Strategies for Reducing Risk Within Your Financial Institution

Fraud erodes trust and puts your entire institution at risk. Today, more than half of banks, credit unions, and fintechs report rising business fraud, and over 50% are boosting investments in prevention tools. But tools alone aren’t enough. What’s needed is a clear, proactive strategy to stay ahead.

Here are five key risks financial institutions must actively manage:

Cybersecurity Risks

Financial institutions are prime targets for cybercriminals. From ransomware and phishing to DDoS attacks and insider threats, cybersecurity breaches can be devastating and costly. According to IBM, the average cost of a data breach in the financial sector is $6.08 million.

Third-party vendors pose an additional layer of risk. As institutions rely more on cloud platforms and fintech partners, vulnerabilities can easily become yours. Make sure to include these partners in your cybersecurity strategy and training.

Regulatory and Compliance Risks

Regulatory requirements for the financial sector are extensive and constantly shifting — from anti-money laundering (AML) and Know Your Customer (KYC) rules to new tax legislation and consumer protection mandates.

Failure to comply can result in significant fines, legal consequences, and reputational damage. But staying compliant is more than avoiding penalties; it’s about building a trusted, sustainable institution.

Operational Risk

Most financial institutions rely heavily on complex systems to process transactions, manage accounts, and support daily operations. Any failure in these systems can have wide-reaching effects.

From miskeyed transactions to poor data governance, operational missteps can lead to customer dissatisfaction, regulatory scrutiny, and financial loss. Business continuity planning, proactive training, and robust documentation are critical to reducing these risks.

Technology Gaps and Legacy Systems

While fintech startups push the boundaries of digital finance, many traditional institutions still rely on legacy systems that are difficult to integrate and maintain and are increasingly vulnerable to cyberattacks. Up to 70% of banks’ IT budgets go toward maintaining outdated infrastructure, according to McKinsey.

Modernization isn’t just about staying competitive; it’s about reducing risk exposure and building future-ready infrastructure.

Fraud and Financial Crime

Fraud and financial crime are constant risks for financial institutions. Some of the most common and costly schemes include:

• Asset misappropriation, including embezzlement, payroll fraud, and investment fraud, accounting for 89% of fraud cases.
• Corruption, including bribery, conflict of interest, and fraudulent accounting practices.
• Financial statement fraud, including revenue recognition manipulation, off-balance sheet financing, and fictitious transactions. While less frequent, this fraud is highly damaging, with a median loss of $766,000 per case in 2024.

How to Prepare Your Financial Institution for Risk

On average, organizations lose 5% of their annual revenue to fraud. Building a strong risk strategy starts with putting the right controls, systems, and culture in place.

Implement Robust Internal Controls

Internal controls include the policies, procedures, and practices designed to safeguard your organization’s assets, ensure accurate financial reporting, and prevent fraudulent activities.

Focus on these elements:

Segregation of Duties
It’s far easier for employees to commit and conceal fraud when they control multiple parts of a process. One financial institution uncovered $340,000 in fraud after a senior employee exploited her sole access to 45 client accounts, knowing those clients rarely monitored their balances.

Audits, Reviews, and Mandatory Leave
Periodic reviews and enforced time off help expose red flags that may go unnoticed.

Transparent Record Keeping
Proper documentation creates an auditable trail and promotes accountability.

Employee Training and Awareness
The ACFE reports that 43% of fraud cases are uncovered by tips, with over half coming from employees. Yet many organizations fail to invest in compliance training or create a culture of openness.

Leverage Technology for Detection
Advanced analytics and system automation allow institutions to monitor anomalies in real time, improving detection and reducing losses.

From Risk Avoidance to Strategic Readiness

The best-prepared financial institutions take a strategic, cross-functional approach to risk, and aligns with broader business planning and adapts in real time.

Whether you need a fraud risk assessment, stronger internal controls, or forensic accounting expertise, we can help you build a risk framework that supports protection and performance.