Digitization Revolution, FinTech Disruption, and Financial stability: Using the Case of Indonesian Banking Ecosystem to highlight wide-ranging digitization opportunities and major challenges
44 Pages Posted: 5 Mar 2020 Last revised: 16 Jul 2020
Date Written: July 16 2, 2020
The article assesses the impact of digitization, ICT, and new big data technology tools and applications on financial stability. The article focuses on three principal areas inter alia, the disruptive effects of the entry of fintechs and TELCOs into financial service provision; Application programming Interface (API) platform open banking; and Block Chain Technology (BCT) based development and deployment of financial services. Digitization and ICT revolution have deepened financial development as new players in the form of fintechs and technology companies have entered financial service provision, providing customers with an increase in product and service variety and ever declining cost due to competition between traditional financial service providers and nonconventional new entrants; enabled financial institution to adopt new business models that are leveraging on data collection, storage, sharing, and discerning actionable insights; accelerated and strengthened financial inclusion initiatives thanks to the ease of use, flexibility, affordability, and security of mobile technology; speedier and low cost; cross selling other financial services the financial service offers ranging from mortgages, insurance, financial planning, investment management, which has contributed to higher educational attainment, financial literacy and human capital and that in turn have been associated with a inclusive growth, higher household incomes, leading to lower poverty and income inequality. Digitization and ICT, have also enabled financial institutions to develop and deploy API based Open banking services, which generates benefits that include more diversified customer base, new collaboration possibilities with both banking and non-banking companies, enhanced ways to leverage customer experience of both existing and new ones, creation of new services; enhanced capacity and capability to meet increased array of customer needs; enabling banks to reduce customer churn; and increase the share of banks in their customers’ wallet through upselling and cross selling of services. Moreover, through aggregation platforms that automatically standardize and normalize financial data, banks have an added advantage they can use to leverage data analytics tools to offer new service offers that complement the customer journey. That should sound good news for stronger bank health, which should also be vital for bank sector and financial system health. BCT and benefits that are associated with enhanced cyber security, decentralized authentication, increased operational efficiency, low compliance cost, shorter onboarding rates of new product and services offers, new set of product offers in the form of crypto assets that should diversify asset portfolios, increase variety of revenue sources, hence resilience in the event of a slowdown in one or so bank’s business lines. Trackability of transactions and assets in real time, around the clock, which coupled with the immutability of any activities that are authorized by network participants, are features that can add to array of product offers, business process, reinvigorate business models, hence good for financial stability. Nonetheless potential dangers from rising digitization to financial stability cannot be underestimated. The rise in the involvement of fintechs an TELCOs in the delivery of financial services poses financial stability risks that are attributable to the reduction of interest-earning income sources for banks as fintechs and TELCOs are leveraging their large customer databases to offer saving and lending services, peer to peer payments’ services, and money transfer services; undermining the ability of banks to function as monetary policy transmission channel due to their declining importance in domestic credit creation, money supply transmission through holding third party deposits, buyers of government bonds, and reduced potency of level of excess reserves general banks hold in central banks on liquidity in the financial system. Meanwhile, with respect to API, potential risks arise from increase in partner and counterparty risk, technology incompatibility risks and attendant domino effects on other players in the financial system; fears of opening businesses to competitors; and uncertainty of long term profitability of platform based business models in the aftermath of breaking down the organization into smaller, coherent business units that are required in developing APIs and platforms. BCT related risks to financial stability, are likely to arise from rising vulnerability of BCT to hacking, theft, and data breaches rises concerns that from critics of the secretive , decentralized distributed record keeping, anonymous, low cost, double encryption hyped platform network based transactions and are increasingly raising worst fears of financial institutions that are participants of falling foul of compliance requirements, creating costly sources of reputation risk , which depending on response and recovery efforts, may culminate in potential financial ruin , and by turn posing both direct and indirect danger to financial stability.
Keywords: digitization, Big Data, data analytics, fintechs, TELCOs, API, peer to peer lending, Money account, Blockchain, open banking
JEL Classification: A14,E44,D18,D80,E44,G20, G21,G23,G28, K24, K29,L86,L96,033, O35,038
Suggested Citation: Suggested Citation