Introduction
The financial industry provides economic services to individual clients, organizations, and governments. It is composed of firms and entities whose sole mandate is to manage money. Some of these institutions are government-sponsored. The major aim of such firms is to improve the economy of the country. The institutions making up the financial industry include banks, insurance companies, stock brokerage firms, and credit and finance unions.
Many companies and businesses have identified and focused on profitable segments in this industry (Tang and Zannetos 143). As a result, the industry is characterized by a large number of players. Each of the businesses operating in the sector works towards attracting as many customers as possible. A firm operating in the financial industry, as a result, needs to be competitive to remain successful.
The current paper proposes how players in this industry can adopt technological innovations in a cost-effective manner. The trends associated with such adoptions will be evaluated about their advantages and disadvantages.
Technology and Services in the Financial Sector
Technological advancements are important in the promotion of global integration. Technology is also known to enhance deregulation in the financial industry. It enables customers to have better access to monetary services (Arasteh et al. 413). New businesses are also in a better position to compete for customers with existing firms.
Research has shown that technology helps change the nature and structure of services provided by financial institutions. As a result of these transformations, customers’ access to financial services is widened. The cost of these services is also lowered, attracting more customers in the process (Tang and Zannetos 143).
As stated earlier, there are many players in the financial market. Technological innovation is used as one of the differentiating factors concerning the services offered by these firms. Institutions that offer high-quality services can attract more clients compared to their rivals. Businesses in this sector are also able to broaden the breadth of their services with the help of technology. Innovations in the financial industry have also helped improve the quality of services provided by these businesses.
Evolution of Technology in the Financial Industry
Overview
Technology is a dynamic phenomenon. Information specialists have continued to develop systems that help cater to the needs of the stakeholders in the financial industry. Such stakeholders include the institutions and their customers. Research shows that the use of technology in this industry dates back to 1918 (Dushnitsky and Lenox 951).
At the time, banks used telegraphs to make payments within their network. At the time, the platform was referred to as the Fedwire Payment System. Over the years, information technology (IT) specialists have made improvements to the systems intending to attain better results. The introduction of the Automated Teller Machine (ATM) marked a major milestone in the technological transformation of the financial industry.
Computers have been used by institutions operating in the industry since the 1980s (Dushnitsky and Lenox 951). In the beginning, they were only used for data storage. However, this is no longer the case. Most of these institutions now use these machines for communication and for conducting other forms of business transactions.
Today, technology is used in the financial sector on a large scale. The introduction of e-finance services in the mid-1990s was a major achievement. Many institutions have continued to adopt the system. Improvements have also been made to cater to the shifting needs of customers and other stakeholders (Shahrokhi 379). The proposal will explore current trends in the industry. The advantages and disadvantages associated with the use of these e-finance services will also be addressed. The results that have been achieved following the introduction of the system will also be discussed.
Current Trends
Today, most businesses have adopted technologies introduced in the financial industry. E-finance has become the most commonly used platform as far as electronic connections between institutions are concerned (Herbst 207). Humans still play a critical role in decision-making in this industry. However, the electronic system has proved to be of great importance since it helps hasten the decision implementation process. Today, many financial institutions are linked to their customers via electronic systems.
The trend has enabled customers to access services from these firms with a lot of ease. Institutions also benefit largely from the system given that they can retain and increase the number of clients enjoying their services. They achieve this by offering better services and increasing their reach to the customers. Financial organizations that fail to incorporate these systems into their operations lag as other firms continue to grow. Such businesses are at risk of losing their existing clients as they move to other institutions that are perceived to offer high-quality services.
Advantages of the current trends
As already stated in this paper, the adoption of an e-finance system has enabled businesses to attract a large number of customers. The businesses are in a position to enjoy increased economies of scale by serving a larger clientele. Firms that can adopt the evolving technology first find it possible to ‘out-compete’ their rivals in the market (Tang and Zannetos 135). The value of services provided is also improved. As a result, consumers feel that the firm is providing services that are superior to those offered by competitors.
Technology reduces the costs of operations. A financial institution that conducts its business using the electronic system will avoid incurring the cost of hiring extra employees to oversee the expansion of operations. Less capital will also be required. The need for space is minimized since the expansion of the portfolio no longer requires the opening up of new branches. The computerized system on which the electronic system runs enables the firms to keep track of their records (Vaitsos 173).
After adopting the system, the firms find it possible to retrieve information about their clients and other aspects of their operations. Today, customers can obtain information about their financial status from simple gadgets, such as mobile phones. Some institutions are also making it possible for their customers to obtain credit services via communication gadgets without having to physically visit the establishments.
Disadvantages of the current trends
The introduction of e-finance has brought with it several costs. To begin with, some of the technologies used to decrease the economies of scale enjoyed by the firms. It is a fact that the use of e-finance systems helps expand the geographical outreach of business organizations. However, several factors limit the nature of benefits accrued from such a venture (Gonzalez, Llopis, and Gasco 918).
Many financial institutions avoid offering services to persons who are outside their country’s legal jurisdiction for fear of incurring losses. Traditionally, banks and other financial institutions could open up branches abroad to widen the scope of their operations. However, this is no longer the case.
The introduction of the system has also encouraged companies that do not necessarily offer financial services to enter the industry. Major telecommunications giants have started offering credit services to their customers. Such a move alienates conventional financial institutions (Herbst 210). The trend is common, especially in developing countries. Safaricom, a telecommunications giant in Kenya, is one such company. What this means is that technological innovations may increase competition in the financial sector.
Changing from a traditional to an e-finance system is an expensive undertaking. For example, there is a need to purchase new communication equipment on which the electronic system will be based. In this case, computers top the list (Tang and Zannetos 135). The devices cannot operate unless they are interconnected. As a result, a firm wishing to adopt e-finance will need to have a reliable internet connection (Cetorelli and Strahan 443).
It is also costly to manage the platform as it requires constant monitoring. In addition, the financial institution needs to pay subscription fees to internet service providers. Training of employees is required to ensure the smooth running of the new system. Firms are also required to outsource some of their operations, such as programming (Leland 766). Some of the financial institutions seeking to adopt these technological innovations are forced to source IT services from firms specializing in this field.
The previously used non-computerized systems were very slow. However, they were safer compared to the current frameworks. A firm intending to adopt the new system will be at risk of encountering security breaches. Over the past few decades, banks and other financial organizations have incurred huge losses as a result of the activities of hackers and other cybercriminals. The privacy of many clients is put at risk, making them vulnerable to attacks (Leland 800).
The introduction of the electronic system is characterized by job losses as various positions are eliminated. Technological trends are also evolving constantly. As a result, the business sets funds aside to cater for regular improvements made to the system (Tang and Zannetos 143).
Despite the various disadvantages enumerated above, businesses still need to change to the new system. It is the only way for them to achieve success and compete effectively with others.
How to Adapt to the Changing Trends in the Most Cost-Effective Way
Managing change is one of the most difficult tasks undertaken by financial institutions as they attempt to embrace technological advances (Allen, McAndrews, and Strahan 12). To adapt to these changes, businesses need to hire or train professionals who will guide the process. To reduce the costs associated with the changes, financial institutions are required to develop the already existing systems as opposed to the creation of entirely new frameworks.
Training of existing employees is also economical compared to the hiring of new members of staff. Such a move enhances sustainability since the new skills will be retained within the institution.
Businesses operating in the financial industry are also required to outsource some of the activities that are expensive to carry out in-house. According to Arasteh et al., electronic systems are not limited by geographical locations (420). However, measures must be put in place to ensure that a firm can serve customers over a wide area. A well-established network is needed to help the firm transact its business electronically. Creating a network that spans a wide geographical area is expensive.
As a result, financial institutions may find it necessary to outsource these services to telecommunications companies operating in the area (Gonzalez et al. 918). One of the benefits associated with this practice is reduced costs of operations. The maintenance and servicing of the systems become the responsibility of the firm that has been contracted. The outsourcing entity will also share risks and liabilities associated with the electronic transactions. In addition, the external agent is likely to provide high-quality e-services compared to the outsourcing firm.
Conclusion
Financial institutions are of great importance to society since they provide solutions to some of the economic problems encountered in the world today. In the recent past, these firms have resorted to the use of technology to carry out their transactions. The decision to adopt innovations, such as e-finance, is inspired by the realization that there is a huge and unexploited market out there. Businesses that adopt these technologies ahead of others are in a position to acquire a large number of customers.
The new consumers are attracted to the firm by the high quality of services provided. However, it is impossible for a firm to successfully embrace technological revolutions without the assistance of other firms. For this reason, most financial institutions have decided to outsource some of their non-core services.
Works Cited
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