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14 September 2016

McKinsey advocates digital credit risk management

Content team

McKinsey, one of the world's biggest and most prestigious management consulting firms, has highlighted some of the benefits banks could gain by digitising their credit risk management processes.

The company released a report highlighting some of the many challenges that financial institutions face today, such as increased scrutiny and changing requirements from regulators, the expectations of investors and the innovation being shown by competitors.

These trends appear to have gone hand in hand with an increase in risk and compliance costs, which are set to account for 15 per cent of total banking costs in the coming year, up from ten per cent in 2012.

McKinsey noted that many banks are struggling to mitigate risk through small and steady improvements in risk management. It stated that banks "need to digitise their credit processes" in order to expand in an environment of growing pressures.

"Lending continues to be a key source of bank revenue across the retail, small and medium-size enterprise (SME), and corporate segments. Digital transformation in credit risk management brings greater transparency to risk profiles," the company said.

"With a firmer grip on risk, banks may expand their business, through more targeted risk-based pricing, faster client service without sacrifice in risk levels and more effective management of existing portfolios."

By automating their credit processes and digitising key steps in the credit value chain, financial institutions can make cost savings of up to 50 per cent, according to McKinsey.

One possible strategy is to introduce real-time credit decision-making technologies, which could reduce the chance of banks losing creditworthy clients to competitors because of a slow approval process.

The firm also referred to potentially beneficial innovations such as machine-learning techniques, which could help finance businesses to enhance the predictability of credit early-warning systems by up to 25 per cent.

Content team, Bureau van Dijk

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