Financial services tech poses risk to global financial system

A new World Economic Forum looks at the risks and how they might be mitigated

Financial services tech poses risk to global financial system

The fast-rise of technology in the financial services sector poses potential systemic risks to the global financial system according to the World Economic Forum (WEF).

In a new report, the organisation explores what the risks are and how they can be mitigated.

The risks include social media and how it can be used to manipulate capital markets, and the rise in ‘buy now, pay later’ debt.

“While continued tech integration into the financial system has many benefits, it’s important that industry leaders, regulators and consumers be aware of emerging tech-driven risks and take appropriate action to mitigate them,” said Drew Propson, Head, Technology and Innovation in Financial Services, World Economic Forum. “As the financial system becomes more dependent upon technology, new risks are surfacing as a result and it’s essential to apply solutions throughout the financial services ecosystem to ensure resilience and stability in coming years.”

Cyber risks

The report, Pushing Through Undercurrents, has been developed in collaboration with Deloitte, and highlights how fragmentation in the global financial system continues to create risks.

Many of the risks have been driven by the adoption of technology in the financial services sector and include geopolitically-motivated cyberattacks.

With talent shortages, especially in some regions, also leaving capabilities weakened the report warns that some financial institutions may not have the ability to resume critical operations following a cyberattack.

The WEF report suggests that building cybersecurity centres that can be utilised by private entities collectively could help solve this issue.

Social media

With the use of social media a key part of the rise of ‘meme stocks’ and the gamification of investing, there is potential risk that investors drive stock valuations due to conversations in ‘echo chambers’.

Investors sharing the same values and opinions are brought together by social media platforms’ algorithms and can play a pivotal role in amplifying stock volatility and heightening individual risk appetites.

The report suggests that use of artificial intelligence (AI) could mitigate this risk by spotting warning signs of potential meme-stock surges.

Overall, the report highlights several key solutions to mitigating tech-driven risks:

  • Promoting trust-enhancing products and services that reinforce financial system stability
  • Dismantling information siloes to better identify tech-driven risk at the ecosystem level
  • Ensuring predictive analytics capabilities reflect geopolitical and regional uncertainty and are applied to resilience efforts

Rising pace of risk

Rob Galaski, Vice-Chairman and Managing Partner, Financial Services, Deloitte Canada, says that risks can emerge very quickly – weeks not years – due to the increased interconnectivity of financial and non-financial players.

“This all points to the need to monitor and mitigate systemic risk at the level of the entire ecosystem. To do this, the industry will rely on data to build a clearer picture of the complex web of links between financial institutions, technology vendors, consumer platforms, social service providers, and other players - and predictive capabilities like AI to spot and evaluate risk vectors before they become systemic.”