All You Need To Know About Risk Management in Cloud Banking Systems
Risk management is a crucial aspect of cloud-based banking systems to ensure the security and stability of these financial institutions. Cloud-based financial systems rely on cloud computing services and tools for day-to-day financial transactions and other operations. These cloud computing services, on one hand, provide benefits like scalability, cost-effectiveness, and flexibility. But, on the other hand, they also introduce some serious risks.
These risks need to be identified and managed for the proper functionality of banking operations. In this article, we will discuss the potential risks of a cloud-based banking system, the risk management process, and best practices for risk management in the cloud. Read the full article to get insights into risk management in cloud banking systems.
Types of Risks in Cloud Banking Systems#
There are different types of risks associated with banking systems, especially when a cloud-based system is involved. As financial institutions store sensitive data related to the financial and personal information of users, these risks need to be identified and necessary actions should be taken for financial institutions to have smooth operations. Here are the types of risks institutions may face in cloud-based banking systems.
Operational Risks#
Important types of risks in a cloud banking system are operational risks. Operational risks refer to problems that occur in the cloud due to internal system failures, human errors, or external cyber-attacks.
IT Failures#
Cloud-based banking systems are dependent on cloud services for their day-to-day operations. That is why a strong IT infrastructure is needed to support operations all the time. Strong IT infrastructure does not guarantee smooth operations. There is always room for risks like outages, low network latency, or any other technical problems. All of these IT failures result in huge financial losses and sometimes inefficient operations.
Cyber Attacks#
According to a survey, more than 2200 cyber-attacks happen every day. The majority of the targets of these attacks are financial institutions like banks. A cloud-based banking system makes the system and information available on it more vulnerable to cyberattacks. Even a failed cyber attack can disrupt the operations of a financial institution. Despite continuous system upgrades, there is always a risk of a potential cyberattack which can lead to financial losses, data breaches, and disrupted operations.
Human Errors#
Human error is an important factor in operational risk. Employees may cause operational risks by giving control to unauthorized personnel, incorrect data entry in the cloud, etc. All of these human errors can cause operational risk in a cloud-based banking system.
Compliance Risks#
Cloud-based banking systems can also pose compliance risks. All financial institutions are required to fulfill some regulations by different government bodies to ensure the privacy of customers and continuous operations. These regulations include General Data Protection Regulation (GDPR), Federal Risk and Authorization Management Program (FedRAMP), SEC, etc.
Cloud-based banking systems make it difficult for banks to comply with all these regulations by different bodies. This difficulty poses a compliance risk that can cost banks fines and restrictions. Continuous fines and restrictions from different government bodies and organizations cause financial loss and less trust among customers.
Reputation Risks#
Reputational risks refer to the harm to the reputation a bank may face due to data breaches, system failures, compliance issues, service disruptions, etc. All of these reputation risks are multiplied in cloud-based banking systems. Since the likelihood of cloud-based services being disrupted is higher than an on-premise infrastructure, it poses more reputation risks.
All of the above risks can be controlled by proper risk management systems and by implementing best risk management practices.
Risk Management Process in Cloud Banking Systems#
Risk management is an important process in cloud banking systems. It involves the identification of risks, evaluation of risks, implementation, and monitoring of risks to improve the security of data and transaction details of users.
This risk management process helps FinTech institutions like cloud-based banking systems to ensure the security and confidentiality of sensitive financial information of their users.
Following are the phases of the risk management process in a cloud-based banking system:
Identification of Risks#
The very first step in a risk management process is to identify the potential risks. Extensive research should be conducted to identify different types of risks in the cloud banking system. This includes thorough research of the cloud to identify types of tools and data stored. Once potential cloud risks have been identified, the next step is to calculate their impact.
Evaluation of Risk#
The next step after the identification of potential risks is risk assessment. This step includes the evaluation of all the potential risks identified in the previous step. Once all the potential risks have been evaluated, it's time to prioritize these risks based on their impact on the banks and customers. Risks largely affecting the security of financial institutions and their customers should be of high priority.
Implementation of Risk Mitigation Measures#
After prioritizing the risks based on their impact, it is time to tackle them one by one. These risks cannot be eradicated but can be minimized by implementing risk management techniques. This includes setting firewalls to increase protection from external threats, allowing only authorized personnel to access sensitive areas of the cloud, setting encryptions, having a disaster recovery plan, etc.
All of these risk management measures can ensure smooth operations in a cloud-based banking system.
Monitoring and Review#
This risk management process should always be in motion. This will help banks maintain smooth operations without any disruptions. This risk management should always be monitored and reviewed for effectiveness because technology is constantly evolving. It is important to evolve a risk management plan in accordance with changing technology to ensure security and smooth operations.
Best Practices for Risk Management in Cloud Banking Systems#
Best practices for risk management help ensure the security, flexibility, and availability of sensitive financial information required for operations in banks. These practices minimize the effects of adverse incidents on the cloud.
Strong Access Controls#
Strong access control should be practiced by every bank, whether it has on-premises infrastructure or is cloud-based. Strong access controls are critical to ensure that only authorized personnel access personal and financial information of banks and customers.
This can be ensured by implementing two-step authentication, access numbers, and codes. Also, access for employees who are fired or suspended from the bank should be revoked to prevent any data or identity theft incidents.
Regular Security Assessments#
Regular security assessments are also a good practice for cloud-based banking systems for risk management. These assessments help financial organizations identify and eliminate vulnerabilities in their system. This assessment includes testing technology, processes, and data for vulnerabilities. This security assessment is usually divided into four steps: identifying the risks, assessing each risk, prioritizing risks, and mitigation.
These regular security assessments help financial organizations safeguard the financial and personal information of customers by eliminating any threat before it does any harm.
Data Encryption#
Implementing strong security measures is a crucial part of risk management. Using encryption for data on the cloud and shared data is very important. It can help financial institutions prevent any significant loss and theft. Apart from encryption, a two-step authentication system should also be introduced to allow the use of the cloud by authorized personnel only.
Apart from encryption, firewalls are also important for the networks to prevent any network interception. Most of the time, data breaches happen due to weak network security measures, and firewalls will ensure network security.
Regular Software Updates and Patches#
Regular software updates and patches are an important aspect of risk management. Regular updates provide developers with the opportunity to eliminate vulnerabilities, fix bugs, and enhance the performance of the cloud. These updates and patches are vital for the security of a cloud-based system. These updates allow developers to make their systems up to date according to changing technology.
Compliance with Regulatory Requirements#
The financial service sector is regulated by different government bodies due to its sensitivity and importance. Sometimes it can be hard to comply with all the regulatory requirements. But by implementing practices like regular security audits, real-time data sharing between organizations, and choosing a reputable vendor, all these regulatory requirements can be fulfilled without any worries.
Therefore, financial service organizations should comply with the regulations to avoid fines and penalties and maintain their reputation in the market.
Disaster Recovery Plan#
Disaster recovery planning is also important for cloud-based banking systems to recover quickly from any disaster or disruption. This planning should include the processes to follow during a disaster, contact information, resources, backup plans, etc.
This disaster recovery plan will help banks recover quickly and ensure the continuation of their operations without any significant loss.
Conclusion#
Risk management is a crucial aspect of cloud-based banking systems to ensure smooth operations and protect sensitive information from various risks. Cloud-based systems have a lot of advantages but can also introduce new types of risks, including operational, compliance, and reputational risks. By identifying, evaluating, and mitigating these risks, financial institutions can manage their operations efficiently and securely.
Proper implementation of best practices for risk management helps banks maintain their operations without disruption. These best practices include strong access controls, regular security assessments, data encryption, regular software updates, compliance with regulatory requirements, and a well-documented disaster recovery plan. All of these practices ensure the security and smooth functioning of cloud-based banking systems.
Risk management in cloud-based banking systems is an ongoing process that requires constant monitoring and updating to adapt to evolving technology and potential risks. Adopting these practices will help ensure the safety, security, and effectiveness of financial operations in the cloud environment.