Fin 507 - Technological Risk in Banking

Technological Risk in Banking

FIN 507 – Bank Management

Colorado State University – Global Campus

October 26, 2014

Managing risk is at the core of the banking industry.  There are several types of risk bank managers have to control.  Credit risk which arises when a borrower cannot meet their obligation.  Market risk which will fluctuate due to market, interest and currency changes.  Operational risk which can surface due to poor internal controls or employee errors.  Compliance risk occurs when a bank does not conform to statutory and regulatory rules.  Lastly, liquidity risk or simply the bank’s ability to meet their obligations.  Managers spend a tremendous amount of time mitigating each of these types of risk.  

This paper will focus on another type of bank risk; technological risk.   The evolution of technology in the banking industry has been explosive since the 1990’s.  It has brought about many benefits and risks for both sides of the banking counter.  I will describe the technological benefits to customers and management as well as the inherent risks for consumers and banks.  The shift in cost that has occurred with the introduction of technology.  The need for new technology to keep up with the changing regulations.  Lastly, bank strategies and models to alleviate technological risk.

Brief history of technology

Introduction of information technology (IT) began dating back to the early 1600’s.  This form of technology is considerably different from what we know today, however, it was the stepping stones to what we have today.  One form of IT, the computer, also came in various forms beginning in 1822 with “developing the Difference Engine, considered to be the first automatic computing engine that was capable of computing several sets of numbers and making hard copies of the results.”  (Computer Hope, 2014).  The Difference Engine was only able to compute polynomial functions which are computations with variables, only using addition, subtraction, multiplication and non-negative number.   It is a simplistic computing machine by today’s standards however a significant advancement for its time period.  

In 1967, the Automatic Teller Machine (ATM) was introduced.  This allowed customer’s to conduct limited banking outside of traditional banking hours.  See Table 1 below.  “The number of physical banking offices using human tellers has expanded at a 2.1% annual rate, whereas the number of IT-based ATMs has expanded at a 10.1% annual rate, so that ATMs now outnumber physical offices by more than four to one.”  (Berger, 2003).  Even as early as 1967, the structure and the way banks function was changing notably due to advancements in IT.