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Fintech is increasing operational risk to banks

European Banking Association report reveals fear of greater operational risk because of increased take-up of fintech in financial services sector

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More than half of banks in Europe expect an increase in operational risk to their organisation over the next 12 months, according to a major report from the European Banking Association (EBA).

The EBA said perceived operational risks have escalated over the past three years, with banks’ rapid move to fintech fuelling the latest surge.

According to an EBA survey of banks, 55% of respondents expected operational risks to increase over the next year. This is jump from the 43% that said so in a similar study a year ago, and 35% that said so the year before.

Current concern is driven by the growing reliance on digital platforms to provide customer services which has increased the likelihood of cyber attacks and IT failures. “[Digital] opportunities are accompanied by a number of new pockets of risk,” said the EBA report. “In this regard, cyber and data security are key risk drivers.

“A high and growing reliance of banking operations on IT platforms, digitalised product channels for banking services, outsourcing to third-party providers of IT-related tasks and functions and communication networks renders banks vulnerable to operational risks.”

The survey also found that 42% of respondents identify cyber risk and data security as the main drivers for increasing operational risk and 16% cited IT failures as a factor.

The EBA said outsourcing, which banks are using increasingly to access new technology, is also a major risk. Although it is not the only operational function outsourced by banks, IT outsourcing is becoming more significant.

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“While banking operations have become increasingly dependent on IT platforms, cost pressures and operational challenges have contributed to an increasing reliance on third-party service providers, to which a range of IT services and data are outsourced,” said the EBA. “Notwithstanding its benefits, the outsourcing of IT services and data poses security issues and challenges to governance and controls, as well as to data management.”

The organisation said it will update the Committee of European Banking Supervisors’ guidelines on outsourcing as a result of the increased importance of IT to banks and the growing use of cloud services.

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