Case Study: Banking on VirtuWorld: When Your Top Brand Guru Suggests a Partnership with a Virtual Reality Website, You Have to Ask Yourself: How Much Real-World Value Do We Want to Put at Risk by Investing in the Online World?
Ramaley, Kenneth J., The RMA Journal
Risk Management in the (Virtual) 21st Century
Perched at the bow of his fishing boat, Paul Stevenson gazed across the placid waters of Moosehead Lake in Maine. "There's nothing like the early morning fog lifting over the lake to help you shake out the cobwebs and gain some perspective on a new risk," he thought.
On this early morning in mid-June, Stevenson, the chief risk officer of National Bank, was reflecting on how risk management had changed in his 30 years in the banking industry. Risk management used to be about credit portfolios, market movements, financial statements--even the occasional fraud or operational risks. Now he was expected to weigh in on the reputation risk associated with National becoming the "official bank" of VirtuWorld, a virtual reality website. National's proposed involvement was the latest brainchild of the bank's head of marketing, Mark McMyers. Before yesterday, Stevenson didn't know what VirtuWorld was. Now he would need to find out quickly.
In his complex role of having to balance the needs of shareholders, customers, regulators, and business developers, Stevenson was known for being open to new ideas without being swept away by the latest craze. Thanks to his steady hand, the bank had bypassed the subprime mortgage market in the early 2000s while competitors (and some shareholders) were chasing easy profits. He had boldly recommended the expansion of his firm's credit "buy box" at a time when other banks were tightening standards. By accurately anticipating the market turnaround, the firm had earned handsome profits on a well-managed portfolio. Stevenson maintained good relationships with regulators, internal audit, and his line-of-business partners as a trusted advisor. His reputation landed him in the position of having to report to the CEO's leadership team on the risks associated with the VirtuWorld proposal.
"Paul, can you come in here for a minute?" came a voice from the intercom in Stevenson's office. National's revered CEO, Thom Fischer, wanted an opinion on something. As he walked over to Fischer's office, Stevenson was surprised to see Mark McMyers sitting inside. Since McMyers had taken over Marketing, Risk Management had not typically been consulted on new approaches and launches. Stevenson immediately assumed there would be some kind of a cleanup job required and steeled himself for the conversation.
"Paul, glad you could make it," Fischer began. "Mark was just describing his latest campaign and it's a big one. As you know, Mark has had a lot of autonomy these last few months and it's worked out well, but this one could be a game-changer, and we want you involved on the ground floor. Mark, could you explain the deal?"
McMyers sipped his water and kept his gaze fixed on Thom as he spoke to Paul. "Sure thing," he said. "We have a ground floor opportunity to become the official bank of VirtuWorld. They only have 50 million users now, but are growing by 3 million users per month. Users are spending an average of 1.3 hours per day in their virtual world--and users under 30 are on the site a whopping 3.2 hours per day. As the official bank, we'd get exclusive rights to brand the banks that people visit in VirtuWorld, the credit cards they use, and the statements they receive. We would be able to produce a real-world credit card that earns VirtuWorld dollars for every dollar they spend. Our marketing data forecasts 2.6 million new cards in the first six months alone. I'd love to give you a VirtuWorld tour so you can see the potential. Of course, there are some new risks, but with rewards this high, I'm sure we can figure out a way to do this deal."
Before Stevenson could respond, Fischer interjected, "Paul, there are a lot of details and moving parts on this thing. Could you get with Mark and figure out what we should do on this play? I'll look for you to report out to the board next week. …