Risk orchestration explained
Many fintechs will be familiar with the benefits of effective risk management. It can underpin successful regulatory compliance, customer satisfaction, brand reputation and prevention of financial losses.
Risk management achieves this, in its simplest terms, through identifying and analysing potential threats and developing appropriate solutions to mitigate these risks.
Technology, software, processes, and customer behaviours are constantly evolving. However, the fundamental principle of risk management will remain the same – and herein lies the critical point of differentiation for risk orchestration.
What’s the difference between risk management and risk orchestration?
Risk management workflows tend to be built from siloed systems and processes that generate discrete outcomes.
On the other hand, risk orchestration combines all the different countermeasures into one single, easily configurable and scalable platform to produce a simplified and actionable risk score.
The power of orchestration for fintech companies
The term ‘orchestration’ stems from its musical analogy. Although professional musicians are highly proficient at playing their chosen instrument as a solo, when put together with a group of other musicians to play a piece, they require a conductor to ensure that they all play together and on time.
Without that guidance, any recital will quickly descend into chaotic noise. This unified approach to financial crime and fraud – with all the individual elements working in harmony – makes risk orchestration platforms such a refreshing and robust approach for fintechs.
Crime and the cost-of-living crisis
One of the key factors expected to drive the evolution from risk management to risk orchestration is the current economic climate.
Crime will often spike during times of recession and financial hardship. Indeed, a survey of 201 UK financial services organisations and fintechs in September 2022 found that four in ten (43%) believe the current cost-of-living crisis will increase financial crime and fraud.
Criminals exploiting the economic crisis
Rising inflation and energy bills are squeezing budgets, leaving more people cash-strapped and susceptible to social media and online ads offering the opportunity to ‘make a little extra money’.
With their guard dropped, people can fall victim to scams and even become implicated in money laundering as money mules. Our research shows that a third (32%) of financial services organisations believe criminals spend more time and resources on fraud and financial crime during this economic crisis.
Orchestration can help fintechs to stay ahead of this intensified criminal activity. An end-to-end integrated solution can provide a more robust set of risk indicators that provide a strong defence against sophisticated and often relentless fraud attacks.
Looking beyond economic conditions, fintechs also face rising levels of fraud and financial crime risk because of the rapid adoption of digital services leading to fewer and fewer ‘in-person’ transactions. This change in consumer behaviour and attitudes has helped fuel the rise of fintechs and create a market ripe for challenger banks.
However, the unwelcome by-product of this progress is the breeding ground of opportunity it has afforded identity fraudsters to leverage stolen payment card details and stolen or fake identities for illicit financial gain.
Meeting customer expectations without sacrificing safety
Risk orchestration enables fintechs to better integrate and automate customer onboarding and authentication checks into one seamless process and easily configure scores bespoke to the organisation’s risk appetite without coding – all without adding friction to the decision-making process. This satisfies customer demand for quick and accessible services without compromising risk or customer security.
A streamlined approach
The tricky balancing act between delighting customers and strengthening defences against financial crime and fraud often leads to fintechs adopting multiple distinct systems and processes to manage their onboarding and ongoing monitoring.
Our research shows that, on average, financial services providers rely on five external vendors for data sources or solutions to prevent fraud and financial crime across their customer onboarding and lifecycle – with half of the firms (49%) highlighting having multiple solutions in place helps to increase protection.
Moreover, most organisations plan to scale up levels of technology and data sources and are keen to avoid this compromising customer service and satisfaction.
However, piling tech on top of tech can inadvertently prove counter-productive.
Managing and maintaining multiple vendors and systems can be costly and time-consuming, as a third of respondents to our survey admitted.
The risk scores and insights output can also be disjointed and challenging to interpret and act upon in such a scenario. This is another critical factor driving many forward-looking fintechs towards risk orchestration, which offers an integrated, simplified platform that manages all tasks and suppliers in one place and produces a simple, actionable risk score for users.
The importance of effective data management
What about the pros and cons of drawing on more data sources? Yes, more data can provide a richer and more complete profile of customers to help avoid criminal transactions. Still, it can also negatively impact operational performance if those data sources are not effectively managed.
Poor processes lead to slower transactions – and it’s well known that this leads to increased drop-off rates during application and impacts brand recommendations and referrals amongst customers.
The bottom line
Orchestration gives fintechs the flexibility and choice to deploy as many vendors and data sources as they require in their screening and monitoring processes without the usual logistical headaches.
Synchronising and unifying existing systems into one end-to-end solution can streamline processes and provide the ability to track customer transactional behaviour over time and flag anomalies automatically.
Fintechs prioritise investment in risk orchestration platforms because they offer quick access to a speedy, agile financial crime workflow that will set them apart from competitors while enhancing their financial crime and fraud prevention controls.
About the Author: Eddie Vaughan is a Banking Expert for the LexisNexis® RiskNarrative™ platform.