Financial Institutions: Minimize your Risks with Technology
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Financial Institutions: Minimize your Risks with Technology

Running a business in the financial sector takes a lot of courage. The courage is supported by a sense of mission and meaning resulting from the value the company provides to its customers, receiving adequate remuneration in exchange. 

However, even if an entrepreneur has a good business idea and the company prospers for some time, at some point there may be a risk factor that threatens its operation. 

Risk factors lurk in almost every area of a company's operations, therefore monitoring and addressing risks is a constant process that should be woven into current operational activities, strategy development, and change management processes.

Risk monitoring includes calming disturbing thoughts like: 

  • What if the competition suddenly launches a service that will take away our customers? 
  • What if the legislator suddenly changes the law and we are forced to allocate funds that we had earmarked for something else to implement the resulting change in the organization? Is our customers' data safe? 
  • Are the partners we use reliable and ready for exceptional situations? Does the technology we use protect us against cyber attacks? 
  • Are our employees well trained and perform their duties with due diligence, or do they expose the company to financial penalties under the law?

Such questions can be multiplicative. Fortunately, entrepreneurs running financial firms are not helpless against them. 

First of all, many of these questions and worries can be addressed by accumulating reliable knowledge and implementing specific policies into our activities (e.g. rules for assessing third-party companies with which we cooperate, training for employees performing key activities, or how to proceed in the event of an act of terrorism). 

When the company is operating in a calm environment, these policies seem like they are slowing things down and making the work harder than it has to be, but when the risk materializes, they can save the company's business.

Special Conditions Related to Risk in Financial Companies

While any company may experience the risks listed above, financial companies, whose activities involve lending money to individuals and other companies (consumer loans, working capital loans, factoring, loans, installment purchases) face additional risk factors.

Firstly, financial companies must manage their liquidity—monitoring the flow of repayments and disbursements to ensure they do not run out of funds. This aspect is important when deciding whether to grant loans for particularly large amounts or in situations where there is a sudden increase in customer numbers. 

Companies must establish clear rules for using their reserves and for deciding when to deny financing.

Financial institutions should be picky about their business partners and clientele and before starting a business relation they should be able to do a thorough background assessment and see if there is a match. The possibility of obtaining large funds tempts criminals who look for the organization's weak points in order to extort funds. 

The creativity of criminals is very high: forging documents, using legal provisions contrary to the legislator's intention: e.g. employing children in their parents' companies and presenting certificates in applications for state-backed loans), identity theft or impersonating other people, and even setting up companies only for the purpose of extorting funds. 

In some cases, bank employees sided with criminals to extort funds from banks.  Even when such criminals are eventually incarcerated, the long-term damage to the company can be extensive and sometimes irreversible.

Pragmatics of Financial Business

Financial companies recognize that some customers will inevitably default on their obligations and factor this into their cost structures. Such risks, which cannot be entirely eliminated, include events like the death of a client or a sudden loss of liquidity due to unforeseen circumstances such as accidents or serious illnesses. 

While financial companies engage in debt collection procedures (which incur additional costs), some debts prove unrecoverable or remain frozen until the courts issue the necessary orders for bailiff enforcement.

Consequently, when setting the prices for their services, financial companies preemptively calculate that the fees collected from all customers must cover potential losses and also generate a profit.

This raises the question: what level of risk is acceptable? If a company adopts a liberal lending policy, the percentage of customers who default will likely increase. This necessitates higher fees to cover losses, which can reduce competitiveness. 

Conversely, a stringent policy minimizes losses and can lower fees, but it also restricts sales because fewer potential customers meet these strict criteria, thus limiting revenue potential. Therefore, the challenge lies in fine-tuning the credit policy to maintain risk at an acceptable level while supporting business growth and maximizing profits.

The Need to Quickly Fine-tune Risk Policies

Over the years, financial companies have built up knowledge thanks to which they examine the risk presented by a given client. They use government registers, credit and economic information bureaus, and their own history of transactions with a given customer. As long as the world situation is stable, their approach maintains its effectiveness. However, the turmoil brought about by a global pandemic or war has shown that the client's existing history may suddenly lose its importance.

In such situations, institutions must quickly adapt to changing circumstances, draw new conclusions, and assimilate fresh insights. Companies that possess a configurable decision engine, such as our client NFG (National Guarantee Fund), are able to adapt more flexibly to these changes.

Decision Engine – Securing our Client's Business

Our cooperation with NFG has been ongoing since 2015. We have built for our client a Factoring Service System integrated with a configurable Decision Engine, which helps NFG to run its business addressed to micro-entrepreneurs and small enterprises.

Thanks to the decision engine, the NFG risk department can configure risk assessment policies that are used in the processes of concluding a Factoring Limit and an Invoice. 

The configuration includes: definition of segments using segmentation rules, configuration of processing rules designed to exclude customers who do not meet the basic criteria, and construction of a scoring card that will allow the customer to be assessed and ultimately qualified.

The rules used in the policy are based on a data model that is based on multiple sources, such as: 

  • Government registers: Central Register and Information on Economic Activity (CEIDG), National Debt Registers (KRS) and National Official Business Register (GUS REGON);
  • Internal systems of the Kaczmarski group, including the KRD database (National Debt Register), the Credit Information Bureau and the Economic Information Bureau (CEIDG); 
  • AML service providers;

 The decision-making engine collects data from the evaluated company and compiles it into a consolidated report that presents a comprehensive overview of the company’s status. 

As the engine is deployed, the risk policy is refined by incrementally integrating additional data, optimizing the costs associated with paid queries. The engine also boasts capabilities such as implementing business rules and transferring specific data vectors to the Factoring Service System.

During the challenging times of the pandemic, NFG managed remarkably well. By fine-tuning its risk policy, the company experienced only a slowdown in growth rather than a decline. Following this period, NFG introduced a new product, Fakturatka, which further enhances the capabilities of the Decision Engine.

As ITMAGINATION, We Help Clients Reduce the Risk of Their Business 

At ITMAGINATION, our mission is to ensure the success and security of our clients' projects, a commitment underpinned by our extensive experience and a rigorous approach to digital transformation, cloud computing, data analytics, and artificial intelligence. While the statistics on IT project failures might be discouraging broadly across the industry, our methods and outcomes consistently prove the exception.

We are very happy when, thanks to our solutions, customers develop their business and at the same time can be confident about its security. 

For our part, we engage the best specialists with knowledge in the field of banking and finance, as well as technology and security specialists. We ensure good communication within the project team and fulfill our promises. The example of cooperation with NFG is one of the many cases that makes us a proven technology partner.

Joining forces with Virtusa opens a new chapter for ITMAGINATION—one that brings stability and a wealth of new technological resources. This acquisition by a renowned leader in digital engineering reinforces our ability to serve our clients with even more innovation and scale. 

Virtusa's global reach and our shared commitment to redefining the future of digital services mean that our clients will benefit from a broader spectrum of expertise and enhanced delivery capabilities.

Explore how ITMAGINATION can support your project’s success. Schedule a conversation with our experts today.

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