Dr. Rahul Sharma Accounting & Finance
Digitalization of Financial Sector
Personal relationship has always been the core to the financial sector since beginning. People were dealing with a particular bank because of personal relationship with the person dealing with them.
For a customer, it was exclusively specific to the concerned branch. Customer was getting all preferential treatment based on his relationship with the person in the branch. OECD (2018) has classified the financial services into distinctive sets based on various activities carried out by financial institutions. Payment, planning, lending and funding, trading and investment, insurance, cybersecurity, operations and communication are the examples of those activities. These activities may have the impact of one or more digital technologies that have wide range of applications from digital ledger technology to block chain, artificial intelligence to augmented/ virtual reality. Technological advancement has totally changed the concept of personal touch in the financial sector, in the recent time. Now, customers are no more required to visit the branch. Even calling to the customer care is very limited to the redressal of grievance for the services. Distance and time to reach the branch to get things done is the not a matter of concern for the customer. They can conduct any transaction with the financial institution with just a click of the computer or the mobile. Thus, besides traditional competitors financial institutions are also facing competition on the technological front. The problem of financial sector does not end here.
Polasik et. Al. (2022) defined challenger banks as those institutions that challenge traditional banks using digital technologies in their operations. The intermediaries who were providing their digital services earlier to the financial sector are now turning into new competitors for them. These intermediaries (FinTech) were providing their digital services by using big data, block chain and crowd sourcing etc. However, now they are posing threat to the existent model of traditional financial institutions. These Technological (FinTech) players are not only changing the way financial sector used to operate but also solving some of the earlier evils of the financial market for example high transactions cost, or the cost of switching from one player to another. One can easily switch his account from one player to another be it bank account or insurance policy. In short, it can be said that these days customers are focusing on the convenience and speed of transactions because of which use of technology is gaining its popularity day by day.
One of the biggest advantage to the Technological (FinTech) players is that they need not have big capital adequacy or regulatory requirements to enter into the financial sector. The reason is they do not offer full-fledged financial services to their customers. Rather, they offer niche services to their customers, be expert in the same, and can enjoy great returns. As it is said that change is the only constant thing. These days other big players from the field of technology are also entering in the financial sector. These big players, known as BigTechs like Apple and Google in addition to the big retail players like Amazon and Tesco, are entering in the field of financial services. The biggest advantage to these BigTech is that they have huge client database from their core business that help them in getting an advantage over others by applying digital application and artificial intelligence. On the other side, these BigTechs are also having an access to the bank data of their clients by virtue of open access regulation offers. This access to the bank data creates competitive value for these BigTechs over other player in the industry. Since nothing is perfect, so is the case with FinTech and BigTechs. FinTech and BigTechs are also not free from risks. However, these are not new risks related to technology but may be more serious because of the applications of new technologies. To be very specific these risks may be related to data security and privacy risks. These tech companies can further aggravate financial exclusion for those who are not familiar with digital communications especially in developing countries.
To conclude, It can be said that technology and digitalization are quickly converting the ways in which financial sector is functioning. These technologies are also affecting the management and delivery of financial services. Innovative applications have changed the way financial service providers were communicating with financial consumers. To overcome form the technology related problems, regulators need to be more vigilant so that the benefit can be passed on to the user of financial services.
OECD (2018). Financial Markets, Insurance and Private Pensions: Digitalisation and Finance.
Polasik, M., Widawski, P., & Lis, A. (2022). Challenger bank as a new digital form of providing financial services to retail customers in the EU internal market: The case of Revolut. In The Digitalization of Financial Markets. Taylor & Francis.