Founder and CEO of Rubix, Mohan Ramaswamy has an overall experience of 22+ years, working with leading MNCs. Prior to setting up Rubix, Mohan headed the LexisNexis business for India and South Asia, transforming the company into one of the most respected brands in the Indian Legal Information world. He drove organic and inorganic growth at LexisNexis and also executed several prestigious projects, including with the Prime Minister’s Office (PMO).
Change is the only constant, but in the era of technology, its pace is exponential. Finance teams in most companies realise that they need to keep up with the technology and tools driving change in modern businesses; Chief Financial Officers (CFOs) need to personify this agility. Now, more than ever, in post-pandemic times, businesses need finance leaders who can leverage technology to manage emerging risks.
Modern-day CFOs are required to plan for and forecast future financial performance in a rapidly changing environment. These forecasts can no longer be based on traditional tools that primarily relied on past performance as indicators of future growth. Future projections of company performance require a dynamic assessment of the risk environment, such as those associated with geopolitics, global supply chains, climate change, compliance, and technological disruption. Operational risks emanating from processes, personnel, logistics, IT and cybersecurity, and unforeseen disasters also need to be managed on a day-to-day basis.
Therefore, simply relying on spreadsheets and email chains no longer works. Fortunately, CFOs have an arsenal of technological tools to handle the increasing demands that the business places on them. Next-gen intelligent platforms leverage Data, Artificial Intelligence, Machine Learning, Cloud Computing, and Analytics to help CFOs identify, model, simulate, report, mitigate risks, and prevent fraud. These tools enable companies to avoid financial losses and grow in a sustainable and compliant manner.
Let us take a look at how these technology platforms can help mitigate risks that companies and financial institutions face:
Dynamic, Data-driven Risk Identification and Reporting
Though it has become cliché to say that data is the new oil, it is an absolute reality of modern business. It is not enough to manually process data through static excel sheets and prepare fortnightly or monthly risk reports. Risk Reporting is now a near real-time function, requiring on-the-fly data gathering and analysis from line functions, staff functions, contractors, and departments on-premise as well as remote sites. Work-flow tools embedded in next-gen risk platforms allow teams to collaborate in real-time, break silos, and share data instantly. These, in turn, help identify and monitor nascent or emerging risks and facilitates early action by CFOs to minimise such risks.
Risk Modelling and Simulation:
Banks and financial institutions model risk at scale on huge volumes of data through Risk simulations. They analyse portfolios by simulating a variety of risks and forecast the projected losses that would occur in different scenarios. The risks they cover include Credit Risk, Market Risk, Liquidity Risk, and Operational Risk, amongst others. Such Risk Modelling helps CFOs of banks to determine capital requirements under different risk scenarios.
In fact, banks and financial institutions are required to undertake Risk Modelling as per Basel II regulations to meet formal capital adequacy guidelines. In the past, a large portion of the risk analysis was done qualitatively, but with the availability of powerful computing platforms, quantitative risk analysis can be carried out easily and accurately.
Compliance Risk Assessment
Today’s Risk Platforms use robotic process automation to trawl through large amounts of structured and unstructured data (including social media) and global statutory databases to find red flags about counterparties (customers, distributors, suppliers, etc.) and key individuals. Some significant elements about which these platforms gather data include Anti-Money Laundering (AML), Politically Exposed Persons (PEP), and International Sanctions Lists, such as OFAC and International Police (Interpol) notices. If a positive match is found in such databases, the transaction is held in abeyance and the counterparty is flagged for further due diligence by the compliance team of the company, bank, or financial institution.
Fraud and Identity Checks
Identity theft is a serious problem. Risk Platforms incorporate Fraud and Identity Solutions, which carry out accurate Know-Your-Customer (KYC) checks on counterparties. These platforms verify identity using Application Programming Interfaces (APIs) that instantly run checks on national identity, taxation, and company registration databases. If there is no accurate match with the individual identity or company registration data, the counterpart could be fraudulent and is therefore red-flagged.
Risk Scoring and Automated Credit Limit Setting
Risk Platforms have scoring models that attach a Risk score to individual counterparties based on several financial and non-financial factors (identity, statutory compliance, litigation, management, age of the company, financial performance, employee and customer scores, etc.).
Credit Limit setting is often a contentious exercise in companies. Sales teams want higher credit to be provided to customers whereas financial controllers tend to be cautious in terms of deciding credit limits and terms. Credit limits depend on the overall risk score of a counterparty and also on its payment track record as captured on the platform.
Once the Credit Limit Setting model is agreed upon by the finance and sales teams, it is deployed on the risk management platform. These models can be customised for industry type, geography, the legal constitution of counterparties, or other variables.
There is now an objective, automated model for credit-limit setting and approval; if a salesperson wants a higher limit for a customer, an exceptional approval needs to be obtained from the finance team, which can do so after evaluating the risks involved. The customer’s credit limit is also automatically monitored on the platform and based on their payment behaviour and changes in the external risk environment, the credit limit can be enhanced or reduced.
In conclusion, an organisation’s sustainability, strength, and growth are heavily dependent on its CFO’s vision and direction. CFOs need the help of Next-Gen Risk Management platforms not only to help them identify, mitigate, and monitor risks but also to provide data-driven insights for growing the business.