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Digital Financial Services Risk Management Classification

Digital Financial Services (DFS) present unique challenges in risk management, especially as digital transactions and mobile money solutions become increasingly integral globally. Unlike traditional financial services, where fraud and technology risks are subsumed under operational risks, DFS categorizes these risks independently, highlighting their significance in this digital era.

This paper presents a comprehensive topology of DFS risk categories, emphasizing how interconnected these risks are, particularly in the context of emerging ESG (Environmental, Social, and Governance) concerns.

Strategic Risk

This refers to the potential for losses or negative impact on an organization's goals and long-term objectives due to decisions or external changes that affect their strategic direction. In mobile money, strategic risk might involve entering a new market without fully understanding regulatory complexities, launching a new product that fails to meet customer needs, or investing in a technology that is misaligned to the business strategy for instance, targeting the mass market with a mobile money app in a country with low smartphone penetration.

Regulatory Risk

Regulatory risk is the potential for financial loss, operational disruption, or reputational damage that an organization may face due to changes in regulations, laws, policies, or non-compliance with existing regulatory requirements. It arises when regulatory environments evolve in ways that may impose new constraints, introduce unexpected costs, or impact how the organization operates.

Operational Risk

Operational risk is the potential for loss resulting from failures in internal processes, people, systems, or external events that disrupt normal business operations. It is a broad risk category that covers a range of potential issues that may impact on an organization's ability to function efficiently and deliver its services as expected.

Technology Risk

Technology risk is the potential for negative impact arising from failure in technology systems and cybersecurity threats. The three key areas are:

• Confidentiality: Protecting sensitive information from unauthorized access
• Integrity: Ensuring information is accurate, reliable, and unaltered from its original state
• Availability: Ensuring authorized users can access information when they need it

Fraud Risk

Fraud risk is the possibility of misrepresentation of facts or deception to the detriment of a party. Mobile money fraud is defined as fraud that takes place on assets owned or held by a mobile money service to the detriment of a mobile money service provider, its customers, agents or third parties.

Third Party Risk

Third-party risk is the potential for negative impacts on an organization due to reliance on external entities such as IT vendors, integrators, partners, mobile money agents or service providers for products, services, or functions.

Elements of Third-Party Oversight Program:

• Due Diligence
• Risk Assessment
• Contractual Safeguards
• Onboarding and Training
• Monitoring and Enforcement
• Contingency and Redundancy Planning
• Offboarding

Financial Risk

Financial risk refers to the potential for losses or financial instability arising from factors such as credit risk, liquidity issues, and currency fluctuations. These risks can impact a mobile money provider's profitability, cash flow, and overall financial health.

ESG Risk

ESG (Environmental, Social, and Governance) risk in digital financial services (DFS) refers to the potential negative impacts associated with a DFS provider's environmental footprint, social responsibilities, and governance practices.

• Environmental Risks: Includes risks from emissions, energy consumption and digital waste from DFS infrastructure and devices.
• Social Risks: The key social risk is financial inclusion that is one of the main reasons for launch of DFS.
• Governance Risks: These are risks from poor governance or unethical practices.

Country Risk

Country risk refers to the potential for losses that businesses and investors may face due to events or conditions in a specific country that could adversely affect the achievement of their objectives.

• Political Factors
• Economic Factors
• Social and Cultural Factors
• Legal and Regulatory Factors

Conclusion

This article identifies and classifies key risks unique to DFS, grounded in insights from frameworks like the GSMA's Mobile Money Fraud Typologies and Mitigation Strategies and IFC's DFS Risk Management Handbook.

The article's insights identify reputational impact as a consequential risk in DFS, affected by all other risk categories. The interconnected risk framework allows DFS providers to prioritize risk areas and better anticipate cascading impacts, supporting a proactive and holistic approach to risk management in an increasingly digital and regulatory-aware world.

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