Part 2: Enabling digital transformation in Australia's financial services sector through project risk management

The Australian financial services sector is an integral part of the worldwide cohort of financial services companies due to their interconnectedness, digital connectivity, and subsequent international agreements. These financial services companies are the backbone of the ongoing digitalization of the global economy and have a crucial role to play in the years to come.

The increasing number of mobile internet users is the primary reason for financial services companies to adopt a digital strategy.?The number of mobile internet users grew leaps and bound. It is now pegged at 4.32 billion as of January 2021 (Statista 2021). The Australian financial services sector was already at the forefront of utilizing digital technologies since the inception of the computer age, the expansion of information through the internet, and the democratization of technologies through various online platforms.?

Overall speaking, the digitalization of businesses started happening due to the rapid rise of mobile internet users, affordable internet connection plans, and convenience in online transactions anywhere anytime, and the ongoing disruption caused by the COVID-19 pandemic crisis.?

The ushering of the digital age prompted Australian financial services companies to introduce new financial products and offerings. The current COVID-19 pandemic crisis has been motivating these companies to expedite their transformation processes further due to ongoing disruptions, second or third wave of mutant virus strains, new social distancing measures, and governmental response to bring their economies back on track.?

There is fierce competition among the financial services companies to lure new and existing clients to gain market leadership and to retain their customer base. While doing so, these companies are subject to risks: financial and non-financial. Financial risk is a class of risk that constitutes categories such as liquidity, market, and credit risk. In contrast, risk categories such as operational, compliance, conduct, model, information technology, cyber, legal, third-party, strategic, and reputational fall within the class of non-financial risk (Deloitte 2018, p.6).?

According to Kaminski et al. (2016), between 2008 and 2012, the global industry lost about USD 200 billion as a result of noncompliance with corporate governance practices and non-financial risks globally. A report by Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in 2019 recommends supervising non-financial risks that mandate adequate attention to culture, governance, and remuneration (Royal Commission 2019, p. 412).

Following the publication of the report, the Australian Securities and Exchange Commission (ASIC) surveyed top financial services companies and concluded that these ASX listed entities lack corporate governance practices to tame the likelihood and occurrence of non-financial risks (ASIC 2019).

The Australian Transaction Reports and Analysis Centre, commonly named AUSTRAC, fined Westpac Banking Corporation (hereafter Westpac) of AUD 1.3 billion penalty due to its non-compliance with Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) 2006 Act.?AUSTRAC is Australia’s leading financial intelligence agency that detects, deters, and disrupts ‘criminal abuse of the financial system to protect the community from serious and organized crime’ (AUSTRAC 2020). The penalty Westpac has agreed to pay is bigger than the penalty paid by the Commonwealth Bank of Australia (CBA) in 2018 of AUD 700 million (AUSTRAC 2018). Taking into consideration the non-financial risks is, therefore, worth more than before given the ongoing developments and watershed moment in Australia’s financial history.

By penalizing Australia’s largest two banks, AUSTRAC has sent a strong signal to other financial services companies regarding the initiation, planning, execution, and implementation of a robust, comprehensive, and holistic risks management approach to set through a framework tailored according to the historical data, contemporary events, and future trends that likely cause financial crime and terror finance, and more importantly mistrust among valued customers, investors and shareholders if customer due diligence is not practiced.

The exposure to both the classes of risks can culminate into monetary and non-monetary losses for transformation seekers. For example, DT failed at a record high of 70 percent in 2018 that is an estimated USD 900 million of the total USD 1.4 trillion spent worldwide just alone on DT (Tabrizi et al. 2020; ZoBell 2018; Bucy et al. 2016).??

Some factors associated with failure are: ‘lack of methodology, unknown processes, products and technology, complexity, uncertainty, human behavior, and leadership’ (Lahmann 2019). However, these factors do not provide a holistic picture of risks in DT projects due to the lack of adequate research. The overall focus of this research is, therefore, on DT in the context of the Australian financial services sector from the project risk management perspective.?

The research aims to suggest a list of risks a project/transformation manager or a financial risk analyst would encounter while managing DT projects. It is assumed that the Australian financial services companies utilize ISO 31000: 2018 (Risk management - guidelines) as a standard practice for project risk management. Therefore, the scope of this research is not to reinvent the project risk management framework but to enhance our understanding of project risk identification by reviewing and mapping project risks in DT using secondary data.

The next part will thoroughly focus on how I enlisted project risks expanding our understanding in the domain of financial and non-financial risk classes.?

References:

Statista 2021, Global digital population as of January 2021, Statista, viewed 21 March 2021, <https://www.statista.com/statistics/617136/digital-population-worldwide/>.

Deloitte 2018, ‘Managing Risk in Digital Transformation’, October 2018, viewed 26 March 2021, <https://www2.deloitte.com/content/dam/Deloitte/za/Documents/risk/za_managing_risk_in_digital_transformation_112018.pdf>.

Kaminski, P, Mikkelsen, D, Poppensieker, T & Raufu?, A 2016, ‘Nonfinancial risk: A growing challenge for the bank’, McKinsey & Company, 26 July, viewed 28 September 2020, <https://www.mckinsey.com/business-functions/risk/our-insights/nonfinancial-risk-a-growing-challenge-for-the-bank>.

Royal Commission 2019, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry: Vol 1, Government of Australia, 1 February, viewed 28 September 2020, viewed 18 April 2021, <https://www.royalcommission.gov.au/sites/default/files/2019-02/fsrc-volume-1-final-report.pdf>.

ASIC 2021, ‘Digital transformation’, Australian Security & Investments Commission, n.d., viewed 16 March 2021, <https://asic.gov.au/regulatory-resources/digital-transformation/>.

AUSTRAC 2020, ‘AUSTRAC and Westpac agree to proposed $1.3bn penalty’, The Australian Transaction Reports and Analysis Centre, 24 September, viewed 29 September 2020, available <https://www.austrac.gov.au/news-and-media/media-release/austrac-and-westpac-agree-penalty>

AUSTRAC 2018, ‘AUSTRAC and CBA agree $700m penalty’, The Australian Transaction Reports and Analysis Centre, 4 June, viewed 29 September 2020, available <https://www.austrac.gov.au/austrac-and-cba-agree-700m-penalty>.

Tabrizi, B, Lam, E, Girard, K & Irvin, V 2019, ‘Digital Transformation Is Not About Technology’, 13 March, viewed 19 March 2021, <https://hbr.org/2019/03/digital-transformation-is-not-about-technology>.

Bucy, M, Finlayson, A, Kelly, G & Moye, C 2018, ‘Why Digital Transformations Fail: Closing The $900 Billion Hole In Enterprise Strategy’, May 2018, viewed 5 February 2021, <https://www.mckinsey.com/industries/retail/our-insights/the-how-of-transformation>.

ZoBell, S 2020, ‘How COVID-19 has pushed companies over the technology tipping point—and transformed business forever’, 5 October, viewed 5 February 2021, <https://www.forbes.com/sites/forbestechcouncil/2018/03/13/why-digital-transformations-fail-closing-the-900-billion-hole-in-enterprise-strategy/?sh=42581b617b8b>.

Lahmann, M 2019, ‘Manage projects risks in digital transformations effectively’, 28 May, Viewed 22 March 2021, <https://www.pwc.ch/en/insights/risk/future-of-risk-2019/manage-projects-risks-in-digital-transformations-effectively.html>.