ECB's Hakkarainen warns on IT outsourcing risks

ECB's Hakkarainen warns on IT outsourcing risks

As the digitalisation of banking gathers pace, outsourcing of key IT services to third parties poses an increasing risk to the sector, warns a senior European Central Bank figure.

In a speech on the supervisory implication of digitalisation, Pentti Hakkarainen, a member of the ECB supervisory board, offered up a hopeful vision of the way technology will shape the industry.

However, Hakkarainen did flag some risks, chief among them outsourcing. Noting that banks are not "technological houses" he said that the fragmentation of banks’ services across a range of external providers creates a "challenge" for banks’ leaders, who retain responsibility.

"It is also a potential concern if many banks are outsourcing core elements of their digital banking business to a single provider - for example systems for processing payments. In effect, such arrangements can create a concentration risk for the industry as a whole.

"If a monopoly provider has a problem in delivering their services - then this could impair the functioning of the whole sector," said Hakkarainen, adding that supervisors need to be "strong" in their scrutiny.

Hakkarainen also used his speech to warn about the potential pitfalls of artificial intelligence: "AI and machine learning must not be added to the list of financial crazes where executives have allowed the risks taken by their “quants” to run ahead of their ability to understand and control what is going on."

But, in general, the ECB's man offered a positive view on AI and its ability to help in analysing the credit risk of borrowers and detecting money laundering.

Overall, Hakkarainen told his audience: "We are all lucky - bankers, regulators, and supervisors alike - to work in a time where such great possibilities to improve the way we do our day-to-day work exist."

He concluded: "Let us therefore embrace technological change where it helps us achieve these stable long-term objectives. I believe we are already making on all sides significant progress in this work. If we continue with the right attitude, we have an exciting time ahead - and together we can help generate a better banking system for customers and citizens into the future."

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