Payments & cards magazine

LATEST EDITION

Putting a price tag on financial crime risk

Putting a price tag on financial crime risk

Shane Riedel, co-founder and CEO of Elucidate shares his insights about financial crime risk and how Elucidate, the industry's first FinCrime risk rating agency can help banks globally to quantify FinCrime and digitise risk management.
Traditionally, the work of compliance departments has been viewed as ancillary to the function of a modern bank, providing limited direct financial value in and of itself. It is time to challenge this common wisdom. In a number of recent financial crime cases, banks that failed to properly manage their risk exposure have paid a substantial price through share price volatility. In the wake of these scandals, investors have therefore begun to hold banks accountable for their inability to effectively manage their risk profile. For banks today, this means one thing: financial crime is a financial risk.
Yet, the management of financial crime risk across correspondent banking today does not reflect this reality. The pricing of respondent relationships is often inconsistent. 
To incentivise improved financial crime management, correspondent banks must begin pricing their services in line with financial crime risk and the effectiveness of their respondent banks’ controls.

 

Using financial crime risk to price correspondent relationships

If financial crime is a financial risk, then the factors that contribute to financial crime exposure must also create a corresponding financial risk exposure. The absence or presence of certain factors and controls have an ascertainable and mathematically definable probability that they will be associated with increased or decreased financial crime risk exposure. Yet, the status quo fails to reflect this reality.

Our research found no evidence of consistent correlation between financial crime risk and pricing of cash and trade products at even the largest institutions, despite a clear acknowledgement that the cost to manage a high risk relationship is discernibly higher than a lower risk relationship. Instead, rather basic and possibly misleading proxy indicators are used, particularly geographic risk, or even volume-driven pricing, a practice which in fact increases risk whilst impacting pricing downward.

The pricing of risk in correspondent banking services should be based on concrete measurables and risk indicators. We see two ways in which this can be done:

1. By linking data on financial crime risk and the operational and compliance costs associated with the contract at initiation and during ongoing maintenance. In doing so, correspondents can establish the base price needed to ensure adequate margins.

2. By evaluating the potential for financial losses (regulatory fines, market cap loss, remediation costs, reputational loss, etc.) due to a financial crime risk event, against the profits generated by the contract. Whilst this approach would be new to financial crime, this is akin to the calculus insurance companies have been making.

Once correspondent banks understand the factors that contribute to their financial crime risk exposure, they can begin to effectively price their relationships with respondents, charging higher fees for poorly managed control regimes, and providing discounts to top-tier institutions.

In turn, those respondent banks seeking a reduced price on their contract with a correspondent bank will be left to improve their control quality, or pay extra for their poor risk management practices. In other words, it gives financial institutions a clear financial incentive to implement more effective and better managed controls across their institution.

How Elucidate can help

Elucidate is the industry’s first data-driven financial crime rating agency, working with banks across the globe to quantify their financial crime risks and digitise their risk management. The Elucidate FinCrime Index (“EFI”) is built on modelling approaches similar to those used to quantify financial risks such as credit or operational risks, and is supplemented by BigData technology, machine learning, and automation.

The EFI evaluates inherent risk indicators and associated controls, providing transparent, objective, and factual risk management. Financial institutions are therefore able to assess the quality of individual control areas in granular detail, and identify where their greatest risk lies.

The risk indicators evaluated indicate potential exposure to financial crime risk, enabling users to make an informed determination as to the associated financial costs.

For respondent banks, this means that they can access correspondent banks solely on the merits of their control framework, not on outdated guesswork metrics.

When financial crime risk is priced, the world becomes simpler for all market participants: the better the control implementation, the lower the risk. The lower the risk, the lower the cost of a correspondent banking relationship.

 

About Shane Riedel

CEO of Elucidate_Shane Riedel
Shane Riedel is the co-founder and CEO of Elucidate. Prior to Elucidate’s creation in 2018, Shane was the Head of Financial Crime Compliance for Financial Institutions and Correspondent Banking at Standard Chartered Bank.  He started his career in Finance with Goldman Sachs.  Prior to his career in Finance, Shane was a diplomat with the United Nations Office on Drugs and Crime.

About Elucidate

logo_RGB-Tagline

Elucidate is the industry's first FinCrime risk rating agency, working with hundreds of banks globally to quantify FinCrime and digitise risk management. 
Using hybrid of machine learning and expert-driven modelling, the Elucidate FinCrime Index (EFI) scores FinCrime risk. The blockchain-enabled platform leverages data from various sources, evaluating it to deliver a risk management solution tailored to the user's needs.





ABOUT PAYMENTS & CARDS MAGAZINE

 

Each issue of Payments & Cards Network Magazine contains valuable insights delivered by experts and business leaders from the industry. Alongside thought leader articles and interviews, the magazine features the hottest start-ups, emerging markets stepping into the limelight, latest events and conferences worldwide, and excellent job opportunities.

We place our readers and clients at the heart of PCN Magazine. This is why we are constantly evolving our product and service offerings to keep our magazine interesting, relevant and exceptional. We love the opportunity to help you promote and grow your business. For more information and questions, please contact us:

 

ALL EDITIONS

Putting a price tag on financial crime risk

Putting a price tag on financial crime risk

Shane Riedel, co-founder and CEO of Elucidate shares his insights about financial crime risk and how Elucidate, the industry's first FinCrime risk rating agency can help banks globally to quantify FinCrime and digitise risk management.
Traditionally, the work of compliance departments has been viewed as ancillary to the function of a modern bank, providing limited direct financial value in and of itself. It is time to challenge this common wisdom. In a number of recent financial crime cases, banks that failed to properly manage their risk exposure have paid a substantial price through share price volatility. In the wake of these scandals, investors have therefore begun to hold banks accountable for their inability to effectively manage their risk profile. For banks today, this means one thing: financial crime is a financial risk.
Yet, the management of financial crime risk across correspondent banking today does not reflect this reality. The pricing of respondent relationships is often inconsistent. 
To incentivise improved financial crime management, correspondent banks must begin pricing their services in line with financial crime risk and the effectiveness of their respondent banks’ controls.

 

Using financial crime risk to price correspondent relationships

If financial crime is a financial risk, then the factors that contribute to financial crime exposure must also create a corresponding financial risk exposure. The absence or presence of certain factors and controls have an ascertainable and mathematically definable probability that they will be associated with increased or decreased financial crime risk exposure. Yet, the status quo fails to reflect this reality.

Our research found no evidence of consistent correlation between financial crime risk and pricing of cash and trade products at even the largest institutions, despite a clear acknowledgement that the cost to manage a high risk relationship is discernibly higher than a lower risk relationship. Instead, rather basic and possibly misleading proxy indicators are used, particularly geographic risk, or even volume-driven pricing, a practice which in fact increases risk whilst impacting pricing downward.

The pricing of risk in correspondent banking services should be based on concrete measurables and risk indicators. We see two ways in which this can be done:

1. By linking data on financial crime risk and the operational and compliance costs associated with the contract at initiation and during ongoing maintenance. In doing so, correspondents can establish the base price needed to ensure adequate margins.

2. By evaluating the potential for financial losses (regulatory fines, market cap loss, remediation costs, reputational loss, etc.) due to a financial crime risk event, against the profits generated by the contract. Whilst this approach would be new to financial crime, this is akin to the calculus insurance companies have been making.

Once correspondent banks understand the factors that contribute to their financial crime risk exposure, they can begin to effectively price their relationships with respondents, charging higher fees for poorly managed control regimes, and providing discounts to top-tier institutions.

In turn, those respondent banks seeking a reduced price on their contract with a correspondent bank will be left to improve their control quality, or pay extra for their poor risk management practices. In other words, it gives financial institutions a clear financial incentive to implement more effective and better managed controls across their institution.

How Elucidate can help

Elucidate is the industry’s first data-driven financial crime rating agency, working with banks across the globe to quantify their financial crime risks and digitise their risk management. The Elucidate FinCrime Index (“EFI”) is built on modelling approaches similar to those used to quantify financial risks such as credit or operational risks, and is supplemented by BigData technology, machine learning, and automation.

The EFI evaluates inherent risk indicators and associated controls, providing transparent, objective, and factual risk management. Financial institutions are therefore able to assess the quality of individual control areas in granular detail, and identify where their greatest risk lies.

The risk indicators evaluated indicate potential exposure to financial crime risk, enabling users to make an informed determination as to the associated financial costs.

For respondent banks, this means that they can access correspondent banks solely on the merits of their control framework, not on outdated guesswork metrics.

When financial crime risk is priced, the world becomes simpler for all market participants: the better the control implementation, the lower the risk. The lower the risk, the lower the cost of a correspondent banking relationship.

 

About Shane Riedel

CEO of Elucidate_Shane Riedel
Shane Riedel is the co-founder and CEO of Elucidate. Prior to Elucidate’s creation in 2018, Shane was the Head of Financial Crime Compliance for Financial Institutions and Correspondent Banking at Standard Chartered Bank.  He started his career in Finance with Goldman Sachs.  Prior to his career in Finance, Shane was a diplomat with the United Nations Office on Drugs and Crime.

About Elucidate

logo_RGB-Tagline

Elucidate is the industry's first FinCrime risk rating agency, working with hundreds of banks globally to quantify FinCrime and digitise risk management. 
Using hybrid of machine learning and expert-driven modelling, the Elucidate FinCrime Index (EFI) scores FinCrime risk. The blockchain-enabled platform leverages data from various sources, evaluating it to deliver a risk management solution tailored to the user's needs.