Technology in Banking (Part-04)
The Impact of Technology on the Organization of Banking Intuitions, and its Impact of Market Structures
Enormous expenditures on technology are clearly changing radically the face of the financial industry. Technology, while key in automating banking function, now offers banks new ways of organizing their structures and controlling their diverse activities. It is also becoming one of the main determinants of how banks interact with customers. In such a diverse industry as banking, it is interesting that this paradigm shift is true both at the retail end of the market and for the wholesale industry. But one common problem is the decision as to whether to lead or follow in technological advances.
It would seem intuitive that the first organization in the banking industry to exploit technology to develop new sales channels or improve existing ones should reap substiential advantages over competitors. However developing such innovations is a highly risky and complex strategy. The potential downsides include higher than expected development costs, lower than expected take up rate of the finished product. The combined result is being increased risk to shareholder capital. Conversely, while the adoption of a tried and tested technology with a proven demand may seem a safer option, followers face the risk of falling dangerously behind the competition.
If the oft-quoted statement ‘information is power’ is true, then banks, with their IT expenses and access to information on their customers, should have a great advantage over any firms wishing to enter the financial services market. Through their information systems, banks have a degree of knowledge on the financial dealings of economically every active person and organization is society. Their competitors operate within a mush narrower field of vision and only have a partial knowledge of their customers’ transactions. What new technology offers, among other things, is easier entry into niche markets.
Banks can gain competitive advantages through the use of technology in financial businesses. Banks have to select and exploit new forms of technology in a manner and at a time which allows them to compete successfully while developing these new processes without wasteful expenditure. But how to restructure and exploit fundamental changes in the nature of doing business requires a very difficult decision making process. Technology has not just become faster and more relevant; it has also become increasingly complex to manage. This problem has significantly increased in recent years as technology has moved into the front office of the banking business. In the past, technology existed in certainly managed computer centres and has been used to automate functions like cheek clearing. Now, however, every bank is faced with a labyrinth of powerful small scale systems, such as PCs networked together. The move towards distributed computer environments has changed the way in which technology is exploited. Emphasis has shifted from purely automating existing back office procedures through utilizing technology to invent completely new ways of handling customer relationship.
The fear is that new types of financial institution could use technology to offer premium service or highly targeted, low cost services while also exploiting brand names developed in other markets. However, the threats from non-banks be they large corporations or smaller one, is only secondary. In general, financial institutions are not threatened across the board by outside companies entering their markets. The threat is from other financial institutions which are better able to adapt to the new technologies, fund their development and exploit them to win market share. Undoubtedly the investment needed in technology to establish a general purpose bank is too large for any new entrant to contemplate.
On balance it appears that what new technology offers is easier entry into niche markets, negating the advantages that existing banks have in term of scale. The revelation taking place in bank customer relationship is being prompted by the new use of technologies. The fundamental changes which technology has introduced are now delivery mechanisms and improved access to customer information.
An obvious successful example of these two factors working together has been the development of telephone banking and telephone insurance operations. These have managed to build up customer bases using new distribution routes and then exploit these new customer bases to gain extra business. These services have, in the case of early entrants, been used as offensive weapons against other banks. Interestingly many of these services have separate brand names established by traditional banks to exploit these new possibilities.
Few established financial institutions have fully explored how these technologies can be exploited to offer the same services options to the millions of customers who use old banking and insurance structure. However, the costs of providing such services are daunting. It may be noted that while an electronic interface with the customer will lower transaction costs, it will be at the expense of personal service as delivered through traditional branch networks.
In the past, computing has been used to process data, such as transactions taking place in peoples’ accounts. It is only in recent years (with the advent of sophisticated databases, the use of networked computers to distribute information and the continuing fall in the costs of computers) that it has become possible for banks to start activity exploiting the information they hold. Technology not only allows new methods of accessing the customer, it also enables much faster development of new financial services.
To be continued...
Professor Rafiqul Islam
Faculty of Business & Economics (FBE)