Accenture 2015 Global Risk Management Study: North American Banking Report

Paths to Prosperity: Choose Risk and Return

Seeking profitable growth in a challenging environmentNorth America’s banks continue to face challenges as they look for a roadmap to deliver sustainable growth. Seven years on from the financial crisis, both retail and commercial banks are still dealing with the regulatory fall-out of systemic collapse, while also facing tough global economic headwinds, the increasing threat posed by new players, as well as rapidly changing customer expectations.

In the US, the fourth quarter of 2014 saw many large banks report disappointing results at the end of a tough year. Despite a recovering US economy, and stronger balance sheets across the sector, profits and revenues fell for some of the largest institutions. Key challenges continue to include regulatory fines, low interest rates and rising costs to manage risk and compliance operations.1 In addition, some North American banks have faced challenges in passing the Federal Reserve’s stress tests and, in some cases, been forced to adjust their capital plans.

Looking to the years ahead, there is no likely respite. Continuing macroeconomic changes, historically low oil prices, a strengthening US dollar and the prospect that interest rates will rise in the near future, are all on the agenda of banking leaders.

In Canada, meanwhile, the performance of leading banks last year was stronger and the sector continues to benefit from the way in which it weathered the financial crisis. The World Economic Forum has rated Canadian banks as the soundest in the world in each of the past seven years.2 Here too, however, the outlook is cloudy, with low commodity prices and, again, the potential for higher interest rates posing a threat to the benign economic conditions the banking sector has enjoyed. Innovative and disruptive technology players are also eyeing the marketplace in areas ranging from payments to small business loans.

Against this backdrop, the challenges for all North American banks are now similar. While the fortunes of the banking sectors in the US and Canada diverged sharply during and after the financial crisis, they now confront many of the same issues. We see these

banks exploring new ways to increase efficiency and productivity to encourage sources of sustainable and profitable growth. They will need to embrace innovation more openly and exploit the potential of new digital technologies and digitally-enabled business models (while avoiding being disintermediated by new entrants). And they need to position risk management to play a more proactive role in these efforts, rather than devoting too much of their time and talent to fire-fighting and operational issues.

This latter imperative, we feel, is essential as banks seek to manage cost bases that have grown as a result of needing to respond to regulatory challenges and improve their compliance capabilities. Within risk and compliance functions, North American banks have seen an explosion of expenditure.

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Key challenges

North American (NA) banking respondents to theAccenture 2015 Global Risk Management Study* face 3 key challenges:

Risk management in the North American banking sector

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of NA bank respondents are open to greater digital risk – less than the global average.

expect cyber risk to increase.

1

Regulatory fall-out of systemic collapse

2

Tough economic headwinds

3

New entrants from technology sector

Approach to digital

of NA bank respondents believe risk is already a significant enabler of long-term profitable growth (28% for all surveyed banks**).

think risk will be critical or important to innovation and product development.

Risk management supporting growth

of NA bank respondents see very frequent interaction between the CRO and board.

think risk function interacts very frequently with the CIO.

Risk’s influence remains limited in places

of surveyed NA banks think cyber and IT risks will become more severe.

say emerging digital risks are taking up more and more of the CRO’s time and energy.

Emerging operational risks

of NA banks surveyed make extensive use of analytics to manage credit risks.

use analytics extensively for operational risks.

Underutilized analytics

of NA banks surveyed have extensive digital technology knowledge.

have recruited data analysts and scientists (49% for all surveyed banks**).

Digital talent

34%

62%

44%

66%

30%

30%

12%

26%

62%

78%

26%

42%

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Risk appetite returning in a targeted wayThere is some evidence that North American banks are seeking new growth opportunities, but the pace appears slow. Among the North American banking respondents to Accenture’s 2015 Global Risk Management Study, 42% have greater risk appetite for new product development than two years ago (see Figure 1). Through our work in the sector, we have also observed banks willing (and able) to take on more financial risk – such as extending credit to new customer segments with different risk profiles than previously served.

Risk management is playing a critical role in helping North American banks navigate back to growth. In recent years, risk management has earned a seat at the table and is increasingly engaged and involved in the strategic decision-making process.

“The role of risk management is not about saying ‘Yes’ or ‘No’ to new ideas, business models or products,” says Ash Gupta, Chief Risk Officer and President, Risk and Information Management at American Express Company. “It’s about ‘how’, it is about having a solution-oriented mindset

focused on service excellence and strong risk controls. We strive to develop a deep understanding of the potential product or service being considered and serve as an enabler of innovation.”

Figure 1. Compared to two years ago, how has senior management’s appetite for risk changed when it comes to decisions made in the following areas? (Represents percentage who say greater risk appetite)

Source: Accenture 2015 Global Risk Management Study – North American Banking respondents

New product development42%41%

Mergers and acquisitions40%37%

Business model change36%35%

Major digital initiatives34%38%

Geographical expansion38%28%

Alliances and partnerships36%39%

North America Rest of the world

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Digital, a key channel to help drive growth for North American banksWe continue to see opportunities for the banking sector to utilize new digital technologies as a significant contributor to supporting growth objectives. Digital technologies encompass two broad categories: client-facing digital initiatives, including online sales channels to mobile, and digital tools and technologies that can be leveraged within the organization, such as cloud and analytics.

Currently, only 34% of North American respondent banks say they have greater risk appetite for major digital initiatives, compared with 38% elsewhere in the world (see Figure 1). With technology-powered, non-traditional banking companies increasingly posing the risk of disintermediating banking business models, banks may only have a relatively narrow window of opportunity to develop and refine their digital offering. This suggests that banks could be doing more to step up their digital investments as they seek out new sources of sustainable and profitable growth – and differentiation in the eyes of the end customer.

In this context, digital for the customer is likely to include an omni-channel

approach to banking, with seamless interaction across branch, online and mobile. It also encompasses moving beyond traditional boundaries to build a digital ecosystem with existing provider partners and other key players in areas such a home goods, health, travel and leisure, communication and transportation.3

“Banks are now seeking growth and differentiation and a lot of their thinking needs to have a digital flavor to it,” says Richard Lumb, Group Chief Executive Officer for Financial Services at Accenture. “In addition, digital can be a powerful tool to reduce the cost to serve, because a transaction on a digital channel is significantly lower than it would be in a branch.”

The relative slow pace of North American banks – particularly those in the US – to develop new digitally-enabled products and services is surprising given their historic reputation for leading on innovation throughout the retail and commercial sectors. All the more so, given the flourishing fintech industry clustered around Silicon Valley and New York.

Moreover, those banks that fail to advance their digital capabilities – either by developing them or partnering with third parties – risk being eclipsed by new rivals. We have already seen, for example, the initial public offering (IPO) of the US’s Lending Club Corporation, the online peer-to-peer lending platform that began life as a Facebook Inc. application, which was valued at more than $5 billion in December 2014.4

The emergence of these new rivals constitutes a burning platform for North American banks. Accenture’s study of the North American banking market in 2014 found that almost three-quarters (72%) of consumers aged 18 to 34 would “likely” or “very likely” bank with a technology, telecom or retail company if it offered banking services.5 According to Accenture estimates, up to a third of banks’ revenues could be at risk by 2020 from these threats.6 This may seem like a long time in the future, but banks need to be laying the groundwork now, particularly given the immediate threat from disruptive new entrants.

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Digital transformation as the cornerstone of profitable growthDigital disruption is already well underway in the banking sector – Apple Inc.’s launch of Apple PayTM, for example, imposes a new player in the payments system.7

In our view, today’s consumers expect banks to provide services that offer the same levels of convenience, simplicity and speed to which they have become accustomed from many other services they use every day. Incumbent banks could be facing a major risk of customer defection. This may be more of an immediate threat in the US than in Canada, where regulation of organizations that may offer banking services is more prescriptive. But new entrants are certainly targeting niches in both marketplaces.

Banks that can transform their operations to benefit from automation, support seamless omni-channel capabilities, make risk management more efficient and improve the customer experience are likely, in our view, to see the biggest benefits in terms of profitable growth. Digital and analytics will be key tools to facilitate this by helping to provide a compelling customer proposition across multiple channels. As Accenture explored in its report The Everyday Bank, this is likely to involve banks being at the center of a “digital village” that integrates banking services with broader advice, access and communication across a wide range of lifestyle services spanning the home, health, transportation and education.8

These new tools can also provide opportunities to reduce cost to serve, for example by increasing levels of automation and migrating customers from costly interaction with agents to less expensive digital channels.

Digital will also play a vital role in strengthening risk management, for example by providing data in near-real time to support fast and efficient decision making, and using risk analytics to forecast losses more effectively and better evaluate macroeconomic shocks to client portfolios.

For now, however, North American banks are not taking the lead in these areas. This may partly reflect the greater regulatory scrutiny that they have faced since the crisis – particularly in the US. This has been a major distraction, consuming significant resources as well as prompting a greater sense of caution overall.

There is, nonetheless, an opportunity to seize the initiative, and the risk management function can play an important role. For example, 66% of North American banking respondents see the risk function playing a critical or important role in innovation and product development (see Figure 2).

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Figure 2. How would you rate the importance of your risk function as a means of achieving the following? (Represents percentage who say critical or very important)

Source: Accenture 2015 Global Risk Management Study – North American Banking respondents

Managing liquidity and cash flow

Enabling long-term profitable growth

Improving accuracy and integrity of data

Reducing the cost of capital

Managing the increasing volatility of the economic and financial environment

Managing reputation with stakeholders (including analysts, the media and the public)

Infusing a risk culture in the organization

Reducing operational, credit, or market losses

Improving capital allocation

Reconciling the need for global coordination and local regulatory coverage

Risk-adjusted performance management

Innovation and product development

86%76%

84%77%

76%72%

76%72%

77%72%

73%72%

80%84%

78%70%

78%70%

77%70%

83%68%

65%66%

North America Rest of the world

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Risk management as a key partner in facilitating digital transformationTo capitalize on that intention, the priorities for the risk function should be updated. Over the past few years, we have seen the emphasis on risk management among US banks move from restoring reputation, meeting regulatory demands and maintaining the license to operate.

We have observed that Canadian banks have enhanced their reputation during the crisis but have also had to respond to regulatory change. Although these will remain key priorities in the future, Chief Risk Officers (CROs) and their teams should combine those demands with a new set of responsibilities. These need to be more forward-looking, strategic, innovation-enabling and centered around transforming banks for the digital age.

“The way I measure success is when I have the business folks calling me up, inviting me to meetings and wanting my input,” says Bob Swinamer, Head of Enterprise Risk Management at Silicon Valley Bank. “When you’re that Chief Risk Officer sitting in the corner office and your phone is never ringing, that’s not success.”

Our study suggests that risk management functions in North American banks are beginning to make progress in these areas. Some 44% believe the risk function is already making a significant contribution to facilitating long-term profitable growth at their bank, compared with 28% of institutions in the rest of the world. More than seven in ten North American banks believe risk is making a contribution to product development and innovation to some extent.

Making progress on these goals will depend on much closer cooperation between the risk management function and other functional areas of the bank. Currently, however, many risk professionals admit that this is not in place to an appropriate extent. For example, less than one third of the North American respondents in this study (30%) say there is very frequent interaction between their CROs and the board. The figures for very frequent interaction between CROs and certain executives are even lower, including the Chief Information Officer or Chief Technology Officer (CIO/CTO) (12%), the Chief Marketing Officer (CMO) (28%) and the Chief Financial Officer (CFO) (32%). As risk management focuses on helping North American banks recapture their market leadership in innovation, we believe these relationships will need to expand and become closer as current interaction levels are somewhat disappointing (see Figure 3).

The value to the business of risk management must be articulated. This means explaining to senior management how risk management serves as an opportunity to seek independent challenge – in essence, taking out a “free insurance policy” against sub-optimal decision making. We believe that risk management should position itself as a function that is not there to prevent risk, but to facilitate it in a way that everyone is comfortable that it is being controlled.

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Figure 3. Describe the interaction between the organization’s CRO (or equivalent) and the following? (Represents percentage who say interaction is very or quite frequent)

Source: Accenture 2015 Global Risk Management Study – North American Banking respondents

CEO (Chief Executive O�cer)74%74%

Board72%69%

COO (Chief Operating O�cer)68%69%

CSO (Chief Security O�cer)68%77%

CMO (Chief Marketing O�cer)61%66%

CFO (Chief Financial O�cer)68%67%

69%64%

Business unit Managing Directors/heads

76%64%

CCO (Chief Compliance O�cer)

73%64%CIO/CTO (Chief Information O�cer/

Chief Technology O�cer)

63%54%

Regional Managing Directors/heads

North America Rest of the world

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The shift to digital introduces new risks to operationsThe concept of “operational risk” – as defined under Basel II – has broadened significantly and will continue to expand in scope and importance. Banks now find themselves dealing with a huge variety of risks, from cyber and digital to the risks associated with a proliferation of third parties and outsourcing arrangements.

Sixty-two percent of North American respondents expect cyber risk will become more severe over the next two years (see Figure 4). And 78% agree that emerging risks, including cyber and digital, are consuming an ever-greater proportion of the CRO’s time and energy. These “risks to operations” can no longer in our view be considered a single catchall category; instead, they should be managed more distinctively and form part of everyday operations.

North American banks are acutely aware of such dangers and this may impede their ability to innovate. “When you venture into unchartered territories, as we are doing by getting into new and exciting innovative payment technologies, that increases our operational risk exposure,” says Bob Swinamer at Silicon Valley Bank. “We have to ensure that we are applying the right resources to manage those risks.”

To manage these transitions, serious consideration should be given to new technology platforms, processes, decision-making protocols and approaches to innovation. These might include opening up the innovation process and partnering with a range of small, agile start-ups.

More broadly, North American banks are encouraged to explore partnerships and joint ventures to gain access to the capabilities, technology and know-how they need. This in our view involves embracing the fintech sector, rather than confronting it as a rival. Such an approach can help bring competitive differentiation and thinking. Still, this more open, collaborative approach can create entirely new risk exposures if not managed effectively.

New exposures will also come from the interaction between different channels, including mobile and online. Banks may be well accustomed to the risks that can come from employees in branches, but what about the teams and partners that may be running the mobile operations? How can banks secure their operations against the backdrop of a widening ecosystem, and be confident that employees are abiding with the organizations’ risk appetites and cultures?

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Figure 4. Over the next two years, what change is expected to the severity of the following risks facing the business? (Represents percentage who expect risks to become slightly or significantly more severe)

Source: Accenture 2015 Global Risk Management Study – North American Banking respondents

68%59%

64%57%

62%55%

62%53%

61%60%

55%58%

62%67%

57%54%

60%52%

57%50%

47%46%

53%44%

57%42%

42%42%

Credit risks (e.g. credit, counterparty, issuer risks)

Strategic risks (e.g. new products or services)

Cyber/IT risk

Regulatory risk

Market risks (e.g. equity, FX, commodity risks)

Fraud/financial crime

Business risks (e.g. changing margin, volume, market demand)

Legal risk

Liquidity risk

Market disruption from new technologies

54%48%

Reputational and brand risk

56%48%

Political risk

Operational risks (e.g. processes, people, systems, external events, project risks)

Employee malfeasance

Government fiscal crises

Outsourcing provider failure

North America Rest of the world

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Analytics, a powerful tool to help enhance the customer experience

There is considerable scope for banks to increase their use of analytics, not only to shift towards a more forward-looking view of risk, but also to enhance the customer experience, particularly in a digital context.

The shift to digital means consumers are becoming accustomed to a higher level of service. Banks are no exception and need to respond to this trend. They could, for example, provide a more rapid decision on lending. Banks can also move to or improve risk-based pricing, leading to better profitability by customer and expanding credit availability. In addition, they can use risk analytics to help determine the right products for the right customers.

North American banks are at a relatively early stage of integrating the use of analytics into their strategic decision making. Only around 10% say that risk analytics is integrated with strategic planning and decision making; for many, relevant, timely inputs from risk analytics are not available. Similarly, only 12% say that risk analytics is applied consistently across the organization and can address all relevant risks and exposures.

To respond to these requirements, we see banks ramping up their investment. For example, 64% expect to increase investment in big data and analytics over the next two years (22% by greater than 20%). Only a handful of banks see a decline in investment here.

North American banks are already users of analytics technologies, but typically in fairly targeted areas. For example, only 30% say that they make extensive use of analytics for managing credit risks (although 40% make moderate use) and 26% for managing operational risks (30% make moderate use here - see Figure 5). This is somewhat lower than the proportions in the rest of the world, which are 35% for extensive use and 42% for moderate.

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Source: Accenture 2015 Global Risk Management Study – North American Banking respondents

Figure 5. Describe the risk management function’s use of data and analytics in addressing the following types of risk?

Strategic risks (e.g. new products or services) 32% 46%

Business risks (e.g. changing margin, volume, market demand)

34% 42%

Credit risks (e.g. credit, counterparty, issuer risks) 30% 40%

Government fiscal crises 36% 32%

Cyber/IT risk 34%34%

Reputational and brand risk 36%30%

Fraud/financial crime 34%30%

Market risks (e.g. equity, FX, commodity risks) 38%26%

Market disruption from new technologies 34%26%

Political risk 40%18%

Regulatory risk 32%26%

Outsourcing provider failure 36%20%

Employee malfeasance 40%16%

Operational risks (e.g. processes, people, systems, external events, project risks)

30%26%

Legal risk 30%20%

34%16%Liquidity risk

Selection and implementation of IT platforms and tools 75%0%

Extensive Moderate

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The transition to digital and the demand for new skills and capabilities in the risk function

Recruitment in these areas has been slower for many North American banks, with rivals in Europe and Asia Pacific taking the lead. For instance, 44% of North American banks have recruited business analysts for their risk functions over the past two years, compared with 58% in the rest of the world. Only 42% of North American banks have recruited data analysts and scientists compared with 49% in other regions (see Figure 6).

Nor are these banks necessarily poised to do better. In both of these areas, the recruitment intentions of North American banks for the next two years lag their counterparts in Europe and Asia. As a result, there would appear to be little immediate prospect of North American banks catching up with their global peers in the near term.

This is unfortunate - to serve as a true enabler of digital innovation, risk management needs to develop the right level of experience, skills and

knowledge – and keep this knowledge up to date against a fast-moving and dynamic backdrop. Only then can risk management participate in the broader strategic discussions around digital. Yet, for now, survey respondents admit that their level of skills and experience is not what it should be. Asked how they would rate the risk management function’s level of expertise to influence strategy and major decisions in technology strategy, just 24% say that it is high, and 34% say the same about big data and analytics.

Figure 6. Which of the following types of expertise has the bank recruited in the past two years?

Accountants

Cyber risk experts

Strategic planners

Business analysts

Security specialists

Data analysts/scientists

Fraud experts

Regulators

Professionals from outside financial services

Former hackers

Quants/risk modelers

Lobbyists

50%48%

46%59%

46%

44%58%

42%53%

49%42%

49%42%

50%

55%40%

39%32%

38%32%

41%30%

28%24%

North America Rest of the world

Source: Accenture 2015 Global Risk Management Study – North American Banking respondents

Asked about the skills and capabilities that will be most in demand for their risk management function, North American respondents point to knowledge and understanding of digital technologies as their number one answer. Only 26% say that they have these capabilities in place “to a great extent”.

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Conclusion

The answers to many (but not all) of the specific challenges facing the banking sector can be found in a move towards digital technologies. This is where new profit opportunities are most likely to be developed, both in advancing customer-facing products and services as well as enhancing profit and pricing outcomes thanks to insights from data and analytics applications. Digital operations also represent an opportunity to reduce costs while also strengthening the security and resilience of the banking infrastructure.

For North American banks, now is the time to decide how they will address these themes. Will they seek to return to their

traditional position of leadership, which has been eroded since the crisis? Or will we see a more balanced global banking sector, in which the banks of Europe and, particularly, Asia, compete and innovate with their North American counterparts?

North American banks have some advantages. In Canada, for example, the resilience of the banking sector to the crisis has been impressive, enhancing the reputation of the sector on the global stage and with its domestic customers. In the US, legislators continue to make the case for the financial services sector – and banks in particular – as one of the country’s most important industries, both in terms of

the economic contribution it makes itself and its wider role in facilitating growth. The US’s relative economic strength – not least the continuing strength of the dollar – is also in banks’ favor.

Yet North America’s banks have to be prepared to capitalize on these strengths, balancing crucial risk management discipline with the need to seek out growth. That will require the risk function within banks to play a far more strategic role, partnering with the rest of the business to facilitate innovation within a robust risk framework.

On a global basis, the banking industry now stands at something of a crossroads. Broadly speaking, it has righted itself following the turmoil of the financial crisis (although challenges remain) and is now thinking about how to move forward. Some banks are looking for new sources of growth while also focusing on managing ongoing volatility.

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Acknowledgements

We would like to thank the senior executives from organizations in North America who took part in our qualitative interview discussions and participated in our survey. We are grateful for the input of senior staff at each of these organizations:

American Express Company Silicon Valley Bank

We would like to thank the following Accenture executives who also contributed ideas and guidance to this effort:

Harpreet Behl (San Francisco) Steve Culp (Chicago) Andres Garcia (New York) Fred Kim (Chicago) Samantha Regan (New York) Chris Thompson (New York)

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About the Research

Participants came from the banking, capital markets and insurance industries with 150 respondents from Asia Pacific (32%), 170 respondents from Europe (36%) and 150 respondents from North America (32%).

We also conducted in-depth interviews in 2014 and 2015 with senior leaders from 50 leading organizations across regions. They provided supporting insights for our data-driven research, while presenting useful perspectives from companies in each industry.

This North American Banking Report presents the insights and perspectives captured from 50 banking industry executives from the retail, corporate, mortgage and card banking areas, including in-depth qualitative interviews with senior banking executives.

The Accenture 2015 Global Risk Management Study is the fourth edition of our study first published in 2009. It is based on a quantitative, online survey conducted by Longitude Research on behalf of Accenture between November 2014 and January 2015 among 470 senior risk management executives involved in risk-management decisions.

Company size Total

Between US$1bn and US$5bn 235

Revenues over US$5bn 235

Total 470

Respondent Roles Total

Chief Risk Officer 141

Chief Executive Officer 78

Chief Financial Officer 147

Chief Compliance Officer 28

Other C-Suite 76

Total 470

Financial Services Respondents

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References

1 “Biggest Banks Lag Behind as Economy Gains Steam,” Wall Street Journal, January 15, 2015. Access at: http://www.wsj.com/articles/fourth-quarter-trips-up-big-banks-1421344540 (access required)

2 “Canadian banks hold steady in top place according to World Economic Forum ranking: 7th year in a row,” Canadian Bankers Association, press release, September 3, 2014. Access at: http://www.cba.ca/en/media-room/65-news-releases/715-canadian-banks-hold-steady-in-top-place-according-to-world-economic-forum-ranking-7th-year-in-a-row

3 “2014 North America Consumer Digital Banking Survey,” Accenture, April 2014. Access at: http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-2014-NA-Consumer-Digital-Banking-Survey.pdf

4 “Lending Club valued at $5.4bn in IPO,” Financial Times, December 10, 2014, Access at: http://www.ft.com/cms/s/0/261f046e-80b9-11e4-b5cf-00144feabdc0.html#axzz3TH58vJJl (access required)

5 “Younger Generations Far More Open to Branchless and Alternative Banks, Accenture Survey Finds,” Accenture press release, May 27, 2014. Access at: http://newsroom.accenture.com/news/younger-generations-far-more-open-to-branchless-and-alternative-banks-accenture-survey-finds.htm

6 “The Everyday Bank: A New Vision for the Digital Age,” Accenture, June 2014. Access at: http://www.accenture.com/us-en/Pages/insight-everyday-bank-new-vision-digital-age-banking.aspx

7 “Apple looks to swipe the payments market”, Financial Times, September 9, 2014. Access at: http://www.ft.com/cms/s/0/85eb978a-3844-11e4-9fc2-00144feabdc0.html#axzz3W4DDHiu0 (access required)

8 “The Everyday Bank – How Digital is Revolutionizing Banking and the Customer Ecosytem,” Accenture, January 2014. Access at: http://www.accenture.com/microsite/everydaybank/Documents/media/EverydayBank-POV.pdf

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