This write-up traces the financial markets, financial institutions and financial technology, the business benefits that can be reaped by financial institutions by acquiring FT – Financial Technology to achieve leadership position in the market place.
Financial Markets and Financial Institutions
In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals) and other fungible items of value at low transaction costs and at prices that reflect the efficient market hypothesis. (Wikipedia)
Primarily, functions of financial markets can be grouped under Borrowing and lending, Price determination, Information aggregation and coordination, Risk sharing and Liquidity and Efficiency.
Like any other business, financial institutions in the financial markets exist to acquire and use assets so that the value of their benefits exceeds their costs. The key difference between financial institutions and other firms is that most of the assets financial institutions hold are financial assets. The other main distinction between financial institutions and other firms is not so much in how they raise funds, because all businesses issue financial liabilities do so, but in what they do with these funds. This process of funds transformation is known as intermediation. For this reason, the financial institutions are also called as financial intermediaries.
The need for financial intermediaries in the financial markets arise in the first place due to the need for reduced transaction and information costs in the market and they are achieved through facilitating a reduction in Search costs, Portfolio selection costs, Monitoring costs, Risk management costs and Liquidity costs. And this intermediation is influenced by customer needs, ownership structure and regulation.
The financial institutions will need to Segment markets and build up in depth knowledge of customers, Develop wide range of demand driven products and services, Leverage on appropriate technologies and Develop multi channel network for delivery of their products and services
Use of advanced, cost effective tools for comprehensive risk management, Aligning organization structure to target market segments,
Developing efficient integrated MIS systems, Good governance, transparent reporting and Adherence to highest environmental and social
standards are other subsequent activities the financial institutions will need to address.
Some of the major challenges faced Financial Institutions in their function are – Reduce cost of acquisition of new customers, Retain credit worthy customers, Maximize profit contribution per customer, Optimize fee income and interest income, Reduce cost of delivering the best people service and best Quality at low transaction cost (quality transaction at low cost)
Financial technology
In his Introduction to Financial Technology Roy S. Freedman states financial technology is concerned with building systems that model, value and process financial products such as bonds, stocks, contracts and money. Financial products are represented by the dimensions of price, time, and credit. Financial systems incorporate trading systems and trading technology to enable the buying and selling of products at different times and in different market spaces. Financial technology integrates mathematical, statistical, computing and economic models with news and analytical systems: and integrates with message, transaction, and order processing and payment systems. Financial systems perform their activities in compliance with rules, procedures, guidelines and regulations. Like military systems, financial systems are involved with strategy and tactics, logistics, information processing, secrecy and resource allocation.
Thus, financial technology facilitates reduction in transaction costs and increase in the price sensitivity of financial markets across borders, while at the same time making possible a range of economies of scale. Financial technology addresses the issues adequately in extending the field of finance beyond major financial capitals to the rest of the world.
Financial technology brings the advantages enjoyed by the clients of “Wall Street” to the doorsteps of customers of “Wal-Mart”. Financial technology enables this through cost-effective ways to leverage and strategically replace outdated and incompatible legacy systems, ushering in best practices from around the world.
Some strategic and key questions one will need to address before investing in Financial Technology are:
Feasibility
Is it technically feasible?
Fundamental science and engineering credible?
Any technical flaws?
Can it perform and deliver what it claims?
Is there a clear route to final product or service delivery?
Value
What options are there?
Are there legacy technologies?
Can they be protected?
What is the unfolding future scenario?
Strategy
What are the risks and uncertainties?
Where does it fit on the technology road map?
Is it base, key, pacing, strategic or emerging?
How much time do one has to acquire?
Implementation
Is it well understood and codified?
Does one have the right resources, processes and organisation? Are there external barriers to transfer?
Why it is critical?
Only financial technology can meet the entire needs of Banking, Financial Services and Insurance industry as it can offer client centred services and products by
– offering variety of business options
– providing perfect business technology fit and alignment
– assuring faster time to market
– bringing the best integration capability to the table
– and all these leading to competitive and cost advantage
Financial technology will enable one answer effectively all the following questions
– What is the clients’ problem or need?
– Why is this problem a problem?
– What outcomes or results do they want?
– Which results have the highest priority?
– What solutions can one offer?
– What results will each solution produce?
– Which solution is best?
Only such financial technology can offer value to the clients on all the fronts, namely
– Financial gain (lowest price, highest total value and lowest total cost of ownership)
– Quality (Total quality management, maintainability, ease of use, fewest problems , fewest rejects and fewest reworks)
– Infrastructure improvement (most flexible, most advanced, most open solution and automating a labor intensive step leading to straight
through processing)
– Industry trends (keeping up with market leaders)
– Minimizing risk (financial stability, solid management plan, relevant experience and high ethical standards)
– Competitive advantage (simultaneous improvements across the organization)
Finally, only such financial technology can facilitate to think clients’ thoughts, feeling their feelings leading to speaking their language.
The financial institutions will be strategically facilitated by financial technology to firmly establish trust, shape the industry and define the risk / return through time tested processes mentioned below.
Establish Trust
– Client Relationship
– Brand Building
– Financial Prudence
– Applying Lessons Learnt
Shape the Industry
– New Operating Models
– New Entrants
– Market Infrastructure
Define Risk/Return
Impact of New Regulations
– Integrated Risk
– Greed and Bonus Culture
– New Pricing Models
Business benefits
The business benefits that financial technology can bring in for financial institutions are grouped under technology perspective and management perspective.
Technology perspective
Quick time to market, Reuse of components, Building blocks approach, An easily integral solution, Service Oriented Architecture, Scalable and flexible platform, Capability to handle complex products, An adaptive seamless business workflow, Provision of user documents and training, Integration to get over duplication of work, Automation of number of complex processes, Strong authentication and authorization system, Implementation of standard operating procedure, Significant improvement due to real time process, Common tools and utilities to leverage technology, Functionally rich and technically superior offerings, Ability to process multiple transactions in lesser time, Alignment with market’s best practices and standards, Support offline transactions and Standardize service process with multiple check points
Management perspective
No other external vendor dependencies, Highly improved turnaround time, Achieve better service management, Ability to leverage on domain expertise, Effective business mapping at all levels, Year on year productivity improvement, Enhanced customer relationship management, Metrics to report productivity and performance, Robust transition to ensure non disruptive moves, Senior management connect, focus and commitment, In built global best practices for better quality management, Data integrity and automated processes to help prevent defects, Flexibility and ease to change business rules and scoring logic, Ability to aid in deciding the next stage in application processing, Ability to view risk to enable higher control and risk management, Plan transition to offshore, without impact to ongoing deliverables, Enable rapid launch of new products for new lines of business, Ability to keep pace with dynamic business needs and requirements, Business rule changes done by the business users themselves, Configuration only required for creation and maintenance of rules, Enable tracking of global transactions for effective risk management, A robust knowledge transition to ensure minimal disruption of service and Centralized decentralized decision making resulting in business growth
Metrics to measure
Reduced or no additional head count, Low set up costs and time, Enhanced visibility in the market place, Lower response time to say YES to customer, Customer ready team with requisite experience, Significant operational efficiency improvement, Cost benefits through the on shore / offshore model, Maintenance, Management and inventory cost reduction, Significant cost saving with no impact on delivery capacity and Freeing up resources for development in business development One can now realize and recognize that financial technology will help financial institutions in reaping immense business benefits and thereby achieving leadership position in the market place.
The bottom line: Financial technology will provide what you need to succeed