Risk Monitoring: What is It, Its Importance and How to Do It

Risk monitoring is often used interchangeably with risk management.

There are key differences, however, and understanding them will help your company develop a better business strategy. Let’s break it all down in detail.

What Is Risk Monitoring?

Risk monitoring refers to an organization’s framework for staying aware of its current risk exposure, including the implemented risk management system and any other activities that inform the organization’s risk decisions. It is a key component of determining individual risk appetites – in other words, the decision of how much risk can be tolerated – and often leads to the creation of key risk indicators (KRIs). 

While business risk monitoring happens at the end of the risk management process and as a result of it, it needs to be ongoing and reviewed often, to ensure that appropriate risk responses are actioned in a timely fashion.

The risk monitoring process can be overseen by a dedicated risk team but it’s also common for compliance teams, anti-fraud teams, or trust and safety teams to take that responsibility.

How Important Is Risk Monitoring?

Simply put, risk monitoring allows companies to know the types of risks that affect their operations and bottom line, as well as which strategies best mitigate them.

More specifically, risk monitoring in an organization:

• minimizes risk by identifying it and ensuring there are defenses sufficient to prevent it
• mitigates the effects of risk of various types by having procedures in place to take action once an event arises
• provides a clear picture of the risk landscape, which in turn allows the company to be proactive rather than reactive
• promotes accountability by recording and defining clear steps to mitigation
• creates transparency and inspires trust in staff and stakeholders
• utilizes historical events allowing you to learn from past failures to improve future mitigation
• allows for growth by minimizing losses to risk of various types, from natural disasters to fraud

How Does Risk Monitoring Fit Within the Risk Management Process?

Risk management is a complete framework, and the monitoring part usually takes place once a strategy has been put in place. Once an organization has created an action plan to tackle risk, the team can then monitor its impact. 

In general, the risk management process follows a handful of steps:

• identifying risk
• assessing risk
• treating risk
• monitoring and reviewing risk

This is why the deployment of key risk indicators becomes tremendously valuable. These concrete numbers help you measure and monitor the success (or failure) of your risk strategy. 

Risk monitoring may be the responsibility of the whole risk management team, or it may be delegated to specific job roles. However, because risk goes by different names within different departments, risk monitoring could very well be the responsibility of the payments team, content moderation team, or compliance team.

It is worth noting that risk and compliance are still an afterthought in a number of industries. A report compiled by Ropes & Gray states that 57% of senior-level executives rank risk and compliance as one of the top challenges they feel least prepared to address.

Meanwhile, 79% of organizations said that cyber risk counted as a top 5 concern for their organization.

What Are the Different Types of Risk Monitoring?

Risk monitoring can be performed continually, regularly, or ad hoc. Its frequency may depend on the kind of monitoring your company must perform:

• Voluntary risk monitoring: When the risk monitoring process isn’t legally required but is a key part of your risk management strategy.
  
• Mandatory risk monitoring: Companies may be legally required to monitor risk based on the vertical they operate in. Transaction monitoring, for instance, can be considered a form of mandatory risk monitoring that banks and financial institutions must perform to remain compliant with AML regulations.

Assessing the Level of Risk Monitoring Required

Every organization will have a level of tolerance to risk, as it is impossible to operate without any risk whatsoever. This level of tolerance may be defined by upper management and/or shareholders and other parties, but it is the necessary starting point for assessing the level of risk monitoring that is required for each organization.

Risk monitoring and risk management are never black-or-white. Instead, we can think about risk as a spectrum. Certain types of risks may be tolerated by the organization, for example in particular areas of activity. Others may be deemed as something to prevent at all costs. By extension, one may want to be more strict when monitoring the latter than the former.

Also, make sure to investigate the likelihood of risk changing in nature and intensity. You will want to take into account historical trends as well as the general landscape in your sector, today and in the future.

In general terms, less intensive risk monitoring is likely to lead to slower and less noticeable changes to risk strategy and mitigation. On the other hand, more intensive risk monitoring will bring about quicker results but also cause more disruption to operations. Make sure you take this into account when deciding on the ideal level to implement for your needs.

How Does Risk Monitoring Impact Organizations?

Risk monitoring takes time and effort. It requires continuous input from the relevant team to measure, assess and optimize risk strategies. Because monitoring risk manually can be a drain on resources, many companies find that third-party software solutions allow them to focus on the strategy rather than on developing technical tools. 

For instance, a team whose purpose is to monitor transactions (for instance to avoid AML fines) may find it easier to deploy third-party transaction monitoring software rather than build the same tools in-house. 

A clearly defined and communicated risk monitoring plan helps improve risk monitoring greatly, also providing transparency and continuity within the organization’s teams.

Risk Monitoring Example: Banking Industry

Risk is industry-specific, which can make it hard to find an example that will cover all bases. But let’s examine a specific risk factor in the banking industry: anti-money laundering. 

Banks, neobanks, and other financial institutions have to ensure they don’t allow financial terrorism and money laundering. This is a regulatory requirement. Going over our risk management checklist of identifying, assessing, treating, and monitoring risk, this is what we may find.

1. The bank must understand how money launderers may use its products or services. It must also be aware of the relevant regulations, including those in every market where it operates.
2. The key risk for the bank is running afoul of government regulators, which can lead to hefty fines, reputational damage, and lengthy legal procedures.
3. To treat the risk, the company may want to deploy AML software and a dedicated team of compliance experts to meet the regulators’ requirements.
4. The software should let the team know exactly how many users have been blocked due to AML risk. You can also create reports to measure the rates of false positives or false negatives and adjust how stringent your anti-money-laundering rules are.

Since a key part of AML risk monitoring involves reviewing transactions over a certain threshold, it would also be worth looking at the rates of transactions that resulted in declines, reviews, or were accepted.

You can then use any anomalies in these numbers to monitor your risk strategy and improve it over time.

Risk Monitoring Tools and Techniques

Risk monitoring is only possible if you have data about your risk strategy and challenges. The two risk monitoring methods used are to either continuously monitor risk in real-time or to review it regularly. Most companies combine both methods to ensure their risk strategies are effective.

From there, techniques that can be utilized include:

• Risk assessment and reassessment: This allows us to reach conclusions from the risk monitoring process, which ought to inform the organization’s strategy.
• Risk auditing: These audits will examine defined responses and other defenses and identify any need to update them.
• Trend analysis: Looks into risk trends as well as the variance between expectations and results, so you can automatically flag any need for urgent action to improve processes.
• Risk responses: A term to describe defined processes that trigger once a risk has been identified or a threshold has been crossed. In tandem, these define your risk management strategy.
• Risk transfer: Such a technique will transfer the risk to an external stakeholder or a different internal department. A common method of risk transfer that is enabled through risk monitoring are insurance policies, where third parties take on the risk in exchange for insurance premiums.

Depending on the type of project or company the risk concerns, there are a wide variety of other risk monitoring techniques, as well as risk monitoring tools and risk management software. For instance, risk from fraud and identity theft is addressed through fraud prevention software.

What Skills Are Needed for Risk Monitoring?

Risk management is a cornerstone of a company’s global strategy. Risk monitoring requires the same skills needed to get a holistic view of risk across multiple departments, including:

• the ability to collect data and connect it to relevant business practices
• an understanding of how different departments interact with each other – especially when risk creates an overlap between multiple teams
• a complete understanding of the business model, to ensure the risk monitored isn’t completely out of scope.

When it comes to must-have tools and features, they vary greatly depending on the risk factors but, clearly, an ability to record and log data is paramount. 

How to Use SEON for Risk Monitoring

SEON is first and foremost a fraud protection platform. However, its flexibility and modularity make it suitable for a number of risk management and monitoring practices, including:

• User segmentation & fraud analytics: Data enrichment is a key component of the SEON engine, designed to give you more information about your users and customers – ideal whether you’re trying to reduce fraud risk or to identify high-risk customers.
  
• Risk scoring: SEON lets you create rules which then calculate a risk score. Whether it’s to understand how risky a payment is, spot fake IDs, protect customer accounts or know how a client may pose an AML risk, these scores can help you monitor risk and improve your strategy over time. 
  
• Real-time protection: Intel gathered through the real-time data enrichment and analysis will shed more light on new and ongoing threats to the company, giving a clearer picture of the risk landscape.

• Compliance: Risk and compliance go hand-in-hand, and SEON is increasingly relied upon for KYC or AML by companies in a wide range of verticals. For example, identifying and catching outgoing payments over the AML threshold or to known sanctioned individuals or entities.
  
• Machine learning: SEON’s transparent machine learning module learns from the risk scoring as it happens – with or without human input – and recommends new rules to mitigate risk that can inspire the wider risk strategy and identify holes in your defense.

And, finally, fraud prevention is where SEON really shines, allowing companies of all sizes to protect themselves against the risks caused by fraudsters, bad agents, and cybercriminals. 

FAQ

You might also be interested in:

• SEON: Best Practices for User Activity Monitoring

Sources

• Ropes & Gray: Global Risk Management Report
• Marsh & MacLennan: 2019 Global Cyber Risk Perception Survey