Depth of Technology Integration in Finance - Research Paper Example

USE OF TECHNOLOGY IN FINANCE Introduction Financial services sector features as one of the leading industries in today’s economic environments. Theoretically, financial industry focuses on scientific management of money. Every aspect of finance revolves around one concept; the time value of money. Supposedly, $1 today is not worth the same value in future. Conventionally, the value of money increases with time. Based on this premise, all services offered within the financial industry revolve around pricing assets based on the expected rate of return in future. According to Freedman and Mullineux (2011), typical financial services include banking, insurance, security exchange and currency trading among others. Services offered can either be of personal or corporate finance levels. Similar to any other industry, financial sector needs appropriate tools and technologies in managing and delivering services to clients. Use of those tools facilitate efficient and effective service provision; hence enhancing the commercial concept of profitability. This research paper strives to appraise the breadth and depth of technology integration in finance, especially information technology and changes brought by the integration. Four decades ago, information technology only found wide application in military institutions. Military units used secured networks in relying communications. Financial institutions used traditional ledger books in keeping transaction records. Later, banking sector adopted the use of secure communication channels to deliver sensitive information for processes like confirming funds reception. Currently, technology dominates almost every aspect of financial services industry. According to Balling and Lierman (2009), technological tools like computers allow generation of financial statements, budgets and expected rate of return with a single click of an icon. In addition, investment companies can easily make precise predictions of future financial trends using customized software programs. Technology not only enhances production of records but also improves the labor aspects of the industry. Effective communication tools like internet, Skype and video conferencing allows company managers to outsource jobs to experts’ location. Times when Wall Street had to mail each client a stamped copy of a general meeting letter are long gone. Moreover, piling of financial records in files became redundant. Changes brought by Technology in Finance i. Speed and Accuracy With rapid evolution of technology, computer systems are becoming increasingly sophisticated, reliable and fast. This speed of evolution created the notion that technology will one day replace employees in financial service industry. However, today’s financial environment disapproves the notion since there must be an expert to push the button and click the icon. In this context, it is undeniable that computers continue to evolve. However, these machines cannot totally replace employees. The first change brought by technology is speed and accuracy of handling finance tasks like production of financial statements. Software applications like excel spreadsheets replaced the painstaking recording and balancing of financial values by hand. Spreadsheets enable financial clerks to arrange, sort and filter data conveniently. Apart from speed, applications used in handling monetary values are accurate and precise. Latest financial software like TurboTax accurately calculates tax expenditures in a timely manner. In this regard, use of computers and suitable software applications by banking, insurance and currency exchange companies not only harness aspects of speed but also accuracy. ii. Easy Accessibility of Financial Information Traditionally, students relied on books and printed articles in acquiring knowledge on financial concepts. Currently, the internet contains thousands of financial blogs, e-books and online articles, some of which are free to access. In this regard, financial education has been enhances by information technology through ease and convenient access to relevant information. According to Freedman and Mullineux (2011), companies within the financial sector also decimate finance information to clients through the internet. Potential investors and insurance seekers can access updated information on websites of companies like Wall Street and AoN. Any consumer interested in acquiring information on financial trends and potential investment opportunities can get help through live chats in financial company websites. iii. Globalization of Finance Prior to integration of technology, financial transactions were largely constricted within geographical regions. Movement of money and other movable assets were invariably restricted by physical distances of transacting partners. However, introduction and articulation of information technology, especially the internet has globalized finance. Smith (2013) mentions that currently, it is possible to perform transactions over vast distances within 5 minutes. Merchant payment accounts like PayPal and Alert Pay enables purchase and payment of goods and services online. In addition to globalizing business, internet and other technological tools has created a 24/7 financial environment. Therefore, productivity, reliability and accessibility of financial services have changed significantly as a result of technology. According to Smith (2013), it is hard to pinpoint when each of the mentioned transformation took place or to quantify the actual benefits associated with speed or globalization of financial services. However, it remains that information technology continues to evolve to date. Consequently, financial services are undergoing a corresponding transformation; hence one can acknowledge the impact of technology within the finance industry. Impact of Technology in Finance Industry Currently, technology forms an integral part of doing business. Companies must adopt appropriate an efficient technological tools in their business undertakings or risk being edged out by competitors. Balling and Lierman (2009) says that with globalization of finance through internet, firms located in distant geographical regions can provide banking, insurance and security exchange services online. In this regard, technological innovations within the finance industry have led to creation of a global economy. Statistics indicates that Wall Street conducts at least 30 billion shares transactions annually. Manual transaction system can handle such a large number of entries with absolute level of accuracy as observed with the use of integrated share trading systems today. Any company using manual systems and seeks to compete with Wall Street will become profitably infinite. In this context, one can appreciate the fact that technology has fueled competition among financial service providers to a global level. i. Improved Service Delivery Technology has enhanced delivery of financial services like banking and insurance in current markets. Four decades ago, banking halls were characterized by long queues of customers withdrawing or depositing money to personal or corporate accounts. Today, introduction of mobile banking and insurance services has changed the mode of financial services delivery. According to Chorafas (2013), banking automation was the first manifestation of technological innovations. With introduction of Automatic Teller Machines (ATM), the inconvenience associated with long queues became a thing of the past. Use of ATM would soon evolve and benefit from internet banking when financial services were globalized. Currently, financial service providers like Visa and MasterCard have articulated the use of ATMs and online banking into making consumer services easy and convenient. A good example is wide proliferation of Visa cards, which finds wide application in small scale business transactions like payment for household goods in convenience stores and gas stations. ii. Increase in Revenue As acknowledged earlier, technology, especially internet enables globalization of financial services. Globalization allows finance companies to delivery services to a wide market base, thus increasing revenue and profits. Arlene (2011) says that in 2011 alone, financial service providers in the US made cumulative revenue of $15 trillion, with 40% of all the revenue generated coming from markets outside the US. In this context, it is evident that globalization leads to expansion of markets and increase in resultant revenue. Information technology offers assistance in services like electronic transactions and online banking. Currently, these two services, online and electronic banking, features as the leading aspects of banking. In this regard, it is undeniable that technology has impacted significantly on the revenue aspect of companies within the finance industry. iii. Improved Security Traditionally, financial transactions required signature from account owners and board members. At the teller counter, the clerk would use his or her observation and subjective judgment in verifying the signature before proceeding to dish out cash during withdrawals. Use of signatures undermined security of financial transactions since such written verification methods could be easily impersonated and forged. According to Balling and Lierman (2009), technology has enable creation of secure and swift modes of authentication like biometric thumb scans, iris scans and hand geometry scans. Biometric authentication methods like voice recognition software relies on unique acoustic features like voice pitch during verification. In this regard, financial transactions are now more secure than before. iv. Minimized Risks Loss of customers’ files and transaction records features as the most risky incident faced by financial companies. In addition, personal and corporate clients also faced the risk of losing their savings records at the hands of finance companies like commercial banks. In the past, entry of every transaction in books and ledgers was not only tiresome but also risky in terms of information loss. In case of fire outbreaks, all company records could be permanently lost. However, integration of computers minimized risks associated with information storage. Chorafas (2013) agrees that back up serves still supplemented information even when the main serve gets damaged or stolen. Today, the concept of cloud computing could provide unprecedented benefits to storage and security of financial records. Cloud computing does not deal with hard disks but involves storage of digital information in space. Utilization of such technology will usher in unparalleled convenience to finance companies and clients globally. Impact on Structure of Finance Organizations Technology has not only improved delivery of financial services but also changed the face and structure of the entire financial industry. Arlene (2011) mentions that prior to incorporation of information technology, banks, insurance companies and security exchange brokers were confined within domestic geographical regions. The size of banking industry was still small and confined within geographical boundaries of origin. Aspect of labor force suffered setbacks associated with geographical restrictions. Capital and revenue magnitude of companies was small. According to Smith (2013), elements of foreign direct investment were still new and companies would not risk physical entry into unchartered markets. Mergers and acquisitions remained at infant stages. However, application of information technology and other communication tools facilitated evolution of business structures within the finance industry. Examples of structural transformation include; i. Expansion of Services in Finance Organizations Advancement of technology gave birth to electronic money transfer and online banking. Introduction of such new services led to expansion of financial services offered by finance companies. According to Chorafas (2013), Wall Street offers almost all stock trading services online. In this context, industry structure manifested in form of expansion in financial services offered to clients. In fact expansion of services came with a corresponding expansion in aspects of scale economies and profitability. Technology also led to expansion of management activities through the use of appropriate administrative tools. Traditionally, every banking hall required a manager on standby. However, large financial companies like AoN run their operation from its headquarters, with only regional managers placed in different geographical regions. In this regard, technology reduced technical difficulties of business administration, thus leading to expansion in oversight role of the chief executive officer of any given financial service company. ii. Geographical Expansion of Companies In the year 1990, financial service providers like Visa, MasterCard and PayPal could be found in few geographical locations. However, introduction of suitable technological tools enhanced geographical expansion of finance organizations. Technically, information technology would minimize the need of geographical expansion. Dimitris (2011) mentions that expansion of companies like AoN into third world nations is necessary in order to handle clients’ issues at the context of their immediate social environments. Integration of technology does not necessarily lead to redundancy of traditional financial services like lending and credit provision. In fact, banks trying to enter into new markets in distant geographical regions must establish infrastructural presents in those new regions. Internet and other convenient technologies cannot provide security against credit default by distant clients. In this regard, banks can only combat risks associated with lending by expanding their physical presence geographically. iii. Increase Consolidation of Financial Organizations Financial organizations used to achieve consolidation through mergers and acquisitions. However, mergers and acquisitions became risky; hence creating the necessity to employ different forms of consolidation. Currently, Visa and MasterCard are enjoying presence in almost all geographical locations around the world. These two companies did not merge with or acquire companies within those geographical regions. Visa consolidated with banks in developing nations by using the banks’ ATM machines. According to Dimitris (2011), clients in third world nations like Kenya are enjoying Visa card services using local commercial banks without necessarily dealing with physical infrastructure of Visa Inc. Such kind of consolidation lacks disadvantages associated with mergers and acquisitions. Mergers and acquisitions usually come with increased cost associated with vertical and horizontal integration of the acquired company into a parent organization. However, technology not only reduces cost of integration but also minimizes risks associated with traditional forms of consolidation Future of Technology in Finance. Future of Technology in Finance For the last two decades, technology and finance have worked closely in enhancing efficiency in business environments. Inconvenience associated with banking risks and transaction security has been addressed by appropriate technological tools. Every year, new application software for financial tasks enters into the market, with each succeeding application more superior than its predecessor. Such evolutionary trends suggest that use of technology in finance will evolve linearly or exponentially. Since we appraised the past of finance industry prior to introduction of computers, it would be appropriate to extrapolate the appraisal into including forecasted outlook of banking and insurance with future technology. Surprisingly, traditional financial services like lending and borrowing will not become obsolete in future. However, technological use will strive to enhance effectiveness of delivering such services. Scott (2011) acknowledges that traditionally, banking transactions like withdrawal could be completed with presence of at least a teller and a client. Today, ATM machines allow completion of such transactions with presence of only a card holder. In future, financial transactions like deposits and withdrawals may be executed virtually without any human intervention. In addition, predictions about future of finance industry and technology extend into the labor and administrative aspects. In the past, physical presence of accountants and financial auditors within a company’s premises was necessary. Today, online business platforms enable managers to outsource audit and accounting services to experts in distant regions. With continued evolution of technology, the future may come with advanced portable devices which allow managers to acquire relevant financial statements without any human intervention. Another interesting innovation in development is nanotechnology. According to Arlene (2011), finance industry will surely benefit from this infant technology. Among the expected services of nanotech include distribution of information and communication. Currently, finance companies use internet as the chief means of communicating and sharing of information. In future, use of nanotech tools may come in handy with provision of financial services. Expectedly, those tools will be way forward compared to what exists today. Therefore, the impact of technology in finance will undeniably extend into the unforeseeable future. Strengths of the Article’s Arguments Efficient Service Delivery The article under analysis extrapolated well on the issue of technology in financial service provision. The writer acknowledges all beneficial aspects associated with computers and internet in enhancing functionality of financial service provision. Argumentative strengths of the article manifest in the manner in which the writer discusses beneficial effects of adopting technology in financial provision services. Among the benefits discussed include convenience of online banking and electronic money transfer systems. Undeniably, these two technologies allow clients to either transfer or receive money at the convenience of their living rooms. All a client needs is personal login information for online accounts and a few pressing of buttons and clicking of icons before completing a $20,000 transaction. Risk Minimization Apart from convenience, another benefit of technology in finance involves security improvement and risk minimization. In the past, an individual would have preferred keeping his or her money under bed than leaving it with a banker. Such actions were justifiable since banking and other financial transactions faced numerous dangers like theft and loss of information through record destruction. However, finance industry today benefits substantially from technology. Incidences of robbery while carrying hard cash have diminished. Freedman and Mullineux (2010) agree that every convenience store today accepts electronic payment methods like credit and debit cards. At this juncture, one can appreciate the fact that the article expounds intensively on the benefits associated with technology in finance today. Setbacks in the Article: Job Elimination After extrapolation of beneficial arguments throughout the article, the writer failed to mention about setbacks or disadvantages associated with computers and other electronic systems. Despite ushering in unparalleled benefits into the industry, technology invited new challenges and disadvantages. One of these disadvantages which the article fails to mention revolves around the aspect of job elimination and employee redundancy. Inasmuch as computer systems and mobile banking increases convenience, such technologies undermines ethical aspects of job security. Currently, managers acquire financial statements easily using spreadsheet tools. Accountants and clerks who used to work in respective departments were laid off because their jobs became redundant. Smith (2013) says that in 2013, Barclays Bank, one of the leading financial institutions in the world, laid off 23% of its staff globally because of technological integration into its service delivery processes. In future, more sophisticated programs and hardware devices will eliminate certain jobs. This means that additional employees in the financial labor market today will feel the pinch of being unemployed as a result of technological advancement. Security Breach Another weakness within the article involves the writer’s failure to mention the issues of security and risks associated with online transactions and electronic systems. According to Kroger and Penny (2012), online accounts faces risks associated with advanced cyber crime activities like hacking. Ill intentioned persons roam the internet in search of vulnerable financial systems and unattended personal accounts. In most cases, such security breaches happens whenever an individual leaves his or her account open or forgets to log out from a computer within a public internet access location. These criminals usually possess technical skills and knowledge that will enable them to transfer funds and withdraw the same funds in a swift manner before the account owner detects any breach of security. In the process of security breach, criminals may also extract personal details like contact information and identification numbers from the online accounts. Such extracted personal information may be used in carrying out subsequent crimes, which may make the victim encounter a detrimental loss of personal finances and other valuable assets. Conclusion In conclusion, it is evident that technology enhances convenience in delivery of both personal and corporate financial services. Technology not only improves productivity in terms of organization’s profitability but also facilitate achievement of customer relationship objectives. Today’s financial services provided online enables clients to perform transactions anytime and anywhere. Such advanced services show that finance industry has undergone tremendous transformation as a result of technology. Technology impacted not only efficiency of business undertakings but also changed the structure of financial service organizations. However, technology used in banks, insurance companies and other financial service providers is not free from technical and ethical setbacks. Hopefully, these setbacks like job elimination and security breaches will be addressed with friendly ethical strategies and use of advanced security systems respectively. Reference List Arlene, J. (2011). “Finance & IT: The transforming power of technology.” The Free Library. Retrieved from http://www.thefreelibrary.com/Finance+%26+IT%3A+the+transforming+power+of+technology%3B+Over+the+years,...-a0148656218 Balling, M. & Lierman, F. (2009). Technology and Finance: Challenges for Financial Markets and Policy Makers. Indianapolis: Psychology Press. Chorafas, W. (2013). Technology in Financial Services Management. Harrisburg: John Wiley & Sons. Crowther, J. (2006). Personal UK e-finance player Moneynet uses technology to monitor and increase online business. Journal of Financial Services Marketing, 6(12), 149-180. Dimitris, C. (2011). Risk Management Technology in Financial Services. Los Angeles: SAGE Publishing. Freedman, R. & Mullineux, A. W. (2010). Introduction to Financial Technology. Harrisburg: Academic Press. Kroger, S. T. & Penny, M. (2012). Role of Technology in Wholesale Financial Service Systems. Romanian Journal of Information Technology 3(7). 76-84 Scott, P. K. (2011). Optimizing and Assessing Information Technology in Business Operations. London: Oxford University Press. Smith, E. (2013). Effects of Information Technology on Financial Services Systems. New York: DIANE Publishing. Read More