TECHNOLOGY IN FINANCIAL SERVICES DURING 2000–2008

GUEST POST: Written by Divya Padmanaban, Class of 2016 Rotman MBA Student

Y2K, the new century, brought with itself the news that customers and corporations were becoming more and more reliant on technology. The sense of urgency to adopt the right technology to improve the competitive advantage of a firm was being seen as the new trend in Y2K. Consumer started adopting online tools and social networks on a large scale, this drove the need for system upgrades to provide a better user experience.

IT adoption could be seen as being used to enhance service innovation practices of the firm and/or to evaluate how service innovation practices would improve the competitive advantage of a firm. Financial services is a highly competitive, dynamic and technology-driven industry that has been witnessing a rapidly changing business environment. Since the 1960’s financial innovation has become a global trend of financial development. Financial innovation refers to technological advances that facilitate better access to information, means of trading and payment, and to all the emergence of the new financial services and instruments. IT adoption can relate to either a product or service within a firm. Product adoption includes either birth of a new product or an adaptation in an integral part of an existing product. Service IT adoption includes improving the service offered by firms, i.e. improving the customer participation. Let’s first analyse the technology innovation and impact in the industry from a product IT adoption standpoint followed by service related IT adoption.

Technology Innovation – Product

In the early 2000’s the industry witnessed the birth of the need to store data and preserve its integrity. The industry was heading towards a time wherein using data to model the current and future scenarios was becoming a part of the business. The generation started witnessing an upsurge in financial innovation related activities. An example of this could be firms offering the service of a “risk map” to its clients. [Risk Map — a report summarizing how a company was creating risk and highlighted the areas of likely exposure and in need of attention] This tool was used by consultants to advice their clients on how to understand, manage and mitigate their total cost of risk.

Technology and regulations are the two most important pillars of this industry. The appearance of increased financial innovations weakened the monetary policy in the industry. Financial innovation led to new payment systems – new means of electronic payment like the debit and credit cards. E-payment became substitutes to the physical money and economic agents started substituting money with different types of assets. This was seen as having destabilizing effects on the demand of money. To counter this negative effect of e-payments on physical money ECB took measures to carefully analyze monetary development and their content for price stability. The industry also saw the explosion of new financial products like, derivatives and shadow banking sector as part of this financial innovation. Deposit-taking and lending shifted from an integrated function, performed by a single institution, to a market‐mediated chain involving a plethora of actors and products. The way the incumbent financial institutions made money changed fundamentally as a result of this era of innovation. This financial revolution had major implications for the economy overall. The collapse of the financial service sector in 2007/8 began with the unravelling of some of these innovative products and structures.

Technology Innovation – Service

Customer focussed technology innovations/adoptions had taken the centre stage for financial firms to stay ahead of the competitors in the market space. Internet applications including e-brokerage products like the custom trading tool from Bloomberg were aimed at improving the user experience. Many banks and insurance companies moved towards role-based user portals. Mobile payments became the key technological innovation because of its ability to increase the profitability of retail accounts that generated barely enough fees to cover the costs of handling payment. Banks noted this transition to mobile banking as means to win new customer segments. Financial services also started shifting from a transaction mode to an interaction mode thanks to the social collaboration tools (wiki, blogs, chats) that mobilized the power of the crowd. Firms started using these tools internally for knowledge development of the employees. Organizations started offering almost real-time business process execution to respond to changes in the business ecosystem. Corporations started becoming more business intelligent using real time data to take strategic, tactical and operational level decisions. Tools like Anti-Money-Laundering (AML) and fraud detection tools that used real-time data were able to compute behaviour patterns and detect unusual activities. Even these firms took advantage of the internet bubble, they started using customized search engines in their systems to search the corporate information system as well as the web for data. There were also long standing players in the industry that were not able to easily migrate into these new IT financial innovations because of their legacy system migration issues.

Conclusion

Overall it was seen that these innovations enhanced company’s response to customer demands, improved organizations delivery speed and progress visibility, and improved customer experience. In my opinion technological innovation had just began in this industry. Firms were moving into an era where technology was not only going to be used for improving the user experience but also play a major role in the back office capabilities of these firms. Also, I believe these innovations helped consolidate the various players in this industry. Agreed that these innovations resulted in improved quality of the services but also led to increased costs for the firms. I still strongly believe that customers’ increased engagement with digital media was suggestive of the fact that they would be ready to pay higher costs for these innovations. I believe it would not be wrong to say that firms who don’t evolve their offerings in the direction of IT adoption would be left behind in this rat race.

The next part to this series would discuss the technology impact in financial services post-recession.