Fintech risks + Reading

Question 1

IT risks

Answer 1

Human error
Technical error
Natural disasters (i.e. disruption to processing)
Deliberate sabotage (e.g., by disgruntled staff)
Industrial action
Cyber breaches (hacking, viruses, espionage)
Non-compliance with legislation

Question 2

IT control framework

Answer 2

• Systems development
• General control
• Application control

Question 3

Internal control

Answer 3

The entire framework of internal controls, encompassing financial and other measures, is established to ensure:
1. Effective and efficient operations
2. Financial integrity within the organisation.
3. Adherence to laws and regulations.

Question 4

Fintech

Answer 4

1. Fintech & Insurtech: Modern IT innovations in finance and insurance.
   
   • Fintech integrates technology into banking, lending, etc. Insurtech does the same for insurance.
   • Both disrupt traditional financial models.
2. Fintech Innovations: Reduce market frictions and costs.
   
   • Examples: P2P lending, cryptocurrencies.
   • Direct connections between borrowers and lenders, cutting out banks. Aim to make financial services more accessible and efficient.
3. Disintermediation in Fintech: Replaces traditional bank transactions.
   
   • Removes intermediaries like banks.
   • Enables direct interactions between borrowers, lenders, and investors.
   • Shifts from relationship-based to market-based transactions.
4. Blockchain in Fintech: Decentralised (distribution of power -everyone has the power) digital ledger systems.
   
   • Ensures secure and tamper-resistant transaction records.
   • Provides transparency and immutability.
   • Facilitates cryptocurrencies, smart contracts, and supply chain finance.
     - facilitates economies of scale in managing transactions & cheaper & secure information transmission

Question 5

How does fintech relate to risk management

Answer 5

Risk Assessment: FinTech tools often employ advanced analytics and data science techniques to assess and mitigate risks. By analyzing large volumes of data in real-time, FinTech platforms can identify and quantify various types of risks more accurately.

Automation and Efficiency: FinTech solutions streamline and automate many aspects of risk management processes, reducing manual errors and enhancing efficiency. Tasks such as credit scoring, fraud detection, and regulatory compliance can be performed faster and more accurately with the help of FinTech tools.

Customization and Personalization: FinTech platforms can offer more personalized risk management solutions tailored to the specific needs and risk profiles of individual customers. By leveraging data analytics and machine learning algorithms, FinTech companies can provide customized risk assessments and recommendations.

Access to Alternative Data: FinTech companies often leverage alternative sources of data, such as social media activity, transaction history, and IoT devices, to assess risks more comprehensively. This broader data set allows for a more holistic view of risk factors and better-informed decision-making.

Blockchain and Distributed Ledger Technology (DLT): Blockchain and DLT-based FinTech solutions enhance security and transparency in financial transactions, reducing the risk of fraud and data manipulation. These technologies enable immutable records and smart contracts, mitigating various types of operational and counterparty risks.

Question 6

Insurance

Answer 6

“insurtech” is the branch of fintech that is dedicated to the insurance sector. The basic economics behind fintech in insurance revolve around connected devices found in homes, cars, and personal wearables, which collect vast amounts of personal data. This enables insurance companies to assess risks with greater precision and flexibility.