Digital Disruption in Banking and its Impact on Competition¶
Introduction¶
The banking industry is undergoing a significant transformation, shifting from a traditional model based on physical branches to one that relies heavily on information technology (IT) and big data. This transformation has given rise to highly specialized human capital and innovative business models. One of the most notable changes in the financial sector is the emergence of FinTech, which leverages innovative information and automation technology to provide financial services. In this Markdown document, we will explore the digital disruption in banking, its impact on competition, and the drivers behind this transformation.
Digital Disruption in Banking¶
Traditionally, banks primarily focused on offering financial products. However, digital companies and FinTech startups have adopted a more holistic approach, aiming to solve customers' problems and redefine service standards. This customer-centric approach is defined as "an approach to doing business that focuses on creating a positive experience for the customer by maximizing service and/or product offerings and building relationships" (Investopedia).
Digital disruption in banking is characterized by the shift towards a customer-centric platform-based model. This transformation challenges incumbent banks to restructure their operations and adapt to evolving customer expectations.
Functions of Banks in the Economy¶
Banks play crucial roles in the economy, including:
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Maturity Transformation and Liquidity Provision: Banks accept short-term deposits and provide long-term loans, facilitating the efficient allocation of capital in the economy.
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Payment and Transaction Services: Banks offer essential services for processing payments and facilitating transactions, relying on both hard (verifiable and codifiable) and soft (relationship-based) information.
The digital revolution has significantly increased the importance of codifiable information and introduced powerful tools like artificial intelligence (AI) and machine learning (ML) for processing this data, mainly through the use of big data.
Supply and Demand Drivers of Digital Disruption¶
Digital disruption in the banking industry is driven by factors on both the supply and demand sides.
Supply Side Drivers¶
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Technological Developments: Technological advancements such as internet Application Programming Interfaces (APIs), cloud computing, smartphones, digital currencies, and blockchain technology have revolutionized how financial services are delivered and consumed.
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BigTech Firms: Big technology companies like Amazon, Google, and Apple have adopted platform-based business models, expanding their presence in the financial sector and intensifying competition.
Demand Side Drivers¶
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Changing Consumer Expectations: Consumers, especially the mobile generation, have higher service expectations. They expect greater convenience, speed, and user-friendliness in financial services due to the digitization of commerce and the real-time capabilities of internet-connected devices.
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Unmet Customer Needs: FinTech firms have identified and addressed unmet customer needs, particularly in areas such as international remittances, credit, and investment advice, by offering innovative and tailored solutions.
Conclusion¶
Digital disruption is reshaping the banking industry, moving it towards a customer-centric platform-based model driven by technological advancements and changing consumer expectations. This transformation is increasing competition and contestability in banking markets. Incumbent banks must adapt and embrace digital innovation to remain competitive in this evolving landscape.
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