The Need for Automation and Human Element in Portfolio Risk Management

A Balancing Act: Automation and Humans

Stephen Hawking predicted that the “rise of artificial intelligence is likely to extend job destruction deep into the middle classes, with only the most caring, creative, or supervisory roles remaining.” So far, this has proven true. The first Industrial Revolution saw machines replace labor, but that was limited to physical jobs.

Today, we’re seeing the possible beginnings of machines replacing cognitive abilities – the human brain. In fact, a PwC report says that 30 percent of jobs will be at risk of automation by the mid-2030s across every single industry, not excluding banking.

We know that automation and technology are important to increasing efficiencies within our industry, especially as it relates to portfolio risk management. As we head into a new economic cycle, this is even more critical.

Banks and credit unions must understand their portfolios and where challenges may arise. Automation can assist, but it is not a cure-all. There is still a need for seasoned staff to further investigate red flag areas and make better decisions. Relying on one or the other simply won’t cut it.

The Power of Automation

We live in a fast-changing world – and it’s only speeding up. Financial institutions must therefore monitor accounts on a daily, weekly, monthly and quarterly basis, but this can be time-consuming. Fortunately, automation can help solve this dilemma.

Banks and credit unions must invest in technology that provides continuous, automated portfolio monitoring throughout the entire loan life cycle. This is especially critical in a tighter credit environment, where financial institutions are fighting to take the very best loans before a competitor swoops in. If they don’t, they could potentially take on loan risks they wouldn’t normally consider.

With technology and automation, banks and credit unions can effectively and efficiently monitor for risk while using significantly less manual intervention that ties up resources and adds costs.

The Power of Data

For an automated risk management system to be successful and effective, financial institutions need lots of data, including current and accurate bureau data, loan, deposit and collateral data, as well as financial statement data from internal and external systems.

Additionally, they must have access to macroeconomic variables, among other data depending on the institution’s portfolio makeup. Banks and credit unions must also know where the data is stored and structured to allow for new data to be added and calculation models updated.

The Power of People

While automation and data are key to risk management, banks and credit unions still need human intelligence to verify problem areas and support sound decision-making. Let’s face it, machines are only as smart as we make them. This means errors can occur if data is inaccurate or not adequately verified or stored incorrectly, and so on. Human involvement to evaluate and verify data is needed.

Beyond reviewing data, people are required to further investigate red flag areas within the portfolio. Not only does this lead to smarter growth, but this also facilitates better service for the customers. If there is a problem loan that needs to be addressed, the institution can enlist employees to intervene and identify a solution. For instance, perhaps a customer is struggling. Data and automation may reveal those challenges, but human intervention can help problem solve to prevent the borrower from becoming delinquent.

As we head into a new decade, a keen focus on growth and portfolio risk management will be needed, especially if banks and credit unions want to take advantage of opportunities to grow during a late cycle. It is possible, but it will require automation and data, as well as human intelligence.

It is no longer just about the Power or Automation or The Power of Data. We are entering a new era that includes a balance where The Power of People will be critical for long-term growth.


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