Financial Institutions & Markets

Financial Technology:
Digitalization of
Finance

Maha Iqbal (26147)

Manhal Nooman (26049)

Class: 7410
26th October 2023
TABLE OF CONTENTS

TABLE OF CONTENTS................................................................................................................ 1
Introduction................................................................................................. 2
The Digital Transformation of Financial Systems...................................3
Digitization of Finance and the Productivity and Efficiency of
Commercial Banks...................................................................................... 4
Digitalization of Finance and Financial Efficiency..................................5
Opportunities of Digitization of Finance................................................. 6
Challenges of Digitization of Finance...................................................... 8
Future of Fintech and Digital Finance......................................................9
FinTech for Sustainability......................................................................................................... 10
Conclusion................................................................................................................................. 11
Analysis and Personal opinion................................................................................................ 12
References..................................................................................................13

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Introduction
Utilizing digital technologies to attain new streams of income and possibilities is the
essence of digitalization. To achieve this, a company must apply digital systems and tools
throughout various sectors of its operations, including customer service and
management as well as communication and production. The implementation of
innovative technologies is known as digital finance, which involves modernizing
traditional banking and financial services. Financial services, just like many other
industries, have been significantly impacted by the spread of digital transformation.
Digital finance refers to the breakdown of financial services, such as banking, payments,
investments, lending, and more, into multiple digital elements that incorporate digital
technology and innovation. It is an all-inclusive phrase that encompasses the use of
digital tools, platforms, and technology to enhance and provide financial services. In the
early 2000s, online trading platforms emerged, allowing investors to trade stocks and
various other financial products.

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Fintech is a new concept that has been introduced in this age of digitization, a term used
to describe the application of technologies in order to enhance and streamline the
provision and use of financial services. At its core Fintech seeks to support businesses,
financial markets and individuals in managing their activities and improving their lives
through software and algorithms which are increasingly accessible, on computers as well
as smartphones. In the modern age, there has been an advancement of Fintech driven
by new technologies like artificial intelligence, machine learning, decentralized finance
(DeFi) and central bank digital currencies (CBDCs). This transformation has had an impact
on the industry by enhancing overall economic and financial efficiency. The global
financial crisis in 2008 played a role in establishing Fintech as a very important
innovation. Consequently both regulators and market participants face challenges in
striking the balance, between embracing innovations and rewards while managing
associated risks.

The Digital Transformation of Financial Systems

Financial intermediaries are created by information asymmetries and economic factors
such as economies of scale. These ideas shape market structure as well. While
technological advances are already well-known to finance, digital innovation has brought
crucial enhancements in the system connectivity, in calculating costs involved and power,
and in new and usable data. These advancements have reduced transaction costs and
produced new and strategic plans for operations of businesses and entrants. The
production of financial services could be dismantled easily since technology has made it
easy to exchange information and lower transaction costs. A new era of technological
innovation and industrial development is upon us. Cloud computing, artificial intelligence,
blockchain, and big data are all extensively incorporated into the finance business. In its
connotation, digital finance is comparable to online finance and fintech, stressing the use
of digital technologies by traditional financial institutions as well as online firms to make
financing, payment, and investment easy.

The four major areas of fintech are artificial intelligence (AI), blockchain, cloud computing,
and big data. Artificial intelligence is intelligence exhibited by machines, as opposed to
"natural intelligence" which is shown by people and animals. As it provides technologies

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such as voice recognition, interaction between humans and computers, and computer
vision for user-account management and anti-fraud measures and machine learning
methods. AI plays a crucial role in traditional banking and finance. Cloud computing is
closely linked to mobile and internet payment systems. Over the last ten years, financial
institutions all around the world have increased their use of cloud computing. They
upgrade and develop new financial services to better match the changing needs of their
customers. Financial institutions are digital businesses, with banks and insurance
corporations investing the most in information technology and data. They have particular
challenges since they are tightly regulated, such as data governance, regulatory
compliance, and risk management; all of which are comprehensive operations. Financial
Technology (FinTech) allows first, well-organized supply of existing financial products and
services; second, expansion of new, innovative and disruptive financial products and
services; and third, digitalization and redesigning of all processes within and across
financial institutions to improve functionality and productivity. New categories of digital
technologies such as Regulatory Technology (RegTech) and Supervisory Technology
(SupTech) make regulatory compliance, reporting, and risk analysis more efficient and
cost-effective. A recent report on FinTech to the European Commission by the Expert
Group on Regulatory Obstacles to Financial Innovation (ROFIEG)1, just 19 of the 161 largest
retail and commercial businesses in the world implement digital transformation in their
systems.

Digitization of Finance and the Productivity and Efficiency

of Commercial Banks
Based on the background of the digital transformation of commercial banks, many
studies investigated the impact of digitization of finance on commercial banks' output
from scientific innovation, financial innovation, deep amalgamation of technology and
finance, and industry advantages. Commercial banks are a key financial intermediary and
their success has a pivotal impact on the growth of the entire financial system and the
transfer of funds in the economy. Consumer credit, for example, has grown in recent
years. However, consumer financing is severely limited due to not enough personal

1
“ROFIEG” is a group of experts set up by the European Commission in the context of the March 2018
FinTech Action Plan to provide high-level expertise on the EU financial services framework with respect to
financial technology.

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information databases. The use of machine learning technologies can make for and
extend this demand for personal finance. Production technology that is efficient can
reduce costs and increase output. The transaction channels lower commercial banks'
transaction costs through the use of certain digital toolkits. Another channel is the
management channel, which increases the efficiency of internal management. This will
boost commercial banks' technical efficiency and scale efficiency. As a result, increased
total factor productivity encourages commercial banks to invest their time and resources
in research and technology and manage a favorable feedback process.

Digitalization and technology advancements resulted in creative, flexible, and adaptable

financial solutions provided by 'Fintech' firms2, which appeared likely to change banks
and banking as well. Fintech firms pose the prospect of gaining a competitive edge by
developing new business platforms in collaboration with Fintech enterprises. These
technological advancements influenced regulations and resulted in official open banking
regulations.Open banking encouraged data sharing through Application Programming
Interfaces (API) and enabled Fintech firms to build their financial services. This enables
banks to establish structures that will help facilitate the banks to access more
competitive financial products and services of superior quality in collaboration with
Fintech enterprises. Digital finance can swiftly and precisely gather market information
using big data, artificial intelligence, and other technology, providing customers with
more convenient and accurate access. It uses network information matching and artificial
intelligence technology to quickly realize the connection between financing and
investment, as well as between accurate mining and the quick transfer of information. As
a result, commercial banks' primary profit method has shifted.

Digitalization of Finance and Financial Efficiency

The ability of financial organizations to improve their methods, minimize expenses, and
increase output while providing exceptional customer service is referred to as financial
efficiency. The digitalization of finance has a considerable effect on financial efficiency in
a number of different ways. In recent years there has been rapid growth of online
banking. Customers can use secure online banking websites or mobile apps to access
their bank accounts, conduct transactions, and manage their finances. Electronic

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Fintech firms employs technology to modify, improve, or automate financial services for businesses or
consumers.

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payment methods such as mobile wallets, peer-to-peer payment apps, contactless
payments, and digital currencies such as Bitcoin are examples of digital finance. Fintech
companies provide different kinds of digital services, from spending tracking, and
budgeting, to customer service chatbots and more. Financial institutions depend on
fintech solutions and these companies have been the driving force in the digitization of
financial services. Data Analytics is also one of the key elements of digital finance. In
today's world big data and data analytics helps in making informed financial decisions
evaluating potential risks and hazards and enhancing user experiences. We also witness
the adoption of automation and artificial intelligence (AI) to streamline operations, elevate
customer service quality and reduce costs. Furthermore the emergence of blockchain
technology has further digitized financial processes. It has paved the way for approaches
to identifying, recording and securely storing assets digitally. Moreover it is reshaping
how individuals invest their resources and engage in trading activities on market
platforms and make their financial decisions.

Computerized and digital technologies reduce manual labor, which helps to fasten up
the financial operations and make them more efficient and effective. Running costs are
reduced significantly via digitization particularly in terms of work force and physical
infrastructure. Any financial institution thrives on its customer base and that is very
constructively managed by digital technologies through easy access at any time
anywhere, self-service choices, and personalized recommendations. Machine-based
monitoring improves risk assessment and helps prevent scams. Digitalization complies
with regulatory requirements, as digital records and reporting are often more accurate
and easily accessible.

Opportunities of Digitization of Finance

The world economy is undergoing a continuous digital revolution. A study has said that
the "global data-sphere" will rise to 163 trillion gigabytes by 2025, up from 16.1 trillion
gigabytes in 2016. This tenfold rise will include data stored in places ranging from the
cloud to our mobile gadgets. The technologies embraced by the term fintech have
accelerated the digitization of finance. Technology has the ability to prevent the
occurrence of unexpected costs in all types of financial institutions. Increased automation
can help financial service providers to engage with their customers in an effective
manner. They have changed the way financial goods are sold to the public. Digital

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technologies contribute to the reduction of national barriers and the stimulation of
competition in the following areas:

● Online/Mobile banking, payments, and digital services: It has helped people

getting familiar with digital transactions, like online payments and transfers.
Customers can access their bank accounts, make transactions, and manage their
finances through secure online banking websites or mobile apps. Financial
inclusion has increased due to digital finance.
● Peer-to-peer lending: is a type of financial technology that enables people to lend
or borrow money from one another without visiting a bank. P2P lending websites
connect debtors with investors directly. The site establishes the pricing and terms
and facilitates transactions. FinTech firms provide different services, such as
robo-advisors and peer-to-peer financing, to provide consumers with new options.
● Data analytics and artificial intelligence (AI): They are used to make informed
financial decisions, assess risk, and improve consumer experiences. Automation
and artificial intelligence (AI) are used to expedite financial operations, improve
customer service, and save operating expenses. Data analytics enables financial
services to be customized, altering them to individual needs and preferences.
● Blockchain technology3: is another technology that is accelerating financial
digitization. It opens up new avenues for digitally identifying, recording, and
storing assets, as well as altering how people commit their resources and trade on
marketplaces. This technology provides enhanced traceability and transparency.
The best-known example is Bitcoin, the cryptocurrency.

The COVID-19 pandemic encouraged the idea of the need for the development of
electronic financial services. Developments in mobile money, financial technology
services, and online banking have the potential to assist both individuals with low
incomes and small businesses. Financial inclusion has the potential to boost
economic growth as a result of the widely available digital financial services that
have remote access as well as per user convenience.

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Blockchain is also known as distributed ledger technology (DLT),

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Challenges of Digitization of Finance
1. Increasing Cyber- Security Risk: financial operations manage enormous
volumes of data pertaining to both customers and enterprises on a daily
basis. Information was once saved on documents and records, but in more
recent times, more data has become available in digital formats. Since
digital data is kept in a digital environment, it is more vulnerable than ever
to security lapses. Malware attacks and data breaches are examples of
cybersecurity dangers that can have serious consequences. On the dark
web, names and credit card numbers can be bought and sold for identity
theft and other fraudulent activities. Nothing they can do will stop the loss
of crucial knowledge. For example the Equifax case study, a website
application vulnerability that occurred in 2017 was the reason behind the
company losing personal details of 145 million Americans to hackers. This
challenge remains the top alarming issue in the field of fintech.
2. Lack of Customer Trust: A PwC analysis found that 48% of British
consumers would not be willing to buy any financial product from a fintech
company. On average, 64% of people say they trust banks, insurers, and
wealth managers, while only 47%, 48%, and 49% of people say the same
about peer-to-peer and digital payments, blockchain, and cryptocurrency
businesses, and digital wealth and robot-advisory organizations,
respectively. Many people expressed the opinion that the government
lacks the necessary understanding of modern technology to adequately
control it. Because they don't think the government can regulate, people
usually conduct financial transactions in the traditional manner because
that is what they trust and it is a very serious matter for individuals
anywhere any kind of money is involved.
3. Technological Disruption: Traditional business models are overturned by
disruptive technology, so it is very tough for established companies to
adopt. Additionally, it has the power to establish anything previously
developed as outdated. Only a small percentage of the tech elite are adept
at applying and implementing the new technologies that are being
introduced. The remaining developers find it challenging to catch up. Many
people experience discomfort when using new technologies because they

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 are unable to fully comprehend and accept them. More broadly, technology
is developing more quickly than people can utilize it completely.
4. Large-scale investments in IT and marketing required: In terms of
technology, developing an application, a product, or a service could take a
very long time and be very expensive to implement. Financial institutions
must prioritize marketing investment more than just development costs.
Like any other industry, it can be very difficult to convince customers to try
something new and technologically advanced, especially when there are
so many powerful competitors. Millions of dollars must be invested by a lot
of startups and businesses before users become devoted to their apps and
in many cases there is a lack of funding.
5. Compliance with Government Regulations: because of the dramatic rise in
regulatory fees in comparison to earnings and credit losses since the 2008
financial crash, regulatory compliance has become one of the biggest
challenges facing the banking industry. There are an increasing number of
regulations that banks and credit unions must follow, ranging from Basel's
risk-weighted capital requirements to the Dodd-Frank Act and from the
Financial Account Standards Board's Current Expected Credit Loss (CECL)
to the Allowance for Loan and Lease Losses (ALLL). The ability to correlate
data from various sources is frequently necessary for compliance, which
can place a significant strain on a Fintech bank's resources.

Future of Fintech and Digital Finance

Moving forward, it is quite evident that the future of the finance sector as a whole will be
more and more involved with Financial Technology. It can be anticipated that artificial
intelligence (AI) can generate up to $1 trillion additional value for the global banking
industry per year. Automatic factor discovery, or the machine-based identification of the
factors that create exceptional output, will diversify throughout the financial services
industry and help financial modeling get more advanced and enhanced. Knowledge
graphs and graph computing will be more widespread. In the future, their ability to help in
creating connections and identifying patterns across designed financial networks by
utilizing a wide range of frequently dissimilar data sources will be common. The training
of financial models will use less data, or only that which is pertinent, necessary, and
properly sanitized, if analytics incorporate improved privacy protections. One of these is

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federated learning, a type of decentralized machine learning that addresses the privacy
risk associated with centralizing datasets by bringing the computational power to the
data rather than the other way around. Consumer protection will advance to a new level
thanks to developments in advanced encryption, secure multi-party computing,
zero-knowledge proofs, and other privacy-conscious data analysis tools. Distributed
Ledger Technology(Blockchain), which lets financial transactions to be simultaneously
saved in more than one locations will increasingly help reinforce ecosystem financing.
The key components of current fintech innovations like digital wallets, digital assets,
decentralized finance (DeFi), and non-fungible tokens (NFT) will continue to be smart
contracts and distributed data storage and exchange technologies. Financial institutions
will continue to depend on the cloud as they implement more agile capabilities and
introduce new ventures that call for high market and customer responsiveness as well as
flexible scalability. The demand for cloud-based elastic computing will increase as a
result of the large use of big data analytics.

In the upcoming years, banks will also be aware of the potential for large-scale
incorporation of cloud-based microservice architecture, in which application
programming interfaces (APIs) allow machines to communicate amongst each other and
allow services to scale independently without having to increase the overall offering's
coding base. Manual labor will be replaced by hyper automation which is Artificial
intelligence, deep learning, event-driven software, and robotics.

Overall, we can anticipate an even tighter integration of IT applications in accounting and

finance in the future. Smart contracts, which feature self-executing agreements with
predefined rules, may be one medium for such increased penetration. With their broad
implications for corporate governance, regulatory compliance, and auditing, smart
contracts have the potential to completely change the landscape of finance and
accounting.

FinTech for Sustainability

Every technological advancement has altered how we engage with the digital world,
representing a turning point in the "data revolution". The way that organizations use data
to improve decision-making, facilitate client understanding, and predict trends at various
spatial and temporal scales is at the heart of the fintech revolution. There are continuous

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initiatives at the national, regional, and international levels to achieve the Sustainable
Development Goals (SDGs) aligning with the revolutions in data and fintech. The concept
of the fintech gearbox—which was first presented in a 2016 UN Environment
report—could lead to useful information technology advancements that support both
local and global sustainable development. The fintech gearbox demonstrates how these
technologies are interconnected to address every facet of environmental policy and
management. From the source to the sewer, the City of Stockholm is integrating an
Internet of Things(IoT) monitoring network into their water system. This technology will
target pollution sources, monitor water quality in real time, and alert citizens to any
unsafe drinking water. One of the first and biggest big datasets is Earth observation data
from satellites, where numerous sensors take daily pictures of the planet in a variety of
light wavelengths. Users can explore high-level, decision-ready products tracking forests
and query datasets in space and time using an easy-to-use web interface. Blockchain is
being used by a World Wildlife Fund program in Australia, Fiji, and New Zealand to track
fish from the ocean to the plate and guarantee the integrity of sustainable supply chains.
IoT and AI have been used by the Jefferson Project at Lake George in New York State to
develop a computing platform that records and evaluates data from sensors monitoring
water quality and movement. They then make better policy decisions by using that data
to forecast and safeguard the lake's future.

Conclusion
Policy trade-offs will change as the financial sector continues to change, and regulators
will need to make sure that market outcomes continue to align with main policy goals.
There are several policy ramifications. 1. Control risks while encouraging competitive
innovation. 2. Extend the scope of monitoring and reevaluate the limits of regulation. 3.
Examine the frameworks for regulation, oversight, and control. 4. As the adoption of
fintech increases, be aware of changing policy trade-offs. 5. Keep an eye on the market's
structure and behavior to ensure competition. 6. Update and liberalize financial systems.
7. Make sure government money is still appropriate for the digital age. 8. Strive to
effectively coordinate cross-border information sharing and best practices.

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Analysis and Personal opinion
The emergence of financial technology, or fintech, has drastically changed the global
financial scene by redefining how financial services are provided and how people and
businesses handle their simple day to day transactions. Digitization of finance has surely
increased accessibility, efficiency, and financial inclusion while also posing risks and
presenting issues that must be resolved. It is changing the landscape of the world by
empowering individuals and small startups to contribute to the global economy. Fintech
touches our life in so many ways if we look around from mobile banking to insurance that
we can conveniently use ourselves, for which previously one would have to see a
financial advisor. Conventionally, Big Tech companies were hesitant to get involved in
finance, especially after the 2008 financial crisis but in recent times Big Tech companies
are getting into the big finance industry. As interesting this progress is, it is important to
note that sometimes there are very high expectations and exaggerations. For example
some crypto currencies endorsed by famous people that were involved in fraudulent
activities. Another example is the company that changed its name to some blockchain
corporation and their share price went up 430% in a day and this is not normal. Such
exaggerated reactions show the publicity in the market for FinTech. In my opinion, in the
face of increasing competition, financial markets should actively implement differentiation
strategies. There should be a well-made system put in place to promise internet safety
because if personally I were to invest my time in digital finance, my biggest concern
would be my internet safety and that would stop me from entering personal information
on sites and I would be constantly worried about cybercrime issues. I think there is also
greater uncertainty in the world of digital finance and it is still not a common household
concept as many people are either not equipped adequately to use these technologies
or they feel unsafe related to their money and personal data. All these technologies need
to be increasingly user-friendly and more awareness regarding their use and benefits as
well as drawbacks need to be communicated to people clearly for people to start trusting
it as the world is really becoming a touch-button digitised age and in the coming years it
will only be the survival of the fittest, it is necessary for all of us to slowly transition into
this digital era as it clearly promises higher efficiency, time-saving and greater output. I
believe these advancements have the potential to transform the traditional way of
providing financial services completely and bring about a revolution altogether.

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