Singtel, the multinational telecoms group, is advertising for a new Chief Risk Officer to work at their head office in Singapore. The catch is that the role is for their digital bank operation and does not relate to their telecoms activities. Applicants must have 20 years of local banking experience and know about the specific kinds of risks that banks manage, including credit risk and liquidity risk. However, as the more advanced telcos in Asia and Africa morph into providers of financial services, we should be asking ourselves how this will affect organization charts when it comes to the operating risks that are common to both sectors.
The role of CRO is well established in financial businesses like banks and insurers, whilst only a minority of telcos have an equivalent position. The need for a CRO in the financial sector stems from the probabilistic element to running these businesses and maximizing returns. Each year a proportion of loans will default and a proportion of insurance policies will pay out. A financial firm cannot tell which specific customers will cost them money but they can manage the mixture of loss-making customers versus profitable customers by requiring wider margins from customers that represent a worse risk. Projections are vital to this kind of business, as is the process of understanding the differences between projections and reality. All of this is very numerical and superior data leads to better decisions… although the financial sector has sometimes fooled itself into believing that high-risk decisions were low-risk decisions, leading to disastrous consequences.
The mishandling of risk in the financial sector has only reinforced the need for powerful CROs who objectively evaluate their business’ tolerance for deviations from forecasts. Financial products can be exceedingly complicated, but ultimately they can always be subjected to numerical analysis. Telcos lack the ability to see their world through numbers, though we can argue about how much this is because of the complexity of telco business models and how much is due to a different management philosophy. A completely digital business has the potential to know everything that happens on its network, and hence to obtain a detailed understanding of every customer if it can sustain all that detail and avoid the temptation to oversimplify.
This leads to an interesting question about who should be better placed to use data to improve business decisions. Is it:
- Banks, because they routinely appoint senior decision makers who have the skills to work with numbers and data; or
- Telcos, because electronic networks can be used to gather far more low-level data about customers and transactions than would ever be possible with traditional banking services.
Businesses that straddle finance and telecoms may find themselves appointing CROs whose initial remit is only to cover the financial services they offer, although there is no rival CRO for the rest of the business. These banking CROs may soon appreciate the additional value that can be added by mining the data provided by the telecoms network. There would hence be a natural temptation for such CROs to expand their role to cover more or all of the company’s affairs, leading to a revolution in how certain big businesses use data to manage risk. Sophisticated software and data models could be unleashed because there would finally be decision-makers who understand how to use them for maximum advantage, whilst having the real influence to do something about it.
We must also be conscious of the fallacy that all innovation comes from Western countries. The leading Asian and African telcos have acquired far more financial sector expertise than their Western counterparts. Telco-delivered financial services like microlending may be focused on simple products now, but they are growing rapidly and have a transformative impact on the economy. Companies that offer these services are gaining important new insights into people and risk. If they appoint and empower CROs then we might see an overturning of complacent expectations about how to run telcos. This would be similar to the way new ideas about using data to deliver enhanced efficiency, quality and cost savings in car manufacturing led Japanese firms to overtake American rivals.