Risk: Business Enabler or Idea Crusher?

Another subject that regularly
crops up in my blog is whether banks can be innovative when they are
risk averse.  My contention is that banks never lead, they only
follow.  As a result, they never innovate because they never create
anything. 

Now I know some banks do generate new ideas, but it
is fairly true as a generic industry view.  For those who remember,
Heidi Miller of JPMorgan said this at SIBOS, so the idea that banks are
fast followers is an accurate one, and maybe this is due to the bank’s
attitude to risk, as in being risk averse.

Risk and risk
analytics create banks that analyse everything in detail before making
a move.  With an army of risk managers – one of the banks I deal with
has 3 percent of all employees dedicated to risk which is over 4,000
people! – everything is picked at and monitored in minutiae.  Internal
risk, reputational risk, external risk, regulatory risk – you name it
and everything has a risk associated with it. As a result, coming in
with a new idea that’s never been tried or proven before is a little
bit difficult. 

Even more revolutionary would be opening up
the bank to transparency of operations, but that’s what banks will have
to do as the market and the customer is demanding it.  Regulatory
change is creating transparency, as is technology. 

Facebook for example.

The idea of employee blogs and Facebook for bank staff is a heresy.

Imagine
a Bank CEO saying “Hello there, I want to allow all of our staff to
make decisions, act like humans and blog and talk about it online.”
This is the stuff of fiction.

Nevertheless, banks cannot stop this. 

By way of example, here’s an interesting Facebook group called “I work at f#@!in Commerce Bank!!!” with wonderful comments such as: 

• “Is anyone else tired of coming to work each day n finding out that they changed the way we do something.”
• “It's the most convenient bank for the customer, but sucks for the employees.”
• “Friday is my last day at Commerce!! love my coworkers but as for the company i say good riddance!!”

The
idea of being able to keep anything secret anymore is rubbish.  For
example, I heard just last week that one bank’s complete internal
operating policy on AML was posted on Facebook by one foolhardy
employee. 

As a result, banks will find they cannot control
such information seepage but will need to start opening up to
transparency and new ideas.  Risk will morph to become a business
creating function, a business enabling function, a business supporting
function ... rather than an idea breaking function, an innovation
crushing function, an entrepreneurial killing function.

This is
not to say that every bank’s risk function is an idea breaker.  In
fact, some banks use risk to purely provide a risk minimisation view.
As a result, they are more innovative although still not
ground-breakers in the same way as retailers and other industries.

This
is because banks have to be secure and so they can only be as
innovative as being secure allows, or as far as the CEO lets them be.

But
this is the bit that will change as bank CEO’s get younger, hipper and
more technology adept, and also as the world changes and becomes more
open.

Just as with Commerce Bank, banks will become transparent
because their employees are human and will start to publicise their
views.  Just as it’s Facebook today, it’ll soon be dedicated employee
channels that discuss the bank’s operations and policies.  As a result,
risk management will change.  In fact, rather than risk management it
will be become more of a risk measurement function. 

As a
risk measurement function, the staff will create internal Facebook
style outlets for employees.  The risk measurement function will create
a bank website that allows staff to blog, bitch, moan, cheer, clap and
shout about their bank.  Then the risk measurement function will make
the best of that site public and the worst responded to.  If a member
of staff wants to complain, let them.  Address their concerns.  Create
internal transparency and external humanness.

A few banks do this today, such as Wells Fargo, as well as a few other innovators such as PayPal and Tom Glocer
of Reuters, and others will follow.  This will create a world where
banks may not be innovators, but they will be able to follow a lot
faster by being open and transparent, and therefore gauging their staff
and customer views in real-time. And risk measurement will be a
dashboard dial rather than a business inhibitor.

Now, what will future banks create in a world that works this way?