An economy based in digital technology, where the Internet has changed the way in which business is conducted, is known as a ‘Digital’ Economy.
In this new economy, digital networks and the communications infrastructure provide a global platform upon which people and organizations form strategies, interact, communicate, collaborate, and search for information.
Recently, the Digital Economy has taken on a new meaning, as the branch of economics that studies the marginal cost of intangible goods via the Internet. In other words, globalization today is more important and pressing, because customers can order products from anywhere in the world and, for companies, logistics are a vital factor in getting products to their final customer.
In this environment, the financial sector must adapt to the disruption generated by this new business model. In the first place, it will require an infrastructure, with reference to business support resources such as technology, hardware, software, telecommunications, and skilled staff. In the second place, electronic business (e-business), referring to the business processes developed using software programs or online platforms. Last of all, electronic commerce (e-commerce), referring to the purchase/sale of goods using the Internet as a means of communication.
We should all be aware of the paradigm shift brought on in the financial sector by social and digital changes. We should also be aware of how the new, digital technology will generate a change in the following sectors: Big Data (data management), Artificial intelligence (to help select the best way of solving a problem), Block Chain (to guarantee safer and more reliable transactions), or IoT (the internet of things, such as wristbands that are capable of registering the habits of our everyday life). In this new era, which has been called the fourth industrial revolution, data is the new oil, because all of the construction and evolution of artificial intelligence depends upon data.
Companies in the financial sector that do not adapt dynamically will not survive, as the ability to react innovatively to the digital irruption will be just as vital for finances as it was for the evolution of cell phones into smartphones. The irruption in new business models also occurs because the experiences of customers with the technological leaders in other sectors (Amazon, Apple, Facebook, Google…) are transforming customer expectations for the services offered at a bank or an insurance company.
Technology and digitalization have led to the emergence of new startups in the financial sector that are called fintech, or insurtech in the insurance sector. These startups seek to facilitate transactions, simplify product procurement processes, cheapen services, reduce intermediation and management fees, and improve transparency and efficiency in financial markets. In this respect, the potential of blockchain to improve market efficiency and risk management is enormous. New customer demands have arisen, such as the immediate delivery of documents and instant response to their financing or investment needs. New consumer patterns require new infrastructures, processes, and efficient internal capacities that can respond adequately to these new customer needs.
Thanks to blockchain, which is a database formed of blocks designed to avoid modification after the publication of their data, the creation of, use of, or investment in cryptocurrencies has become more popular. This technology, which employs mathematics, cryptography, and programming languages, serves to solve the issue of trust by cooperation to achieve common goals.
But all of these new businesses based around the financial sector must be regulated. Traditional banks are demanding a new regulation that allows them to compete with these new fintechs. Fintechs offer traditional services with a smaller infrastructure, which makes the prices they offer hyper-competitive, reducing margins in the financial sector. Amazon recently acknowledged that it was interested in taking on the banking business of checking accounts, which are relatively unprofitable for banks, where these accounts hardly receive commissions. However, this action would help Amazon obtain 70 million clients from both American commercial banks, and commercial banks all over the world. The customers, contacts, knowledge, and data are most important; these factors are what will make other company business units more profitable.
The technological evolution will soon make it possible to have autonomous cars. Then, for an insurance company, in the event of an accident, who will be at fault? The driver, as is currently the case; the car’s manufacturer, or the telecommunication company that connects the vehicle to 5G.
At the same time, the advanced and mass management of details (Big data) opposite the traditional methods that are based on sociodemographic criteria will allow for the development of profitable and personalized new products, while at the same improving the operating process.
The greatest challenge for banks will be to adapt their traditional business model of selling products through their offices to include new technologies that will allow them to satisfy the new demands of multi-channel customers, who will no longer go to their offices.
In this respect, the technological development that we are experiencing in society, and the continuing struggle for companies to adapt and profit from their enterprises, is growing exponentially; so, the irruption of digitalization in companies will continue to increase, as well. Every organization must adapt to the current level of digital maturity, as well as to an individual business model based on that organization’s customers, distribution channels, marketed products, internal processes, organizational structure, culture, history, and characteristics particular to that organization.
Director of the Master in Banking and Finance, UPF Barcelona School of Management