For many financial institutions as January ends, the implementation phase of plans begins. As you put the finishing touches on your plans and give it one last look, among the critical things to consider should be your assessment of Strategic Risk. For the prudential regulators (the FDIC, the Federal Reserve, the OCC and the CFPB), strategic risk has become the preeminent issue, as indicated in public statements, guidance and planned supervisory focus documents. The main issue driving strategic risk is the convergence of unbanked/underbanked people, the growth of financial technology (” fintech”) firms and shrinking demand for traditional lending. And to paraphrase the comments of Comptroller of the Currency Thomas Curry, those who fail to innovate are doomed.

Strategic risk is generally defined as:

Strategic risk is a function of business decisions, the execution of those decisions, and resources deployed against strategies. It also includes responsiveness to changes in the internal and external operating environments.[1]

The OCC’s Safety and Soundness Handbook- Corporate Guidance section discusses strategic risk as follows:

The board and senior management, collectively, are the key decision makers that drive the strategic direction of the bank and establish governance principles. The absence of appropriate governance in the bank’s decision-making process and implementation of decisions can have wide-ranging consequences. The consequences may include missed business opportunities, losses, failure to comply with laws and regulations resulting in civil money penalties (CMP), and unsafe or unsound bank operations that could lead to enforcement actions or inadequate capital.[2]

More to the point, strategic risk today is the difference between being able to “think outside the box” and being mired in tradition.   Banking as we know it is being disrupted by technology. There are many customers who have never had bank accounts and an equally large number of people who use banks on a limited basis. Many fintech firms have been founded specifically to offer products that meet the needs of these customers. Products such as online lending, stored value and bill payments are here to stay and they are changing the places customers look to fill their banking needs.

Both the FDIC and the OCC in their annual statements recognized the need to address strategic risk and will be looking at the institutions they regulate to determine the level of consideration of this risk. [3]

So, what does consideration of strategic risk look like? It means consideration of new types of products, customers and sources of income. It also means reimagining compliance.

Types of Products

Today a traditional financial institution offers a range of deposit products, consumer loans and commercial loans traditional loans. Tomorrows’ bank will offer digital wallets, stored value accounts, and financing that is tailored to the needs of customers. Loans with terms like $7,200 with a 7-month term which are not economically feasible, will be commonplace soon. Commercial loans will come with access to business management websites that offer consultation for the active entrepreneur, savings account will be attached to the digital profile of the customer. Banking will be done from the iPad or another digital device.   Your institution can be part of this updated version of banking or continue to suffer declines as your current customer base grows old and disappears.   Consider deciding which fintech companies will allow your bank to offer a full range of products that have not yet been offered. No need to reinvent the wheel, simply join forces

Types of Customers

The number of customers that are available for traditional commercial lending products is a finite pool and there is tremendous competition for these customers. However, for financial institutions that are willing to rethink the lending process there are entrepreneurs and small businesses that are seeking funding in nontraditional places. Fintech companies have developed alternative credit scoring that is highly accurate and predictive. Consider partnering with these firms to allow underwriting of nontraditional loan products.

The dreaded “MSB” word

In the early part of this decade we experienced the unfortunate effects of “operation chokepoint” a regulatory policy specifically aimed at subjecting MSB’s to strict scrutiny. Many financial institutions ceased offering accounts to these businesses. The law of unintended consequences was invoked as many of the people who used the MSB’s were left without financial services. Even today there are sizable communities of people are still hurt by the inability to get financial services. More importantly, financial institutions are missing the opportunity to develop fee income, expand their customer base and reshape the business plan.

MSB’s facilitate a huge flow of funds that flow throughout the world in one form or another and the more financial institutions are a part of that flow, the safer and more efficient it will be. MSB’s provide an extremely important service that will be filled one way or another- why not be part of it? [4]

Compliance as an investment

When considering overall strategic risk, an institution must balance risk levels with the systems in place to mitigate that risk. New products and different types of customers carry with them different levels and types of risk. Your system for risk management and compliance must be up to the task of administrating new challenges.   The traditional planning process considers the compliance program only after the products and customers have been determined. A proactive approach to risk would consider expanding the resources and capabilities of the compliance department to an end; adding products and services that can breathe economic life into your institution.

When the ability to monitor, and administrate new products and customers is acquired by the compliance program, your financial institution can grow and expand. Now is the time to start thinking of compliance as an investment rather than an expense.   This of course requires an investment in compliance, but the return is well worth it.

[1]Businessdirectory.com

[2] OCC Comptrollers Handbook-Safety & Soundness- Corporate Risk management

[3] OCC Report Discusses Risks Facing National Banks and Federal Savings Associations

WASHINGTON — The Office of the Comptroller of the Currency (OCC) reported strategic, credit, operational, and compliance risks remain top concerns in its Semiannual Risk Perspective for Fall 2016, released today.

[4] Per the world bank High-income countries are the main source of remittances. The United States is by far the largest, with an estimated $ 56.3 billion in recorded outflows in 2014. Saudi Arabia ranks as the second largest, followed by the Russia, Switzerland, Germany, United Arab Emirates, and Kuwait. The six Gulf Cooperation Council countries accounted for $98 billion in outward remittance flows in 2014.