Risk Control Framework - Finding the Right Balance

Businesses must continuously assess, manage, and mitigate their risks. Controlling risk involves a step-by-step process. First, a business evaluates its environment, sets its goals, and determines how to achieve them while identifying potential risks that could jeopardise these goals. This involves breaking down the business into processes and sub-processes to ensure granular risk management.

Risk management comprises the overall strategies and frameworks that guide an organisation’s approach to handling risk. It includes the policies and procedures designed to maintain effective risk control measures. In contrast, risk control specifically refers to the actions taken to mitigate identified risks within particular business activities or situations.

Risk Control Framework – Importance

Implementing a robust risk management and control framework is essential for any business. Without investing in risk management, a business becomes increasingly vulnerable to risks. Take the payment industry as an example. As we transition from a cash-centric economy to a highly digitised ecosystem, the emergence of advanced payment methods and technologies has significantly enhanced financial inclusion and transparency in India, positioning the country as a global leader in digital payments.

Technology, automation, and innovation are driving progress in the payments industry, but each advancement introduces its own set of risks. A comprehensive risk control and management framework serves as a safeguard, protecting payment service providers from the negative impacts of these risks. For any business, this framework is crucial for identifying, assessing, and mitigating risks that could potentially harm operations.

Determining the Adequacy of Risk Control Measures

Risk control, prevention, and mitigation measures must be tailored to the specific risks being addressed. While complete risk elimination is often impractical, effective risk management ensures that controls align with business objectives. For instance, avoiding a war may seem like the best strategy to avoid loss, but sometimes engaging in conflict is unavoidable. Similarly, the adequacy of risk control measures must be carefully evaluated in the context of their impact on business operations.

Implementing restrictive risk controls requires balancing their impact on business goals. For example, a gaming platform may avoid hosting games deemed illegal by the state, or a payment service provider might exclude crypto payments in jurisdictions where they are banned. However, a payment company should not disregard UPI payment options simply to avoid potential UPI fraud.

In such cases, risk controls should enhance rather than hinder business operations. In the payment industry, major risks include fraud, cyber security threats, information security breaches, and money laundering. Overly restrictive risk controls addressing these issues could disrupt business continuity. Therefore, an effective risk management framework involves crafting a policy-level statement at the top of the hierarchy, with risk controls derived from this statement being tested for both efficiency and their impact on business operations. 

A Risk Control Framework in Practice

When an organisation decides to put a risk framework in place, it must adopt a carefully selected series of steps. Typically, these steps include:

Risk identification - All the potential risks that can harm the business objectives are identified. These risks can be under categories like security, compliance, financial, operational, strategic etc. These risks are included in the risk register, along with their respective likelihood, impact, source and control.

Risk prioritisation - The identified risks are arranged based on their impact and likelihood, where a worst-case scenario analysis becomes helpful. These risks are then balanced against the risk appetite of the organisation or the process. 

Risk response - This is where mitigation measures are identified and controls are established. Within the broader scope of risk management, these measures form what is commonly known as a risk control framework. Beyond implementing controls, other risk management strategies may include maintaining backup systems, obtaining insurance, and developing contingency plans. These approaches address risks that cannot be entirely eliminated through controls alone.

Once the framework is in place, an ongoing process is crucial: regularly reviewing both the risk and the effectiveness of the control measures. This ensures that the risk control framework remains effective and responsive to evolving risks and circumstances.

Staying in Control

Businesses in the payment industry encounter a range of risks, with fraud being particularly challenging due to its technological complexity and constant evolution. Worldline addresses these challenges with advanced fraud prevention measures, leveraging AI, machine learning, and industry-leading expertise. By partnering with Worldline, businesses can safeguard their customers from inherent risks and deliver a secure and reliable payment experience. Check out our solutions>

References

• Payment Fraud Management
• Risk Control & Risk Management