk management fintech.
• Transfer information between different parties in a secure way. When implementing risk management in fintech, consider Conway’s law. This concept states that the design of a system will mirror the communication structure of the organization that creates it. In turn, the way in which information is communicated within a fintech company can have a significant impact on the design and technology functionality they produce.

Cybersecurity Risks

Cybersecurity fintech risk can result in fintech fraud and the theft of sensitive personal and financial information. Then go phishing attacks and malware. The first is a common tactic used by cybercriminals to obtain sensitive information by tricking users into divulging their login credentials. The second is malicious software that can infect fintech systems, steal data, or disrupt operations.

Insider threats occur when employees, contractors, or other insiders with access to sensitive data intentionally or unintentionally cause harm to the organization. Also, fintech companies often work with third-party vendors, which can introduce additional cybersecurity risks.

How to mitigate cybersecurity risks?

• Implement robust security measures, such as data encryption, access controls, and regular security audits.
• Invest in reliable and secure technology infrastructure. Risk management and financial technology is a powerful duo which you can use to protect against data breaches. Implement a robust cyber risk management system and regularly update it.
• Provide user education and awareness training to help users identify and avoid phishing scams.
• Regularly update the software and implement antivirus and firewall software.
• Create strong cybersecurity protocols. Regular data backups, secure data storage, and multi-factor authentication can significantly reduce the risk of data breaches.
• Implement strict access controls and monitor employee activity to prevent insider threats.
• Conduct due diligence on third-party vendors and ensure they meet security standards.

Financial Risks

Financial risks are threats to the financial stability and performance of fintech companies.

One of the most significant financial risks faced by businesses is investment risk. Investing in the wrong opportunities or making poor investment decisions can result in significant losses, potentially threatening the viability of the business.

Securing adequate starting capital is another financial risk that fintech businesses must manage. Insufficient capital can hinder growth and prevent the business from achieving its objectives.

How to mitigate financial risks?

• Conduct extensive research and analysis before making any investment decisions. When implementing risk management in financial technology consider factors such as the potential return on investment, market trends, and the financial stability of the investment opportunity.
• Diversify investments across different assets and industries to mitigate the risk of losses in any one area.
• Create a comprehensive business plan that includes a detailed financial analysis. This analysis will be an essential part of your financial compliance management. It will estimate the amount of capital needed to start and operate the business and how long it will take to become profitable.
• Seek funding from multiple sources, such as investors, banks, and government grants, to secure adequate starting capital.

Vendor Choice Risks

Vendor choice risks in fintech are the challenges associated with selecting a service provider to support fintech operations. 

Choosing the right vendors and vendor risk management fintech are essential parts of business. However, selecting the wrong vendor can lead to serious risks, such as security breaches, regulatory violations, and reputational damage.

How to mitigate vendor choice risks?

• Conduct thorough due diligence when selecting vendors. This may include evaluating the vendor’s track record, assessing their security measures, and ensuring that they comply with relevant regulatory requirements.
• Have a clear contract that outlines each party’s responsibilities, liabilities, and expectations. As a part of fintech risk management, you can consult with a lawyer to avoid any unpleasant surprises after signing the contract.

Vendor Lock Risks

Third-party risk management is our next point. Fintech companies rely on third-party vendors for critical services such as payment processing, data storage, and customer service. Still, this reliance can create a risk known as “vendor lock.” In this scenario, the fintech company becomes so dependent on a vendor that they are unable to switch to another provider without significant disruption or cost.

How to mitigate vendor lock-in risks?

• Ensure that your company maintains ownership and control of the data, even if it is stored with a third-party vendor. The data can be achieved through strong contractual protections and robust data management policies. That ensures data is always accessible and can be easily transferred to another provider if needed.

Maintenance Risks

Fintech systems are highly complex and require ongoing maintenance to ensure that they remain secure, reliable, and up-to-date. This maintenance can involve regular upgrades, patches, bug fixes, and ongoing support. If fintech companies do not properly plan and budget for maintenance costs, they can quickly become overwhelmed by the expenses required to keep their systems operational.

How to mitigate maintenance risks?

• Carefully plan and budget for maintenance costs as part of your overall financial planning process. This planning should include estimating the cost of ongoing maintenance and support, as well as budgeting for periodic upgrades and replacements of hardware and software.
• Choose vendors who provide reliable and timely maintenance services and who are committed to keeping the systems up-to-date with the latest security and technological advancements. Ask them what risk management technology in financial services they use and understand how they can benefit your business.
• Always monitor and evaluate the maintenance plans to ensure that they are effective and cost-efficient. This may involve assessing the frequency and cost of maintenance activities, identifying areas where cost savings can be realized, and regularly reviewing vendor contracts to ensure that maintenance costs are reasonable and well-defined.

Client Support Risks

Fintech companies use digital channels to provide their services to clients. This means that there are certain risks associated with client-facing support, such as chat integration, human factor, and regions. For example, if chat integration is not properly managed, it could lead to misunderstandings between the client and the fintech company, resulting in financial losses.

Similarly, if employees are not properly trained to handle client queries or complaints, this could lead to reputational damage or even legal liability. Lastly, operating in different regions or countries can bring additional regulatory and compliance risks that need to be carefully managed.

How to mitigate client-facing risks?

• You need to implement robust processes and systems to manage client-facing support. This could include training and ongoing education for staff, implementing best practices for chat integration, and ensuring compliance with regulatory requirements in different regions or countries.
• Have contingency plans in place in case of unexpected events, such as technology failures or security breaches. Remember, your risk management in financial technology should be highly client-focused and professional.

Architecture Risks

The term “architecture risk” refers to the possibility that a project’s architectural design may not meet the project’s requirements. Such fintech risks may arise from capacity constraints, subpar designs, flaws, and inefficiencies that may result in rejection by the sponsor or hinder project progress.

For example, the Downing platform, a fintech platform created by DashDevs team, enables investors to invest in renewable energy projects. The platform relies on complex algorithms and data analytics to identify and evaluate potential investment opportunities.

One key risk of the Downing platform is the potential for technology failures or errors. If the algorithms used to evaluate investment opportunities were not properly calibrated, this could result in poor investment decisions and financial losses for investors. Similarly, if the platform experienced a security breach, this could compromise sensitive investor data and damage the company’s reputation.

How to mitigate architecture risks?

• Implement robust testing and quality assurance processes throughout the development lifecycle. This should include regular code reviews, penetration testing, and other security measures. For efficient risk management fintech, it is also important to have contingency plans in place. It will help you  in case of unexpected events, such as technology failures or security breaches.

Development Risks

There are a number of issues that can arise during the development process: unexpected technical issues, budget overruns, or delays in delivery. Being the owner of a fintech company means carefully managing development risks to ensure that their products and services are reliable and secure.

How to mitigate development risks?

• Implement robust planning and project risk management processes. Include regular status updates and progress reports, as well as contingency plans in case of unexpected issues. It’s also important to have clear communication channels between the development team and other stakeholders, such as senior management, investors, and clients.
• Use agile development methodologies, which can help reduce the risk of surprises by providing greater flexibility and responsiveness. This involves breaking down development projects into smaller, more manageable tasks, regularly reviewing progress, and making adjustments as needed.

Risk Management in Fintech: How To Make Your Company Risk-Proof

Neglecting the risk management software projects can put the final product at risk and have serious consequences for the entire organization, particularly when the project is essential to the company’s operations.

However, there have been lessons learned from previous failures, leading to the development of more effective risk management methodologies. Use the next critical steps to create an actionable fintech risk management framework and safeguard your projects from possible threats.

1.Early engagement with key stakeholders

Gaining early buy-in from stakeholders is critical to the success of a fintech software development. Key stakeholders include end-users, executive management, and change agents in core teams, who can provide valuable input and support throughout the project.

It is important to agree on key objectives and outcomes with stakeholders and ensure that everyone is aligned with the project’s scope. This also allows the project team to understand external factors that may impact the project’s success.

2.Implementation of risk management processes

Although risk management in fintech is now a common procedure, getting everyone on board can be challenging when there is pressure to move forward quickly. To make risk management a common-sense approach, it is crucial to identify technical and business risks that could impact the project.

• Preparing a risk register is recommended to document identified risks, assess their likelihood and impact, and plan mitigation strategies. The risk register should be regularly reviewed throughout the project’s lifecycle.
• Researching risk management technologies in financial services and selecting the one that suits your project best. This will help you make your fintech risk management framework less dependent on manual processes and more efficient in identifying risks.

3.Defining project milestones and objectives with precision

It is essential to define project milestones and objectives to set up efficient risk management in financial product development. This involves breaking down projects into smaller, more manageable components and setting specific targets for each phase of development.

By doing so, fintech companies can better track progress and identify potential regulatory, financial, security, and operational risk in fintech at each stage of the project. Clear and measurable objectives also allow for more accurate risk assessment, which enables companies to take proactive measures to mitigate risks before they become significant issues.

In addition, setting precise project milestones and objectives helps establish a clear sense of direction and purpose for the project team. This fosters better collaboration and ensures that everyone involved is working towards the same goal. Moreover, it helps to manage expectations and communicate progress to stakeholders, which is important for maintaining trust and confidence in the project.

4.Collaborating with project financiers and financial team

• Establishing a working relationship with the project’s funding body is crucial when financial implications are tied to the project’s success. This is especially true for teams with strong technical expertise but limited experience in cost management or budgeting.
• The finance team can provide valuable assistance in creating a detailed budget that considers all cost implications, including technical materials and equipment, resource costs, and business overheads. Their prior involvement in other projects can help understand the types of costs that may be encountered.
• If cost overruns occur, the finance team can draw on their previous experience to identify areas where these overruns are likely to happen and make the necessary provisions. They can also assist in securing additional funding if required, despite their best efforts to identify the correct allocations in the initial budgeting process.

According to ResearchGate, two-thirds of enterprise IT projects go over budget, so planning and budgeting should be integral parts of the fintech risk management framework

5.Consistently monitoring and sharing updates on advancement

To keep stakeholders informed and engaged, it is important to communicate the progress of a project regularly. This can be done through concise dashboards that provide key metrics and pertinent information, including important activities, progress made towards goals, challenges faced, and potential risks or concerns.

Regular reporting can also help with the following:

• Providing relevant parties with timely information can enable early intervention that can prevent risks from eventuating or minimize their impact.
• Documenting important decisions and actions taken during the project, which can be useful in evaluating the project’s success later and may be required if challenged in the future.
• Incorporating any changes to the project scope that may arise due to evolving business needs or the identification of new challenges or risks.
• Revising realistic timelines for project completion.

6.Effective staff management

To ensure staff stay motivated and engaged in long-term and high-stress software development projects, try to align their personal goals with the project’s goals and incentivize behaviors that lead to success.

The technical expertise and project-specific knowledge of team members become increasingly important as the project progresses, and losing staff before the completion of crucial testing and implementation phases can have a negative impact on the project’s success.

7.Assessing the Success of the Project

During the project’s execution, it is crucial to carry out a formal quality check or audit process to provide an impartial assessment of the project’s progress and potential success. This is particularly useful when core team members are heavily involved in specific areas, making it difficult to see the overall project from an unbiased perspective.

Likewise, at the conclusion of the project, you should always evaluate the results and learnings to enable future projects to benefit from an understanding of what went well and what could have been improved.

Best Practices For Effective Fintech Risk Management

We already mentioned a lot of criteria for creating a risk-proof team. So, let’s take a look at some best practices for establishing efficient risk management in financial product development:

1.Develop a Fintech Risk Management Plan

You should have a formal plan in place that outlines the approach to identifying, assessing, and managing risks. This plan should include clear guidelines for fintech risk management practices, as well as policies and procedures for addressing specific types of risks.

2.Establish a Risk Management Team

Assemble a dedicated team responsible for managing and monitoring the fintech risk within the company. This team should have the authority to make decisions and take action to mitigate fintech risks. It should also participate in developing a fintech risk management framework and choosing risk management technology in financial services.

3.Foster a risk-aware culture

All employees should be educated on the importance of risk management in financial product development and their role in mitigating risks. The company should foster a culture of risk awareness and encourage employees to report any risks or concerns they identify.

4.Conduct Regular Risk Assessments

Companies should regularly review fintech regulations and assess potential fintech risks and evaluate their likelihood and potential impact. These assessments should be conducted across all areas of the company and include an analysis of both internal and external risks.

5.Implement Risk Mitigation Strategies

Once the fintech risk has been identified and assessed, companies should implement strategies to mitigate them. This may include developing contingency plans, establishing controls, or purchasing insurance.

6.Monitor and Review Risks

Companies should continuously monitor and review risks to ensure that their fintech risk management strategies are effective. This includes reviewing and updating risk management plans and conducting periodic risk assessments.

Risk Management Technology In Financial Services: How DashDevs Can Help

Effective risk management is crucial for any company, especially in the fintech industry, where risks can be significant and potentially devastating. Creating a culture of fintech risk management and readiness involves identifying potential risks, developing strategies to mitigate those risks, and regularly reviewing and updating those strategies. It also involves ensuring that all employees understand the importance of risk management and are trained to identify and report potential fintech risks.

With DeshDevs, you can be confident that all potential risks in fintech will be carefully considered and managed. Our experienced team has a proven track record of effective risk management in the industry. We prioritize staying up-to-date with the latest regulations and industry best practices and provide assistance in any fintech questions that arise. 

Don’t miss your company’s success to chance — partner with DeshDevs for expert risk management solutions.