1.1 Introduction
The digital revolution is dramatically changing the global business environment and financial services (finserv) is no exception to it. Technology-enabled financial services institutions (FSIs) are changing the way humans are fulfilling basic financial needs. For FSIs, the digital transformation does not mean only adopting technologies such as cloud capabilities, big data, artificial intelligence (AI), mobile capabilities or dominant social media presence. It is aimed more towards creating new business models to develop an ecosystem where all markets and consumers could participate.
FSIs are operating in a very customer-centric industry where banks and finserv players are not only competing among themselves to attract customersā attention and loyalty but also facing stiff competition from technology players who are venturing into the financial world. This has completely changed the financial ecosystem making digital transformation inevitable for the FSIsā survival. The dire need for digital transformation in the financial sector is impelled by the way customers want to interact with the FSIs and the growing threat from the disruption caused by the challenger banks and technology firms offering financial services also known as techfins .
Digital transformation is often confused as the use of information technology and digitalization in an organization but it has a wider application. In the context for FSIs, digital transformation can help FSIs to move away from face-to-face engagement with customers to online as well as innovate their business model to cater for the changing need of their stakeholders. Digital transformation is mainly achieved by the digitalization of the operations and services provided by the institution, and the firms which are slow to embrace it are getting disrupted by the new incumbents. Many progressive financial institutions (FIs) are already deploying machine learning (ML) and artificial intelligence (AI ) to meet their strategic objectives such as usage of ML to identify anomalies in transactions which can reduce fraud and money laundering problems.
1.2 Digitalization of the Financial Sector
According to Gartner, digitalization is the use of digital technologies to change a business model and provide new revenue and value-producing opportunities. Digitalization is rapidly transforming the way in which the financial sector is operating. By employing innovation and digital technologies, management and delivery of financial services have been completely transformed. For instance, in the banking sector, digitalization has brought new business models for the industry, developed new concepts and provided areas for continuous improvement.
Digitalization has provided FSIs, whether it is a bank, a wealth management company or an insurance firm, an opportunity to reach out to potential customers and has helped them to improve their customersā experiences. By use of a mobile app or virtual communication, it is much easier for FSIs to handle a large set of customers without a delay which increases their efficiency and reduces the cost. In the banking sector, digitalization is changing the way banks used to operate.
The following discussion will provide a brief overview of emerging digital technologies which are being applied to the different domains of the financial sector. Detailed discussion on these digital technologies will be dealt with in Chap. 3 (Table 1.1).
Table 1.1
Applications of digital technologies to the financial services
Digital technology | Payment services | Advisory service | Investment & trading | Financing & Funding | Insurance |
|---|---|---|---|---|---|
Blockchain | ā | ā | ā | ā | ā |
Big data analytics | |||||
Artificial intelligence | ā | ā | ā | ||
Augmented reality (AR) / virtual reality (VR) | ā | ā | |||
Biometric | ā | ||||
Internet of things (IoT) | ā | ā | ā | ||
Cloud computing | ā | ā |
Blockchain , which is based on distributed ledger technology (DLT), is in the simplest of terms, a time-stamped series of immutable record of data that is managed by a cluster of computers not owned by any single entity. Each of these blocks of data (i.e. block) are secured and bound to each other using cryptographic principles (i.e. chain). The blockchain is used for know your customer (KYC) compliance or to streamline financing application processes which involve documentation from various parties.
The exponential increase in digitalization of finserv is primarily due to big data analytics . By using big data analytics in finserv , FSIs are taking a more proactive approach to gain a deeper understanding of their customers. Use of big data analytics can help FSIs to understand the customer preferences which can aid to increase the efficiency and effectiveness of the financial products and services.
Artificial intelligence (AI) is a branch of computer science which involves algorithm and machine learning to create intelligent machines. AI helps institutions including FSIs in learning, decision making and providing useful predictive analytics . FSIs are using AI in many applications such as market and customer analysis, credit scoring, usage-based insurance, data-driven trading, fraud detection and beyond.
Augmented reality (AR ) is an enhanced version of the real physical world with the use of visual elements, sound or any other sensory stimuli. AR helps FSIs to decode complex data streams by providing powerful data visualization which aids quick decision making.
Biometrics refers to the study of measurable biological characteristics such as the face, fingerprints, retina, and iris. For authentication purposes, biometrics rely on measurable physical characteristics that can be automatically checked. Using biometrics in financial activities helps to control fraud and identity hacks.
Internet of things (IoT) is a network of connected devices which receives and sends data over the internet. Using data coming from the use of different devices for financial transactions allows FSIs to have an overview of customer finances and financing need in real time. Customer information will also help FSIs to provide value-added services, financial assistance and customized products to ensure a win-win situation for both parties.
Cloud computing allows users to run software applications and store, edit and retrieve data over the internet from large networks of remote web servers rather than on usersā own computers. FSIs are using cloud services for their business and IT needs such as core banking cloud services and insurance management services.
It can be seen from above that there is a rapid increase in the digitalization of the financial sector which is leading to both disruption and transformation of the financial sector. Disruption in the financial sector is discussed below.
1.3 Disruption in the Financial Sector
Technology is changing the landscape of the financial sector by rapid changes in the way customers interact with financial services providers. Financial tasks once handled by humans and dealt with paper currency are now being completely transformed by technological innovation . Well-established FSIs are freaking to respond to a variety of technology-enabled financial services including cryptocurrencies , peer-to-peer lending , mobile payments , e-wallets and distributed ledger technology . Banks and financial services providers used to be the stronghold of traditional financial institutions having a very high barrier of entry such as capital and stringent regulatory requirements. As the demand and expectations of consumers evolved over the period, these barriers have been reduced gradually giving rise to technology-focused entrants known as financial startups t hat have...