Managing the Digital Enterprise - Essay Example

? Managing the Digital Enterprise Table of Contents Contents Contents 2 0 Introduction 3 2 Banking Activities and Developments in IT 3 1.2.1 Electronic banking and its value 4 1.2.2 Impact of electronic banking 6 1.2.3 Banking Business Models 7 2.0 The Opportunities, Challenges, and Risks for the Companies Operating In the Banking Industry 8 2.1 Opportunities and Challenges 8 2.2 Risks 9 3.0 Conclusion 9 The Impact of Technologies on the Banking Industry and its Business Models 1.0 Introduction In the past years, the use of information technology has significantly increased in the service industry and in particular, the banking industry, “which by using Information Technology related products such as internet banking, electronic payments, security investments, information exchanges, financial organizations can deliver high quality services to client with less effort” (Hamdan and Jalal-Karim 2010, p1). Information is described as an arrangement of data, information technology, process, and people that interact to possess, collect, provide, and store as output the data or information required for the support of the organization. From this definition, information system is an arrangement of data, technology, processes, and groups that function together to collect, provide, store, and process information output required to improve and increase the speed of the decision making process. In the past decade, various organizations have began utilizing computer technology to facilitate the provision of services and the process of adoption is expected to increase at a higher rate as technology advances (Hamdan and Jalal-Karim 2010, p1). This paper focuses on the impact of modern digital technologies on the banking sector with a bias toward electronic banking. 1.2 Banking Activities and Developments in IT All aspects of the banking activity are influenced and continue to be influenced by the development of information transmission, distribution, processing, storage, and collection. Developments in information technology affect the banking industry in two ways. Firstly, the information technology contributes in the decrease of the costs linked with information management (information is managed by means such as processing, transmission, collection, and storage) through the replacement of labour-intensive and paper-based methods with processes that are automated. Secondly and lastly, information technology modifies the ways through which the consumers access the bank’s products and services, for instance, through automated channels such as remote banking. Developments in information management have been occurring for a considerable length of time but remote banking (the latest phenomenon in the banking industry) developments are occurring more gradually especially within retail banking (European Central Bank 1999, p5). Business model can be utilized to describe the main components of any banking business. In regard to the differentiation of the bricks-and-mortar banking from e-banking, there are five crucial dimensions of the business model and they include market scope, profit potential, value network, cost structure, and value proposition. Since consumers are capable of electronic banking over the internet regardless of the time and location, electronic banking eradicates time limitations, and physical and geographic boundaries linked with bricks-and-mortar banking. Electronic banking also offers consumers with efficient online financial services (the services are offered at high speed and they are time saving). Additionally, through the internet, the consumers are able to access numerous information and services (Heng, Hsia, and Wu 2006, p115). 1.2.1 Electronic banking and its value The convenience resulting from electronic banking has three considerable impacts. Firstly, it may lead to information symmetry where the consumers can access more information than through the bank; the consumers may opt to avoid the bank for services provided through alternative parties (SCN Education B.V. 2001). Secondly, it is probable that information transparency may lead into a new market space for the financial services in the virtual world. It is worth noting that electronic banking has resulted in the repackaging of financial roles thus giving rise to a completely new channel (Heng, Hsia, and Wu 2006, p115). Additionally, electronic banking can be used as a channel to create long-term consumer relationships via prepared access to an increasing wide variety of services, products, tailored product-service innovation, quick response to consumer inquiries, and low-cost financial shopping. As a result, the substitute channel can expand bricks-and-mortar banking. In total, electronic banking has realized these value propositions: customization, market extension, and efficiency (Heng, Hsia, and Wu 2006, p116). The market scope indicates the market segments and the geographic areas in which the value can be offered. In terms of the geographic regions, bricks-and-mortars banking market scope is limited within the physical marketplace. In bricks-and-mortars banking, the potential consumer base size is small. Electronic banking is a novel market space and its market segment is quite different from that of the traditional banking (SCN Education B.V. 2001). The demographics of the traditional banking customers are heterogeneous just like that of the general population. Majority of its users are technologically unsophisticated and functionally computer illiterate. On the other hand, electronic banking consumers are information technology literates and internet users. In general, these internet users are young and well educated (Heng, Hsia, and Wu 2006, p116). Electronic banking is generally driven by the projections operating revenue maximization and operating costs reduction. Electronic “is likely to be implemented where the operating overheads of e-banking delivery of bank services are less that the operating costs of delivery of financial services through branch network” (Heng, Hsia, and Wu 2006, p116). Electronic banking is much cheaper and it can handle transaction processes in an automatic manner without being overwhelmed by the numerous bulky documents. Therefore, the utilization of electronic banking has the ability to reduce the order-of-magnitude in regard to the cost of transmitting and processing information. Additionally, the internet has low application development costs, networking fees, and free internet operating costs. Electronic banking also offers more self-services; this implies that the bank does not require many resources and thus resulting into low production and transaction costs (Heng, Hsia, and Wu 2006, p116). 1.2.2 Impact of electronic banking The impact of electronic banking (e-banking) entails two aspects, business model reconfiguration and technological knowledge change. First, internet technology has reversed branch-based networking of the IT-infrastructure and it has generated changes in the knowledge concerning data transmission, interoperability, computing platform, system design, and data transmission. Electronic banking has also changed the physical transaction processes, security schema, traditional payment mediums, and service delivery channels. Finally, customized, self-service, and informational offerings improve the existing roles of the bricks-and-motor banking. These new online services seem to be significant in the differentiation of electronic banking from the traditional retailing banking. Electronic banking makes the bricks-and-mortar technological knowledge old-fashioned (Heng, Hsia and Wu 2006, p117). Additionally, the novel value propositions of electronic banking will instigate important changes in the dimensions of the business model such as market segment, cost structure, BFI (banking and financial industry) value network patterns, revenue resources, customer base, and customer value. It is important to note that both the business model and technological knowledge dimensions between electronic banking and the bricks-and-mortar banking are very different. Therefore, one can categorize bricks-and-mortar banking to e-banking innovation as disruptive innovation. This indicates that “e-banking will change the trajectory of the IT application for the BFI and evolve a different business model and will strongly influence the existing technological and business capabilities of the incumbent bricks-and-mortar banks along with the progress of e-banking” (Heng, Hsia, and Wu 2006, p117). 1.2.3 Banking Business Models A wide variety of mobile banking business models are evolving. The mobile banking business models differ mainly on the establishment of the relationship (that is deposit-taking, account opening or lending) with the bank, the non-bank (the telecommunication company) or the end consumer. The models of branchless banking can be categorized into three classes and they include bank-led, non bank-led, the bank focused models. The bank-focused model materializes when the traditional bank utilizes the non-traditional low-cost delivery means to offer banking services to the existing consumers. For instance, the utilization of ATMs automatic teller machines to internet banking. Mobile banking can also be used to offer particular limited banking services to the customers of the banks (Infogile Technologies 2007, p2). The bank-led model provides a distinct option to the conventional branch-based banking; the consumer is able to perform financial transactions at the retail agents or through the use of mobile phones rather than through the bank employees or at the bank branches. In the non bank-model, the bank does not perform any transaction and all the transactions are performed by the non-bank (usually the telecommunication company). Mobile banking services offered through the mobile banking business models include account information, payments and transfers, investments, support, and content services (Infogile Technologies 2007, p2). 2.0 The Opportunities, Challenges, and Risks for the Companies Operating In the Banking Industry 2.1 Opportunities and Challenges Banks face several strategic challenges when it comes with technological developments. Remote banking can turn from complementary to main service in medium term to long term. Thus, a failure to take part in remote banking can have adverse outcomes in the individual banks future market position. Consumer loyalty can decrease; this is because the consumers have improved access to competing financial services suppliers and there is increased information about the prices of the banking products and services. In regard to the prices of banking products and services, there can be emergence of specialized information brokers to help the consumers to search for information. However, there are indications that the consumers are becoming too precise and a considerable decrease of consumer loyalty is not yet evident. It is important to note that relationship banking cannot be underestimated even in cases such as those of remote channels (European Central Bank 1999, p6). Competition between the banking sectors and the non-bank financial institutions such as funds, supermarket chains, and security brokers may increase considerably as remote banking develops. Technological developments or advancements that are based on remote banking “can significantly determine substantial changes in the nature of banking competition for two main reasons” (European Central Bank 1999, p6). The first reason is based on the demand side; the consumers have the probability of easily getting and accessing information regarding the banking services and products provided by various banks and thus, they are capable of making comparisons. The second reason is based on the supply side; retail market entry barriers are minimized since a huge branch of network is not required to attain the critical mass of consumers. This indicates that the niche institutions and the small banks can also be competitive in this aspect (European Central Bank 1999, p6). 2.2 Risks Information technology advancements can have impact on the overall risk profiles of the banks. Some of the banking risks can be increased while others can be lowered (Kondabagil 2007). Operational, legal, and strategic risks are some of the risks that face banks in this age of technological development. The speed at which technology is advancing has made banks risk investing in information technology resources that quickly become outdated or they make the banks invest heavily on the introduction of new products without careful consideration of the level of acceptance and the demand analysis (Kondabagil 2007). Legal risk is associated to the insecurity involving the applicable regulations and laws on various aspects related to technology. Technological development can increase operational risk to a level that the banks fail to upgrade internal control systems to cope with the introduced operational environment (European Central Bank 1999, p7). 3.0 Conclusion Technological advancement has had effect on almost all industries in the world. Nearly every industry makes use of technology to perform its day-to-day operations. The impact of these technologies on the industries is significant and it has created benefits, losses, opportunities, and risks. Service industry (for instance, the banking industry) is one of the industries that have been adversely affected by technological advancement. In its provision of services, the banking industry has been forced by technology to adopt business models that are in line with technology. These business models include electronic banking and the recently launched mobile banking. All these business models make use of the internet in the provision of products and services. Electronic banking and mobile banking have made it easy for the consumers to perform financial services and access banking information without the need to visit the banks physically for such services. Thus, banks have to adopt recent banking business models in order to maintain the loyalty of their customers. However, the banks run the risk of venturing into technological investments that are either outdated or do not have an impact on the potential. Technological developments have raised risks such as operational, legal, and strategic risks. There are opportunities for the banking industry to grow significantly with the advancement in technology. For instance, the banks can adopt recent banking business models (mobile banking is among the recent banking business model) in order to maintain the loyalty of the customers and reduce the operational costs. References European Central Bank. (1999) The effects of technology on the EU banking systems, Frankfurt am Main, Germany: European Central Bank. Hamdan, A. M. & Jalal-Karim, A. (2010) The impact of information technology on improving banking performance matrix: Jordanian banks as case study. European, Mediterranean & Middle Eastern Conference on Information Systems 2010, Abu Dhabi, UAE: pp1-16. Heng, M. S. H., Hsia, T. & Wu, J. (2006) Core capabilities for exploiting electronic banking. Journal of Electronic Commerce Research, 7(2), pp111-122. Infogile Technologies. 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