4

Digitalization, Emerging Technologies, and Financial Stability:
Challenges and Opportunities for the Indonesian Banking Sector and Beyond
Muyanja Ssenyonga, Jameaba2
Abstract
One of the challenges financial institutions is how to adapt to a changing business environment, increasingly
demanding and differentiated customer preferences, digitalization and technological change. Using a
documentary analysis approach, the article navigates the ramifications of API based open banking, Block Chain
Technology (BCT) and entrance of Fintechs, Big technology companies (Big Tech1) and Telecommunications
companies (Telcos on the performance of general banking sector and financial system stability. Results
underscore the role of digitalization revolution and ICT in fundamentally changing the financial service
development and delivery, by empowering ICT savvy non-financial institutions including financial technology
companies (Fintechs), TELCOS, and Big Tech to become players in the industry; enhancement of financial
inclusion thanks; reduction in transaction costs; and inducing traditional banks to adopt new business models
that leverage Big Data and data analytics approach. Digitalization has paved way for the development of agile,
adaptive open banking supporting business models financial that supported collaboration with other providers
of financial services, back end and front end technologies, diversified customer base, strengthened capacity
and capabilities to leverage customer experience , develop and deploy financial innovations to strengthen
competitiveness. Nonetheless, despite its many benefits, most banks are yet to adopt BCT due to persisting
uncertainty that surrounds the technology a, its adoption, deployment and operations. BCT adoption has been
undermined by an array of failures of several BCT based crypto exchanges and assets, limited understanding of
BCT business case, regulatory ambiguity, and risk aversion. The adoption of BCT promises improvement in the
integrity and authenticity of financial service delivery, reduction in vulnerability to cyber insecurity,
decentralized authentication, increased operational efficiency, low compliance cost, shorter onboarding of new
product offers and customers, accelerated development and deployment of new product offers, which should
diversify and broaden liability sources and investment portfolios. Failure to adopt and deploy both business
processes and products on BCT poses the danger of empowering new entrants into financial service
development and delivery. The reluctance of conventional banks to adopt emerging technologies poses threat
to both their interest and non-interest income sources, ability to provide monetary policy transmission
function, providing customer wealth custodianship services, serving financial payments and money supply
transmission functions, and serving as lynchpin in financial system liquidity. The article highlights challenges
and pathways to mitigating them in such a manner that improves bank performance without undermining
financial system stability.
Key Words: Blockchain, CBDC, crypto assets, digitalization, Fintechs, emerging technologies, open banking,
P2P lending
JEL: E44, E02, G20, G32, 033,M15, M25
I. Introduction
Product and process innovations are pivotal for growth, productivity, profitability and competitiveness, albeit
unleashing creative disruption in the process (Ziemnowicz, 2013). Based on market, technology and degree
of change required, extant literature identifies four types of innovations as a spectrum that ranges from
incremental, disruptive, architectural to radical (Lopez, June 29, 2015). Innovations take various forms including
new products, processes, markets, inputs, organization structures, and business models. The onset of
deregulation and globalization of markets in early 1980s generated an increase in competition in factor and
product markets, which coupled with the age of the internet, spurred innovations in products, business
process2es and business models. Business model innovations transform the way businesses produce and
deliver products and services (business processes), managerial practices and processes to achieve the highest
efficiency, and factoring in not only internal stakeholders in organizational decisions but also, principally
customer preferences, competitor strategies and offers and regulatory agencies.
Nonetheless, the impact of the 1997 Asian financial Crisis which was aggravated by pervasive
mismanagement of the banking sector, on not banks but also financial sectors, economies and society,
fundamentally changed attitude toward risk taking in the financial sector. Risk aversion is today embedded in
national banking laws, and provisions , attributes, standards and principles of standard setting bodies. It thus
apparent that considering the attitude of practitioners in the general banking industry, regulatory and
supervisory agencies, and the general public, banks are facing formidable challenges to adopt to the new
financial services delivery regime that requires transforming business models, take aggressive steps to exploit
new opportunities, compete vigorously with new financial service providers, all that without flouting existing
laws, regulation and principles of prudential banking and undermine public confidence.
Business model innovations are crucial to transforming production and business processes; instituting and
sustaining agility and adaptability in managerial practices to align with an increasingly dynamic, demanding
and complex business environment; and laying firm foundation for nurturing and accommodating technological
change (Serrat, 2017). Four theories of innovation lay the groundwork for understanding the process and impact
of innovations on businesses, industry and society. The innovation diffusion theory propounded by Rogers,
considers innovation to comprise for components including the innovation, communication media used to
disseminate the innovation information, the social system context that underpin adoption and non-adoption,
2
Research Economist, Master Program in Public administration, Department of Management and Public
Policy, Gadjah Mada University
1
Electronic copy available at: https://ssrn.com/abstract=4808469

and time required to adopt the innovation. Innovation adoption is dependent on its relative advantage,
compatibility, complexity, trialability, and observability (Ham, 2018).
Meanwhile, the Concerned based innovation adoption model (CBAM) underscores the importance of
addressing various aspects of concerns of stakeholders impacted by and those charged with implementing
the envisaged change for a successful process. CBAM has three components including stages of concern (SoC),
levels of use (LoU), and innovation configuration (IC). SoC refers to characteristics of adopters, while LoU and
IC principally relate to innovation characteristics. Thus, CBAM considers characteristics of adopters and how
their concerns are addressed and the characteristic features of the innovation to be crucial for successful
adoption of service innovations (American Institute for Research, 2010).
The technology acceptable model argues the importance of the prospective adoptor’s attitude and
expectations in influencing the adoption (Davis, 1985, 1989). Specifically, factors that relate to ease of use and
potential usefulness of an innovation influence adoption, with the latter showing a higher correlation than
the former with technology adoption than the former. Meanwhile, according to the Chocolate model
(Dormant, 2011), looks at innovation and the change it envisages for an organization as two inseparable
components. The model comprises for components including change, adopters, the change agent(s), and the
organization, hence the acronym (CACAO). To that end, the chocolate model requires sequential analysis of the
change, adopters of the change which includes developing a change plan; identifying the change agents;
assessing the organization that is the target of the innovation, and making necessary revision in the plan to
incorporate organization analysis outcomes.
Despite some differences, the four theories share some similarities. Such similarities are discernible
from the emphasis placed on analyzing the rationale for the innovation as reflected in usefulness and relevance,
impact on interests of adopters and those charged with implementing it, and compatibility with adopters and
the organization. Celner (2020) of Deloitte identifies several key drivers to bank performance and
competitiveness during the digital transformation age. The list includes the need to become data centric and
leverage data analytics while protecting personal and business data integrity from cyberthreats; embracing
emerging technologies in business processes, functions and relationships; leverage platforms and data
monetization; develop agility and flexibility in adopting adaptive business models; the demand for a
customer centric strategy; readiness to embrace ecosystem framework; future of work that is increasingly
being characterized by automation of routine tasks, employee empowerment and participation in key decision
making processes, and demand for diversity, inclusion, and equality.
In the same vein, the Economist (Lin et al. 2022) identifies imperatives for bank performance for the
next seven years to include developing a business strategy that is aligned with purpose and profitability,
customer values, and corporate responsibility for the environment and social values. Moreover, banks face
other challenges in their operations ranging from accelerating digitalization, disruption for financial technology
companies and big technology and telecommunications companies, uncertainty arising from digital currencies
and related investments, brazen waves of cyberattacks (Lin et al. 2022,6). Social and impact investors are
increasingly selective in choosing investments as they are rating candidates based on performance on
corporate social responsibility (CSR), environmental, social and governance (ESG), and increasingly track record
on diversity, inclusion and equality (DEI) issues. Specifically, however, the importance of ESG has increased in
light of growing concerns about mounting evidence of the impact of climate change on communities, economies
and by extension, potential threat to lifestyles and livelihoods of current and future generations. Such concerns
are amplified by reluctance of companies to not only focus on achieving short-term market-focused financial
performance but also make long-term value creation imperative by emphasizing long-term sustainability in
their expectations, goals, and activities.
Besides, transparency in corporate financial ESG disclosure does not take fully into consideration
expectations and goals of investors (Gordon & Bell, 2022), which is not to mention interests of employees,
regulators, and communities where they undertake their operations. The performance of Indonesian banking
on ESG risk exposure remains minimal as Morningstar sustainalytics in Gandolfo & Simic (2022) show3. Of the
26 general banks covered, only 7.7 percent were in the low risk category (10-20), 42.2 percent were in the
medium category (20-30), 34.6 percent were in the high risk category (30-40),and 11.5 percent were placed in
the severe risk category (40 and above). The implication that none of the banks covered were in the negligible
risk category (0-10), while 88.3 percent of the banks covered had score that ranged from 20 to above 40. And
this covers a sample of 26 banks out of more than 130 general banks in the Indonesian banking sector.
Meanwhile, the regulatory and supervisory regime, is taking measures to strengthen provisions on
asset risk weighted capital and liquidity requirements to factor in rising risk sources from the spate of
unregulated digital financial products and business models. Thus, banks face formidable challenges that are
attributable to the rapid and fundamentally changing configuration of markets, customers, array of financial
service providers, products and services, evolving regulatory and supervisory regime requirements. It is only by
rethinking and reinventing banking, corporate purpose, customer relations, products and services offered, and
business strategy, that the general banking sector has the chance of remaining relevant and key player in the
rapidly changing financial sector landscape.
The paper contributes to literature on the impact of the interaction among key drivers of competition
in the digitalization era in financial service development and delivery, changing configuration of the market
for financial products, and evolution of emerging technologies on operations and performance of general
banks and the impact of that on financial system stability. Banks face formidable challenges that are
attributable to legacy systems, high risk aversion adopted as a response to 1997 East Asian economic crisis,
stringent retrospective looking regulatory and supervisory regime in a real-time, data analytics driven and
informed regime; and rapid changes in the competition landscape, largely motivated by reaction to changes
in financial innovations than have provided opportunities for new financial service players.
Ironically, while the financial regulatory regime has created new opportunities for new players to
operate, it is yet to relax stringent regulations imposed on general banks in conducting their businesses. This

hampers the readiness of banks to adopt new business models, revamp business processes, develop new
sources of non-interest income, and develop agile business strategies that are responsive to changing
customer and society values, open banking and direct banking, the need to forge strategic alliances with new
entrants in product development, entering new markets, and in procuring and managing backend technology
provision. The paper also leverages findings to propose pathways for banks respond to changing financial
sector landscape while at the same continuing to serve as an anchor of financial system stability.
Digitalization is going mainstream, affecting our daily working, lifestyles, and interpersonal
interactions. Manifestations of changing business competition in financial services provision are increasingly
evident in the number of new players entering the industry ranging from post offices, telecommunications
companies (Telcos), technology companies (Big Tech), financial technology startups (Fintechs). What is
common among most entrants is the ability to leverage data analytics to align business strategy and product
and service offers with customer needs, experiences and expectations that is far beyond what traditional
financial service offers. The main drivers of Fundamental change in operating and business environment which
has created such opportunities for new comers into financial provision is the availability of emerging
economies.
Doubtless, the speed of advancement, adoption and deployment of emerging technologies has
become an important driver of the fundamental changes in ways financial and nonfinancial institutions are
reimagining, redefining and conducting businesses today. PWC (2022) identifies eight essential technologies
that are crucial to the process including “artificial intelligence (AI), augmented reality (AR), blockchain, drones,
Internet of Things (IoT), robotics, 3D printing and virtual reality (VR)”. The technologies are driving,
reconfiguring, expanding the redefinition of the capacity and reach of the boundaries of the world of work,
corporate operations, and the seamless use of technologies to support livelihoods in society through fostering
reconfiguration of convergencies in the use of technology as manifested in automated trust, immersive
interfaces, extended reality, working autonomy, digital reflection n and hyperconnected networks” (PWC, 2022,
pg. 28). The focus of this paper is to examine the influence of block chain technology, open banking, and crypto
assets, and the involvement of Fintechs, Big Tech and Telcos in financial activities, on traditional banking
operations and performance, and financial system stability.
In their research on factors that are crucial for digital transformation, W o e r n e r et al. (September 15,
2022) identified areas and ten capabilities , which successful digital transformers develop and deploy to
create customer excellence and efficient operations that deliver 17.3 percent in revenues and 14.0 percent in
net margin, which are above industries. The four areas of the firm comprise customers, operations, and
ecosystems, and foundational capabilities, with the latter playing a facilitating role of the other three.
Meanwhile, with respect to capabilities that distinguish leaders in digital transformation from laggers
W o e r n e r et al (2022) cite the such factors as delivering customer needs through multiproduct seamless
customer experience , having company mission that encourages excellence beyond delivering shareholder
value (customer capabilities); developing modular, open and agile digitized services delivered directly as well
as through partners, and leveraging technology to innovate, controls costs and accelerate transformation,
which supports enhances improvements in processes, data reuse and technology, and capabilities to identify
productivity enhancements; develops capabilities to solve customer problems and delivering of seamless
customer experiences (operational capabilities); participating in ecosystems that develop and deliver curated
digitized products, pursuing dynamic and digital partnerships to extend reach and width of customer-base
through automated sharing of data, transactions and insights (Ecosystem capabilities).
In the same vein, in the area of foundational capabilities, digital transformers develop capabilities and
processes that support treating data as a strategic asset that is monetizable , standardized, cleaned, simplified
, easily accessible and serves as a vital source of organizational learning that informs decision making, use
emerging technologies to develop and retain relevant talent to serve effectively in organization roles while
empowering them to solve increasingly complex problems, link individual and team behaviors to goals of the
organization by communicating leadership style, and strengthening employee accountability and data, and
foster rapid learning in the organization to support adaptability to increasingly uncertain external environment
that demand quick adoption, exploration of new ideas, and creating values and scaling up lessons in the
organization (Weiner et al. September 15, 2022).
Digitalization, by making fnancial service delivery mass produced, remotely customizable, and
deliverable, has propelled Big Tech, Telcos, and Fintechs into financial service delivery. In the Indonesian
context, key players in the digital platforms space include e-commerce and ride hailing platforms that
encompass Tokopedia, the largest e-commerce and payments platform in Indonesia and Gojek (ride -hailing
platform)4; Shopee, Bukalapak, Lazada, and Blibli (MarketResearch, April 11,2022); Tiket.com and Traveloka,
which are travel booking platforms; LinkAja, an interbank payments network (Medina, April 12, 2022), among
others. To that end, thanks to their ability to develop and deploy emerging technologies, aggregate data and
glean actionable strategically important insights by leveraging data analytics capabilities to align with customer
needs and experiences, new players are offering easily accessible, customized, affordable services that
traditional financial institutions find hard to deliver due to various constraints that include legacy systems,
regulatory overload, risk aversion and mistaken belief that the new wave of players is just another fad that
changing dynamics will eventually push into oblivion.
The reality is that by leveraging data analytics on data on customer needs, experiences and
expectations, and internal and external drivers of performance, empowers new entrants in the financial
services delivery that include Indonesian post office, Telecommunications companies (Indosat and Telkomsel),
e-commerce portals and a spate of Fintechs, to not only gain a foothold in rules based, highly regulated financial
services but also carve out niches that make them serious competitors for key sources of non-interest income
for traditional banks and possibly incomes of nonbank financial institutions5. It is a development that is
replicated in not only other emerging and developing economies but also in developed economies as Data
released by Statista testifies. Projections in 2018 showed that of the 55 million people aged above 14 years in

US in 2018, 23.4 million would use Starbucks Application to make in-store transaction, 22 million would use
Apple Pay, 11.1 million used Google Pay, and 9.9 million would use Samsung Pay (Richter, May 23, 2018).
The entrance of new players in financial services provision while may not be considered to be
disruptive or posing an existential threat to traditional financial institutions today, it has the potential to exactly
achieve that in the long term. Thus, unless traditional banking institutions adopt and modify the necessary
emerging technologies in line with domestic customer needs and regulatory requirements sooner than later,
which should enable them to reinvigorate and overhaul their business processes, models and business
strategies, they face the danger of being relegated to marginal players in the Industry.
Nonetheless, that is not to imply that the financial services industry has not taken some ground
breaking measures to join the fray, albeit in a limited manner. Being a stringently regulated industry, the
Indonesian government has to a large extent paved the pathway of digital transformation in the financial
service industry, especially retail banking. That said, there is little doubt that by deferring the development and
deployment of emerging technologies in their business processes and strategies, traditional banks face the
danger of losing out to agile new entrants that are not burdened by legacy systems and sunk costs. Thus, while
such an attitude is normal and to many has been tried and proved as vital for success in the past, it is highly
debatable that such a perspective, outlook and retrospective thinking will not relegate them to becoming
perpetual laggards as early adopters and movers seize and concert the rapid and constantly changing dynamics
and developments in rules, players, and drivers of success into value-adding business opportunities.
This is the more so considering the fact that central and local governments have not failed to realize
and recognize the significant contribution new nimble players in financial service delivery are making toward
key policy priority areas including financial inclusion, poverty reduction and income and regional income
disparity. Consequently, new regulations ate being adopted to create a business environment that fosters
accelerated digital transformation through the adoption of emerging technologies. The implication is that any
failure for traditional financial institutions to quickly adopt to the new financial regulation paradigm that treats
Telcos, Big Tech and Fintechs as accredited providers of financial services has the potential to increase the
influence and control they have over the financial services and products market share in developing and
emerging economies. If such a scenario were to be realized, it has the potential to create a formidable and
growing threat to the core business of traditional financial institutions, undermine their long term profitability,
and by disrupting and upending financial intermediation and monetary policy transmission mechanisms,
pose serious risk to future financial stability (FSB, 2020).
That said, one complication is that the new business environment that embraces and is underpinned
by emerging technologies in product and business process innovations, requires huge investments in ICT
infrastructure and networks, upskilling and reskilling workforce, redefining corporate missions, value
propositions and business strategies amidst lingering uncertainties and problems that still plague any hasty
adoption of such technologies. To that end, this article assesses the impact of a combination of digitalization,
emerging technologies, and new entrants in financial services provision on opportunities, obstacles and
challenges traditional banks face in not only remaining competitive but also more importantly avert the
creation of new sources of financial system instability in future.
Section two presents the methodology, followed by section three that presents a brief background of
the digitalization initiatives in Indonesian banking. Section four examines the impact of ICT on financial services
delivery, which is followed section five that discusses BCT, crypto assets and financial services delivery and
stability. Section six assesses the impact and ramifications of open banking and financial service delivery and
stability, followed by section seven that highlights challenges emerging technologies and changing financial
services landscape pose traditional banking, financial institutions in general and financial system stability. The
last section draws conclusions to the article.
II. Research Methods

The article used a qualitative research design, which was implemented using document analysis. The choice of
document research or analysis was predicated on various considerations including the focus of existing data
sources accessed through creating situations that elicit participants to create such documents as in the case of
participant- elicited interviews and those already available from various sources and formats (Grant, 2019);
ease of access to various documents using online mediums; flexibility of extending the research scope and
coverage from domestic, regional to global context; cost effectiveness as regards time and cost of the research;
existing documents provide comprehensive and representative of the wide-ranging and cross-cutting context,
and coverage that quality generalizable research demands these days Tight (2019) cited in Kosciejew (2021).
Besides, document analysis does not involve creating new data rather either accessing or eliciting available
data; applicability to various theories and disciplines (Grant, 2018); considering the fact that most of the data
content was in text format, document analysis proved practical and feasible for data collection, and provided
an opportunity for data source triangulation (Bowen, 2009).
Document analysis in this research involved examining the purpose and context of the document;
reviewed and compared content of every documents relative to other documents; interpreted the results of
documents review; collated results obtained from various documents including published statistics, to write the
research results , conclusion and policy implications. Documents analyzed included journal articles, relevant
book chapters, laws and regulations, principles and practices, chronicles, circulars, newspapers, reports,
relevant YouTube channels content, blogs, podcasts, webinars, digital platforms, and relevant document source
applications (Tight, 2019). The main sources of documents and published data included Indonesian central
bureau of statistics (BPS), Bank Indonesia (Indonesian central bank), the financial supervisory agency (OJK),
International Monetary Fund (IMF), World Bank Group(World Bank) ,Organization for economic cooperation
and development (OECD), Asian Development Bank (ADB), Bank for International settlements (BIS), Financial

stability Board (FSB), and relevant Indonesian government agencies. Other key sources included Journal articles,
relevant internal and domestic newspaper articles, and relevant laws and regulations.
III. A Snapshot at the Recent developments in the Performance of Indonesian Banking

sector
Taking a glance at Indicators of bank performance may provide insights into the state of health and soundness
of the sector, and by extension the financial system considering the important role that general banks play in
Indonesian economy. Indicators analyzed include trends in total assets, return on assets (ROA) (measures the
rate of conversion of assets into net profits), net interest margin (difference between interest income and
interest cost of funds), loan to deposit ratio (conversation of deposits into assets (loans), capital adequacy ratio
(percentage of risk weighted assets a bank has in place to mitigate any exposure that may arise in future),
liquidity ratio (proportion of short term assets in place to meet unexpected liquidity requirements), investment
in government bonds (important risk free but low return investment), and operating expenses (measure of
efficiency in banking operations).
Bank asset growth
[Figure 1]
Bank assets show an upward trend during October 2021 to August 2022 period. However, growth of assets
shows high variability that may underscore inherent risk in bank asset acquisition and management (Figure 1).
Return on Assets and net interest margin.
[Figure 2 ]
The performance of general banks as reflected in ROA and net interest margin weighted by net operating
margin ratio , remains strong and shows improvement during March-2022 to August 2022 period. The
performance reflects an efficient use and source of bank funds (Figure 2).
Core capital, and operating expenses
[Figure 3]
Despite declining during March -June 2022 period, Capital adequacy ratio and core capital ratio to risk
weighted assets ratios remain higher than those recommended regulatory minimum. It is important to note
that CAR tracks movement in core capital ratio, an indication that banks increase capital buffers as required
when their the risk exposure increases. Meanwhile, as regards the trend of the operating expenses to
operating income ratio, which is an indicator of the efficiency of use of funds (bank operational efficiency),
shows a declining trend, which is in line corroborates improvement in bank efficiency. All such factors attest to
a healthy and prudent banking sector (Figure 3 ).
Bank net profit
[Figure 4]
However, while net profit remains strong, its growth seems to decrease during March 2022-August 2022
period (Figure 4 ).
Investment in government bonds
[Figure 5]
Investing in SBI and SBIS which are risk free reflects risk aversion, which impacts willingness of banks to disburse
credit to sectors and areas considered risky. While government bonds is an important risk free investment
albeit low return, increasing investment by banks poses the potential danger that the health of the banking
sector , and by extension the financial sector, becomes strongly associated with and influenced by the state of
government finances including budget deficit, politics and any other factors that affect public perception of
government performance (Figure 5) .
Bank capital, bank liquidity and loan to deposit performance
[Figure 6]

The general banking sector shows strong performance with respect to the capital adequacy ratio (CAR)
and loan to deposit to financing to deposit ratio , attesting to incorporating risk management in investment and
financing decisions. Nonetheless, the liquidity assets ratio, which in addition to CAR is an important component
of BASEL III risk management indicators, while remains still high, shows a downward trend that starts in
November 2021 and deepens in July 2022 (Figure 6). Bank liquidity is the first line of defense for not only the
banking sector but also importantly, the financial system. To that end, declining bank liquidity amidst rising
liquidity constraints poses potential danger to future financial stability. That said, the decline in bank liquidity ,
rather than pointing toward worsening liquidity, may in fact reflect the continuation of Bank Indonesia’s policy
of lowering liquidity requirements during the Covid-19 pandemic as an integral component of forbearance
measures implemented to mitigate the adverse impact of Covid-19 pandemic effects on the economy which
have been in place since the peak of the crisis and expected to remain until March 2023 (Bank Indonesia, 2022b;
World, Bank, 2022).
It may however also indicate that the banking system did not undertake sufficient procyclical liquidity
buffers during low interest rate regime as recommended. The tendency to avert to excessive risk aversion
under tight monetary policy conditions, may be a strong indication that despite investing a lot in risk
management mechanisms and programs, banks may not be well prepared for fundamental changes in key
drivers of business competitiveness in the external environment conditions (political, economic, social,
environment, and legal). Strong preparedness demands structural and operational overhaul, to institute
adaptability and agility in business processes, functions, and internal and external relationships. However,
based on Bank Indonesia (2022b) , the decrease in bank liquidity may be a direct consequence of central bank’s
efforts to maintain monetary policy stance that continued to support economic and social stability while at the
same time allowing the continuation of economic growth-supportive ‘macroprudential, economic inclusion, and
financial market deepening policies’. Supporting, encouraging ,and incentivizing digitalization through
developing and deploying emerging technologies is obviously considered pivotal to that process.
Overall, Indonesian banking sector is adequately capitalized, has quality assets, sufficiently potential
loan- loss provisioned, strong third party credit growth, and low Non performing loan ratios. Nonetheless, as
long as forbearance measures remain in place, determining the position of Nonperforming loans remains
difficult. A good indicator of the exact value of NPLs in the banking system is discernible from value of NPLs ,
those restructured and subject of special mention had reached 19.2 percent by December 2021. The
continuation of current forbearance measures among others things entail the reduction of down payment
required to zero, an increase of Loan to value ratio for automotives and property to 100 percent, reduction of
macroprudential Liquidity Buffers, macroprudential Intermediation Ratio, and incentivizing banks to continue
lending to 38 priority sectors (World Bank, 2022).
IV. Background on Key Initiatives in Indonesian Digital Banking

In pursuit of strengthening equitable development efforts, successive Indonesian governments have
implemented various digitalization programs. One such program is expanding financial inclusion through the
Laku pandai (branchless banking) program. The program allows Indonesian commercial banks to offer financial
services through designated agents rather than branches, which reduces overhead costs, expands the reach
of financial services to remote areas, hence with national financial inclusion strategy (SNKI). The main goal of
the program is to expand the reach and access of banking services to underserved and underbanked sections
of the Indonesian population. Thanks to the Laku pandai program, general banks are able to deliver services
that include saving, lending and micro insurance services through agents and other institutions, by leveraging
easily accessible, simpler, and less risky ways6 than is the case with conventional financial services provision.
This is thanks to the ability of agents to provide basic saving services through a saving account that does away
with administration fees, a minimum account balance, and limits on the withdrawal frequency.
The program itself envisages recruiting individuals who will serve as agents for banks in delivering
services that will include saving, insurance, and other services that partners of banks they represent. The
program was expected to involve 13 national banks, and recruit 350 000 agents a year (Amianti, March 27,
2015). Thus, despite the requirement that agents can only extend loans after prior approval of the bank under
which they operate, major banks in Indonesia have taken advantage of the mode of operations by requesting
and obtaining operating licenses to operate branchless banking services from the Financial services supervisory
and regulatory agency (OJK). The list includes Bank Mandiri, Bank BRI, Bank BCA, Bank Tabungan Nasional
(BTN), and Bank BNI. Consequently, the program has stimulated the expansion of branchless banking services
across the Archipelago nation. Based on financial supervisory agency 7, by September 2019, 25,777,824
accounts had been opened; the number of agents had increased 160,490 to 1,146,131 (614%) from (2016);
mobilizing IDR 2.218 trillion in deposits in 511 city and districts in all the 34 provinces of Indonesia.
Another transformational development in digital financial service provision is the development and
deployment of Q-code based payment services. Launched in August 17, 2019 through a collaborative
arrangement between Bank Indonesia and Indonesian Payments System Association , the quick response
Indonesia Standard (QRIS), is a mobile and web browser-based payments system that uses a QR code for all
types of payments. What is required is for merchants and service providers to register their personal and
business information with the managing agency.
One of the advantages of QRIS is that it obviates the need to use different e-wallets to make digital
payments. This implies that QRIS it is linked to major e-wallets in Indonesia including OVO, GoPay, LinkAja,
ShopeePay, DANA and WePay. More importantly, however, is that QRIS code facilitates payments that are
linked to commercial bank accounts, making it a gamechanger. Moreover, what is making the QRIS innovation
widely acceptable in Indonesia is the fact that Bank Indonesia regulation No. 21/18/PADG/2019 mandates all
its use for financial payments service providers that use QR in Indonesia. To that end, traditional banks no
longer have to develop their separate non-interoperable e-wallets with those of other banks as a way to
6

strengthen their customer engagement and experience, which does not only reduce the need for outlay in that
regard but also and most importantly, strengthens the leverage commercial banks have in digital payments
space compared with their more agile and nimble competitors- fintech companies. As of November 11, 2022,
QRIS was being used in 514 cities and districts, involves 127083 merchants including large, micro and small and
medium size enterprises, and facilitated the IDR 382,027,768,637 in payments 8.
Bank Indonesia-Fast is another nationwide response to the growing need for fast, secure, efficient and
real-time, digital payments system that is available 24/7 to meet customer needs everywhere and anywhere.
BI-FAST, according to Bank Indonesia (2022b, p.9) is a ‘cheap, 24/7 real-time, retail payment infrastructure’,
which complemented by the harmonization of payments language into a single national Standard Open API
Payments (SNAP) framework, has contributed to the acceleration in the digitalization of payments services.
Such a trend is commensurate response to increasing customer demand for fast, affordable, easy-to-use
financial services, anywhere, at any time adoption. Factors cited as drivers of the rapid development and
deployment of digital payments infrastructure (B1, 2022a) include efforts to strengthen domestic payments
system geared toward creating an integrated end to end digital financial ecosystem; underpinned by the
overarching goal of supporting the development and sustainability of an integrated, interoperable,
and interconnected ecosystem that is crucial for the country’s monetary, financial, and payments systems
stability9.
However, the enactment of the Omnibus law on the development and strengthening of the Financial
Sector on December 15, 2022 will have the most far reaching effects on the conduct, operations, resilience and
performance of the Indonesian financial sector, including the banking industry. Provisions of the law among
other issues regulate such issues as widening the scope of bank Indonesia mandate to include maintaining
economic stability and sustainable development including purchasing government bonds; increasing the
efficiency of the banking sector to enable it to provide funding to key economic sectors including access of
MSMEs to bank credit that while encouraged should be based on prudential principles; the streamlining of the
conduct and governance of conventional and shariah banking services; revision of the scope of BPR functions
to include trading in foreign currency and providing payments services; strengthened the framework for
securitization and establishment, management of trustee funds, and bullion market.
Similarly, the law, stipulates the need to transfer the regulation and supervision of crypto assets
from Commodity futures trading regulatory agency (Bappebti10) to the Financial services supervisory authority
(OJK); regulate financial sector conglomerates to prevent market concentration, monopoly pricing of services,
and posing systemic risk to the financial system; the creation of an enabling environment for the financial
sector to play pivotal role in climate mitigation and adaptation including the financing green economy projects
and support the carbon market; widened the coverage of Indonesian deposit insurance agency to include
providing premium policy guarantee to insurance sector customers; revised regulations on voluntary and
obligatory pension fund management; regulated the reversion of savings and loans cooperatives to core
functions that are limited to serving interests of members, while cooperatives that engage in financial services
henceforth must be supervised by OJK; stipulated the requirement to use principles and activities in regulating
the increasingly ubiquitous albeit risky P2P lending; and revised regulation of microfinance institutions with
the regulation of micro and small microfinance enterprises entrusted to local governments, while regulation
and oversight over medium and large microfinance enterprises fell into the remit of OJK (Heriani, December
15, 2022; Badan Kebikan Fiskal , December 15, 2022).
Other key issues in the new Omnibus law on the financial sector include strengthening financial
literacy, inclusion and innovation while ensuring requisite protection of consumers and the financial system;
the urgent need to develop and deploy a sustainable central digital currency (Digital Rupiah); efforts to protect
financial sector consumer data privacy; protection of individual and corporate customers from financial sector
crimes.
Thus, the financial sector Omnibus law, is informed by gaps in developments in financial innovations
and prevailing regulations; urgent need to lay a firm foundation for a digital economy as an integral element
of deepening the financial sector; the growing importance of the digitalization, transactions, payments and
digital assets most of which remain unregulated in the prevailing law on financial services; an increase in
financial fraud that has affected individual and corporate financial service customers; the pivotal role of
financial regulators including central banks in both financial system stability and economic growth and
development; the growing importance of the financial sector in general and banking sector in particular in
financial the green economy , in part motivated by an increase in stakeholder emphasis on the track record of
prospective investment on environmental, social and governance issues.
Nonetheless, it is also important to consider content of the Omnibus law on the financial sector from
the perspective of efforts to create an enabling environment for ecosystem based financial service delivery
that leverage benefits of product, and process and technology scaling through collaboration, networking, and
interoperability. This is in line with ASEAN community pivot of digital technology as an invaluable driver of future
economic growth and development, especially after Covid-19pandemic. Thus, the law is an apt response of the
government of Indonesia to the imploring of ASEAN community to its members to lay a strong foundation for
an inclusive, green and equitable post Covid-19economic recovery by developing and implementing national
actions plans, programs, and initiatives that are informed, promote and leverage digital transformation (UOB,
PwC-Singapore, & SFA, 2022).
V. Drivers and Ramifications of Digitalization in Financial services delivery

While banks are projected to register high revenue growth of 11.5-12.5% in 2022 due largely to rising interest
margins, which enabled them to post high 14-15% tier I capital ratios, 50% of general banks will continue to
generate lower return on equity than the cost of equity. This implies that despite projection US$345 billion in
revenue in 2022, the largest percentage of banks will remain destroyers of equity, perpetuating a problem
that has pervaded general banks since the onset of the 2008 global financial crisis (Dietz, et al. 2022). Factors
7

attributable to bank underperformance include long period of low interest rate regime, low long term
growth prospects due to legacy systems, rising external environment uncertainty that is reflected in food and
energy shocks; repercussions of Covid-19pandemic on key revenue sources, rising cost of attracting, acquiring
and retaining talent, lingering effects of supply chain shocks, and inability for general banks to align their
product and service offers with fundamental changes in customer needs , preferences and expectations.
The onset and protraction of the Covid-19pandemic, has not only created unprecedented global
peaceful time death toll, but has also generated substantial damage to core business capabilities, made
orthodox business models obsolete if not irrelevant, thrown skill and expert space into turmoil as some highly
prized skillsets have become redundant as new ones assume prominence. Besides, the new Covid-19induced
market environment has increased return on value added to providing differentiated customer services,
increased the importance of having the capacity and agility to identify emerging opportunities and seizing them
before competitors do, and changed the innovation landscape due to rising uncertainty about the realities of
the next normal.
Besides, the slowly evolving nature of the Covid-19pandemic and subsequent imposition of restriction
on social movements, closure of in-person interaction and imposition of lockdowns on business and community
activities (Bank Indonesia,2022b,p.4), have fostered change in shopping patterns. Consumers either fearing the
spread or adhering to health protocols have revisited purchasing patterns from mainly in-person to online
channels and increasingly use cashless modes of payments while abandoning cash. Doubtless, such change in
consumer behavior has increased the business value and strategic benefits of online service delivery.
To that end, changing consumer behavior in part necessitated by measures aimed at controlling and
responding to the pandemic, have created opportunity for providers of services to accelerate digital
transformation by implementing drastic changes in business processes, operating procedures, products and
services and some are in the process of overhauling their business models. Such a development has been
evident in sectors that have been severely affected including education, health, public service delivery,
merchandize commerce and financial services (Zou & Cheshmehzang, 2022; Muyanja-Ssenyonga, 2021; Ruzita
Abdul-Rahim.et al. 2022; Muangmee et al. 2021). That may explain why the impact and ramifications of Covid-
19pandemic (pandemic) have been described as a force that has accelerated the pace of digital transformation
(Galvin, et al. 2021; LaBerge, et al. 2020; Goergieva, 2020; Tut, 2021; Vinerean et al. 2022).
Moreover, specifically for the banking industry, the repercussions of COVID-19pandemic have sent
shock waves across management boards as persisting anemic economic growth is has contributed to an
increase in risk weighted assets, depreciation of liabilities amidst plummeting liquidity. Consequently, to meet
prudential banking requirements, banks are forced to increase asset loss provisions, risk weighted capital and
liquidity buffers, and this at a time when they have to contend with declining revenues and profitability on
core business activities, and growing need to meet soaring employee attraction and retention costs.
From the customers’ standpoint, rising pressures on household incomes attributable to rising cost of
basic health care and education services, housing and daily sustenance requirements amidst an increase in
uncertainty of employment security, and availability of alternatives that are easily accessible albeit sometimes
with hidden costs, are undermining attractiveness of conventional banking services that continue to be not
easily customizable, fraught with rigid procedures and prerequisites, unavailable 24/7, and demand a lot of
private information disclosure. This coupled with economic uncertainty, has compelled banks to continue to
demand premium charges for services at a time when return on customer deposits remains low. Unsurprisingly,
a growing percentage of customers especially Generation Z and millennials is opting for using a variety of
financial services that are offered by an array of nonbank financial services, which is costing banks vital and
stable sources of revenue.
Doubtless, the above conditions are undermining capital formation, reducing bank capital buffers
and liquidity, and if prolonged, pose the danger of accelerating the road to insolvency, which in turn will
endanger current and future financial system stability. Nonetheless, crises have often spurred high innovation
activity, and the current crisis, which the Covid-19pandemic has imposed on 21 st century mankind is no
exception. Banks have to wade through tough times as they refocus their core business activities by shedding
off non-core business lines, identifying targets for mergers or acquisition; take measures to reduce the capital
hemorrhage by forging strategic partnerships with Fintechs to hasten emerging technology adoption that is
crucial for business process reengineering, and product and service innovations (Buehler et al. 2020); and
reconfigure business processes to support agile innovation and management culture. In a word, the case for
digitalization has never been clearer and inevitable for the banking industry.
That said, it is important to emphasize that the impact of Covid-19 pandemic has only accentuated
a catalogue of existing structural problems that have plagued banks for long prior to the onset of the
pandemic. The problems are rooted in the rising cost of developing and delivering services due largely to
competition from specialist providers of core bank services that happen to be key revenue sources including
third party deposit mobilization, consumption finance, and payments management. Besides, the formidable
challenge of rethinking and reimagining bank corporate mission, business strategy and business model made
imperative by fundamental technology shifts in drivers of efficiency and effectiveness of business processes;
product and service innovations and delivery; an increase in the potential danger from counterparty and
operational risk associated with increasing individual and corporate customer interest and investment in highly
risky but yet unregulated crypto assets; and challenges of delivering on Environmental, Social and Governance
(ESG) expectations (Ditez,et al.2022), have only compounded the situation.
Redressing such challenges requires reorientating and refocusing corporate capital and resources
toward identifying and discovering actionable insights quickly and act upon them to inform business process
reengineering, product and service delivery , and product, service and process innovations; and undertake
business model reconfiguration to match changes in customer experiences, regulatory regime and competition
dynamics. In addition, tackling the problem also requires accelerating and scaling new products and services
to create first mover advantages, hence process, product and service innovations (Bank Indonesia,2022, p7);

identify, nurture and forge collaboration opportunities with others in the same industry as well as different
industries in the realm of backend and frontend operations technology, sharing in making use of scarce
resources as in risk mitigation, as well as keeping track of changes in regulations and standards on product
and service offers, employee working conditions, business practices and management compensation packages.
Keeping in constant sight and abreast of the varied assortment of internal and external factors, is what it takes
for banks to deliver growth during and in aftermath of the next normal economy (Am et al. 2020).
That said, the most immediate challenge traditional banks face today is the rising pace of competition
from specialist banks and Fintechs that are using the latest technology and have adopted lean organizational
structures to develop and deliver low cost, easily accessible, more convenient, and customized core bank
services to differentiated customer segments. Services offered include peer to peer lending services,
transaction payments processing, and real-time funds transfer services, which doubtless is gradually eroding
vital sources of revenues and income of traditional banks. To that end, the increasing importance of data driven
and based Fintechs and Big Tech, clearly underscores the importance and role that control over customer
data, data analytics and relevant technology is playing in shaping the new competition landscape. Needless to
note, data analytics is underpinned and informed by digitalization, digital technology and ICT.
However, the rising importance of ICT and digitization, does not essentially lie in the technology per
se, rather the immense contribution it is making toward the development of capabilities to create corporate
and economic value through improvements in processes, systems, products and services in general and
absorptive capacity in particular (Knowhow). Knowledge capacity in its various forms, has long been recognized
as the most important asset a company, society or country has or may acquire. Consequently, economists have
long recognized the fallacy of injecting immense capital resources in societies with material conditions that lack
complementary factors such as appropriate human resource skills, economic and social infrastructure, and
pertinent mindset, among others.
That may explain why, the level of development of a country correlates with the extent to which it
invests in knowledge creation activities such as investment in research and development, education, human
resource development, and protection of intellectual property rights (World bank, 2006). And an increasing
important source of knowledge today is information and communications technology (ICT). ICT has become an
important source of knowledge creation, dissemination, updating, transformation, invention, and innovation
generation. That is why leveraging information and communications technology to increase financial inclusion
is today considered to be one of the vital pathways to poverty alleviation due to higher affordability, ease, and
simplicity of access to financial services, associated with falling cost of semi-conductors, LCDs, and ICT devices
and gadgets, as well as implementation of fair competition regimes in many developing and developed nations
alike.
Besides, using ICT has been associated with enhancing effectiveness of economic activities that
proportionately benefit the poor more than other sections of society (pro poor growth policies). This is
manifested in supporting for pro-growth processes (capital deepening, labor utilization and productivity,
network effect, multi factor productivity); enhancing efficiencies (service delivery support structures, financial
infrastructure, infrastructure, private sector development, rural livelihoods); complementing specific pro poor
growth theories (supporting SME entrepreneurs, micro credit availability through social capital); and fostering
improvement of poor livelihoods ( investment in local agricultural research, construction of rural roads that
connect the poor to markets); and in addressing systemic pro poor obstacles (natural vulnerabilities,
corruption, lack of capacity).
Besides, ICT is expected to contribute to pro-poor growth through market expansion and
development that translates into lower transaction costs; reducing household and community vulnerability
risks to natural and manmade disasters, and health emergencies; empowerment through facilitating increased
communication, mobility, energy and water that help to foster better access to health and education services
for the poor ; increasing market expansion, access, and timeliness of dissemination of accurate information on
better prices to sell products, source of emergency warnings that contributes to lower risks from disasters, and
increases the effectiveness of responses to health services (OECD, 2005). In any case, ICT access is found to
benefit the very poor compared to those categorized as non-poor in East Africa with education attainment,
living in urban rather rural areas, being determining factors (May et al. 2014); contributes to improving access
to commodity and labor markets, governance, and knowledge and skills enhancement (Maema, 2014),
revenue generation and poverty reduction among Tanzania SMEs (Mascarenhas , 2014), in crisis and emergency
impact mitigation in Rwanda during 2007-2008 food crisis (Diga et al. 2014).
The digitalization wave is in part attributable to the steep drop in semi-conductor prices, major
advances in storage capacities, rapid increase in processing speeds thanks to major breakthroughs in
miniaturization, and increasingly widespread use broad band internet, which factors have increased the cost
effectiveness of employing ICT based gadgets and networks in programs, projects and activities in an
increasingly varied array of areas in private and public life. Unruh (2015) studies a case that shows the adoption
of electronic money in South Africa to channel entitlement payments as well as withdraw cash using MasterCard
cards in collaboration with government and vendors. It is a concept that shows potential benefits if adopted
and deployed in social benefit transfer programs through cost reduction, increase in safety and security,
convenience of transactions for MasterCard Company in the long term.
In any case, digitalization and ICT in particular have become instrumental in implementing financial
inclusion initiatives. This is because efforts to widen and deepen financial inclusion are underpinned by the
increasing use of mobile phones and information technology platforms. The relevancy of such efforts lies in
the fact that they are integral and complementary to government efforts to reduce poverty incidence, and
income inequality across regions and sections of its population. Moreover, increasing access of financial
services to the poor as well as micro enterprises, is considered pivotal in diversifying the customer base of
financial institutions, strengthen micro enterprises, reduce the cost of transactions by increasing cashless

transactions, widen bank income sources, widen the reach of monetary policy instruments, hence monetary
policy effectiveness.
Meanwhile, the importance of secure, impenetrable, 24/7 internet-based, decentralized, ledger
(database) technology (BCT) is evolving to become one of the most consequential inventions in the digital era
(McKinsey, 2022). The adoption and deployment of BCT is expected to enable banks to widen the reach of their
service offers beyond national and regional boundaries to vitually the entire globe. It also has unlimited
opportunities in product development through collaboration, cost cutting on overheads by adopting
decentralized ledger system, exchange and transactions through immutable smart contracts 11, conversion of
banks assets into highly secure cypto assets that are secured by encrypted key pairs. BCT promises banks
benefits that include enhanced cyber security, decentralized authentication, increased operational efficiency,
low compliance cost, shorter onboarding rates of new customers, 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.
Moreover, using BTC affords economic agents the opportunity to develop 24/7 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. Dangers for banks from increasing digitization
are by no means few, which if not well anticipated and countered by rising to the challenge, may send the
banking industry as we have known it since 1472 to the relics of history.
Technological advancement and falling cost of computing processing capacity, data storage, and
connectivity speed, have fundamentally shaped and influenced business models, winning value propositions,
and essentially, underpinned drivers of competition in many an industry, in the financial and nonfinancial sector
alike. And the pace will only become breakneck, when 5G internet technology will become mainstream by 2028
with 5 billion subscriptions projected for that year, which represents a more than fivefold increase from 870
million and 1 billion subscriptions for the third quarter and end of 2022, respectively (Ericsson, 2022, p.4).
The rate of 5G internet adoption in SEA Asia and Oceania for instance is projected to reach 48 percent
by 2028, driven by among other factors, the accelerated pace of adoption of digital technology by large,
medium and small enterprises to align product offerings and channels of distribution with a fundamental shift
in consumer behavior; ASEAN post Covid-19 initiatives to strengthen regional economy that emphasize digital
transformation in achieving an inclusive economy that is pivotal for the Industrial 4.0 revolution society;
increased demand for dematerialization of production processes; the tendency of national actions plans
among ASEAN members to pivot the development of a digital economy in spurring high economic growth,
reducing poverty and income inequality and achieving sustainable development goals by 2030.
The strengths of 5G lie in its large bandwidth, high speed, low latency rate, and ‘bi- directional
bandwidth shaping’ capabilities that will enable it to support high resolution video streaming experience,
virtual reality and augmented reality that support virtualization over physical materials hence reduces material
use in products, processes, along supply value chain, thereby strengthening net-zero emissions goals (Ericsson,
2022); and real-time high resolution data transmission and exchange capabilities across connected devices
(IoT) such as remote surgeries, inspections and repair of complex machinery installations, and online gaming
(Sims, June 08, 2018; Kelly, 2019).
For the banking sector, the increase in digitalization has spurred development and expansion of
branchless banking services by traditional banks as a response to the emergence of alternative financial service
providers that either establish new business lines to their core businesses through leveraging information and
communications technology (Telcos for instance) or new lean , agile financial technology startups going it alone
initially but with time forging collaborations with incumbent financial service institutions. Most of the disruption
is attributable to the advent of financial technology companies (Fintechs).Financial technology according to
Kagan (2019) refers to the application of “new technology to improve and automate the delivery and use of
financial services”, a process that “helps companies, business owners and consumers to better manage their
financial operations, processes, and lives by utilizing specialized software and algorithms that are used
on computers and, increasingly, smartphones.”
Fintechs provide services that include alternative financing that involve offering financial services by
a slew of institutions using non-conventional channels and business models. Such institutions run the gamut to
include peer to peer (P2P) borrowing and lending platforms, data analytics agencies, digital banks that deliver
banking services entirely online without physical offices and branches; marketing and trading support service
platforms ; technological solutions providers that deliver services that bridge financial service providers and
trading agencies and brokerages; payments and remittance handling platforms; and Robo-advisors and
personal finance services.
In any case, financial technology tools are not limited to retail services but have become crucial to
better, efficient, effective , responsive and fraud-free front, middle offices, and back office services
(reinventing financial service delivery business process). In that regard, Fintechs are offering software solutions
and Information technology (IT), referring to firms that provide software/application and information
technology solutions to business process related problems such as improving human resource management,
enterprise resource planning services (ERP), supply chain management, cloud computing and storage services
(Franco et al. 2020:6).
Consequently, one of the sectors that has borne the brunt of transformative digital disruption 12(Reddy
& Reinartz, 2017), is the financial services industry in general, and the general banking services sector, in
particular. In 2014, McKinsey projected the number of digital banking customers to reach 1.7 billion by 2020,
while statistics at the time showed that during 2011-2013 period, the number of users of internet and mobile
banking channels in Asia and Pacific region increased by 35 percent, while branch use declined by 27 percent.
During the same period, banking customers completed nearly 20 percent, about 25 percent, and 40 percent,
of key product purchase, pre-purchase, and post-purchase decisions, respectively, using mobile or Internet
10

devices (Sengupta, Lam, & Desmet, 2014). Expansion of 4G internet services complemented by the gradual
adoption of 5G internet services (especially the non-standalone mode), is contributing to a big leap in expansion
in connectivity , which is supporting a rapid increase in internet and mobile use in Asia Pacific(APAC). Thus
despite having a lower internet penetration rate than Europe, APAC has the World’s largest internet usage by
population. Internet usage increased from 2.56 billion in 2021 to 2.6 billion in 2022 (Ganbold, December 12,
2022).
In other words, ICT and digitalization have become increasingly unavoidable thanks to the advantages
they not only for individual users but also businesses including enhanced connectivity, automation (efficiency),
data insights-based decision making, and enhanced innovation capabilities. To that end, it is not surprising that
digitization and attendant digitalization13 (digital technologies that shape customer relations, internal
processes, and value propositions (Ritter & Pedersen, 2020; Brennen & Kreiss, 2016) has become increasingly
important in increasing customer experiences through various forms of service personalization based on
demographics, risk tolerance, space, context (emergency or normal), and even emotion state. This is thanks
largely to the adoption of financial technology in general and artificial intelligence in particular, in areas that
span interaction space with customers (front office), vetting customer transactions (middle office), and
operations (back offices), among others. Since the launching of ChatGPT in November 2022, Artificial
intelligence , what Andrew Ng calls as the New Electricity (Lynch, 2017), is defined as “systems that display
intelligent behavior by analyzing their environment and taking actions – with some degree of autonomy – to
achieve specific goals” (AI HLEG cited in Sheikh et al. (2023, p.19) is on the mind of corporate C -Suite, regulators,
civil society, and lay persons for a variety of reasons.
As Business Insider notes, during 2020-2023 period, banks were projected to reduce US$447 billion
in costs through investment in AI technology in the front and middle bank offices (Digalaki, 2019); and US$199
billion in costs achieved thanks to investment in AI technology that will help in enhancing customer
identification, authentication capabilities, and delivering 24/7 conversational banking services using chatbots
and voice assistants to handle transactions, providing insights into customer voice behavior to discern patterns.
Besides, the above investments are expected to enable banks to generate timely and personalized services
based on customer needs, mood state14, and experience, all of which will inform decisions on providing
personalized, real time and context aligned solutions (Smolaks, 2020).
Meanwhile, another US$217 billion in cost saving achieved through scaling up investment in AI
technology in middle office processes. The outlay is expected to strengthen antifraud and risk detection
processes including enhanced payments fraud detection and bolstering anti money laundering processes and
know your customer (KYC) regulatory checks. During the same period, banks are projected to save US$31
Billion in costs by investing in back office processes to reduce financial product and service risk by for example
strengthening loan covenants through smart contracts (Digalaki, 2019). Moreover, digital technology is also
expanding the reach of financial exclusion by helping in providing solutions that increase access and
affordability of financial services to an estimated 1.7 billion of the World’s adult population that remains
financially excluded from most of the services (World Bank, 2018).
Obviously the lack of access to financial services affecting 21.25 percent of the World’s population
has serious policy implications for efforts to improve quality of life through making use of “savings, credit and
insurance, starting and expanding businesses, investing in education or health, managing risk, and weathering
financial shocks15”. It is not thus surprising that internet and mobile banking services have become an
opportunity equalizer to sections of the population who have for long been excluded from financial service
delivery (Demirguc-Kunt et al. 2015). It is a trend that will continue if projections come to fruition. While 84
million Indonesians had access to Internet in 2017, a figure that rose to 107.2 million in 2019, and is forecast to
reach 150 million in 2023 (Statista, 2019). Extension of internet network, coupled with the drastic decline in
mobile phone prices, has for many financially excluded Indonesians brought the opportunity enjoy regular
financial sciences.
Financial inclusion is important for a number of reasons, including but not limited to, the vital role it
plays in increasing access to financial services of hitherto financially excluded groups and sectors of the
economy, hence considered important in reducing poverty and facilitating inclusive economic growth; has
been found to achieve higher acceptability in areas and sections of the population who have little or no access
to alternative financial services such as underprivileged areas and the poor (all countries at least 10 percent of
adults have a mobile money account as well as where the percentage of adults reported having a mobile
money account than an account in a conventional financial institution are found in Sub Saharan Africa.
Moreover, access to mobile financial services also increases the capacity for businesses to expand
and achieve better performance, especially those that are of small and medium size, which are often left out
of formal financial institutions ambit; facilitate investment in human development through education;
increases propensity to responsible risk taking, which is imperative for entrepreneurship, ground-breaking and
game changing innovations and inventions; and increases productive investment and consumption, both of
which contribute to economic growth. Besides, financial inclusion has been found to strengthen self-esteem
due to an improvement in the perception of the World for the better, which has been associated with
happiness (Demirguc-Kunt et al. 2015). Indonesia like other developing countries has witnessed an increase in
the use of mobile phone sparked by falling prices of mobile phones and internet data packages amidst rapid
advancement in Information and communications technology (ICT), internet speed and bandwidth of
communications networks and rising computing power of mobile devices.
Moreover, data on financial inclusion, positive a positive association between credit disbursement to
small and medium size enterprises (financial inclusion initiatives) and greater bank loan default rates as
reflected in levels of non-performing loans (NPLs), and banks being an important player in financial systems of
emerging and developing economies, such a development augurs well for greater financial stability (Morgan &
Pontines, 2014).
11

The above findings also collaborated in previous research that found that widening the diversity of
deposit holders reduces susceptibility of banks to correlated bank runs, and by extension, lowers the likelihood
and severity of banking and financial crises thanks in part to the predictable nature of the behavior of millions
of small borrowers and lenders (Han & Melecky,2013; Hannig & Jansen, 2010). Lower risk to banking systems
lies in the fact that ssuch lenders show relative stability and strong willingness to pay off their loans, prior to,
during, and in the aftermath of financial crisis times.
To that end, financial inclusion programs tailored to ‘lower bottom of financial markets’ has generally
low institutional risk to lenders owing to the small balances and transaction volumes hence do not pose systemic
risk to financial institutions and where reputation risk arises, which it is manageable based on existing
prudential and consumer protection tools. Meanwhile, internet users increased from 181 million (2018) to 191
million (2019) (Eloksari, November 11,2020), rose to 213 million (2021), and is projected to reach 240 million
in 2025 (Nurhayati-Wolff, August 1, 2021) (Figure 7).
[Figure 7]
Such developments have led to the perception that mobile phones should serve as a medium that
expands outreach of various programs that target the underprovided sections of the population living in
underdeveloped regions in the Country. This is more so in financial inclusion programs that are tailored toward
onboarding sections of society that are excluded from financial services due to various factors that range from
inadequate bankability; stringent requirements that many members of society located in remote areas with
low physical and financial assets and limited education find onerous to meet; topography obstacles; and time
constraints (opening and closing hours concurring with the time when people are involved in economic
activities that earn them and members of their household livelihoods.
Besides, the significant decrease in data storage prices, increase in data storage capacities,
advancements in communications and information technology (speed, capabilities, reach, and diversity), and
rising importance of cloud web services, has led to a shift from analog to digital mobile services. It is such a
development that has led to an increase in mobile phone subscription. Based on mobile phone subscription
data, cellular mobile subscribers per 100 people increased from 2.4 (2002) , 132 (2015), 164(2017), but declined
to 119 (2018) before recovering to 130(2020) (Figure 8).
[Figure 8]
The increase in cellular mobile usage (Figure 2), has meant that 131 million Indonesians had access to mobile
phones in 2020 (World Bank, 2022). The increase in cellular phone ownership and internet access, has
underpinned an upward trend in the use of mobile phones as a medium to access financial services. By 2021,
45 percent of Indonesian aged 15 and above had mobile accounts, with the percentage of women higher than
that of male, 66 percent and 23 percent, respectively (Figure 3).
Thus, as regards using mobile phones to access financial services, there is still a disconnect between
high cellular phone ownership (73% of the adult population), internet access (51% of adult population) and
using mobile phones as a medium to access financial services (50% of all those who have mobile phone and
access to internet). It is only 26% of all adult working population (Figure 9) who have mobile phone and have
internet access use them as a medium to store money.
[Figure 9]
The disparity is also discernible from data on mobile phone ownership by social income status. While 56
percent of Indonesians aged 15 and above who hail from higher income group background have money
accounts, only 28 percent of those from poor social income background do so. The gap is also wide based on
gender. While 66.17% of adult Indonesian female population have mobile money account , but only 23.22%
of their male counterparts do so (Figure 10).
[Figure 10]
To that end, most people who own cellular phones and have access to internet, continue to use them more
for social networking purposes than as a medium to access financial services (Figure 11).
[Figure 11]
VI. BCT, Crypto assets , financial service delivery and financial stability
Blockchain, according to Higginson et al (2017), “is a shared, public ledger of records or transactions that is open
to inspection by every participant but not subject to any form of central control.” In a more comprehensive
definition or aptly description of the technology, Crosby et al. (2015) refers to blockchain as a “distributed
database of records or public ledger of all transactions or digital events that have been executed and shared
among participating parties. Each transaction in the public ledger is verified by consensus of most of the
participants in the system. And, once entered, information can never be erased. Despite its current nascent
stage, block chain technology (BCT), has the potential to contribute exponentially to global GDP, if the
trajectory of current projections materialize. According to IDBRT (2017) block chain technology refers to
“tamper-evident ledger shared within a network of entities, where the ledger holds a record of transactions
between the entities underpinned by Cryptographic Hash Function.”
Based on International Data Corporation (IDC), spending on blockchain is projected to grow at a five-
year compound rate of 81.2 percent during 2016-2012 period. In 2018, blockchain spending is expected to
reach US$2.1 Billion, will be more than double Worldwide total spending on the technology in 2017 (US$954
Billion), and will US$9.7 billion in 2021. The business potential of BCT, which by 2030 is projected to reach
12

US$3.1 trillion in business value-added, is no longer debatable. Several business cases have been tested and
proved. The immense but yet unexploited potential of blockchain technology lies in the increase in efficiency
of transactions in financial intermediation, healthcare provision, conducting tamper-proof elections, asset
management, payment systems, law enforcement, trade and commerce, entertainment industry, social
networking, and supply chain management (Figure 12).
[Figure 12]
Efficiencies BCT is generating arise from lower transaction costs, reduction in intermediation costs
thanks to automation of initiating, conducting, approving, and recording transactions all of which replace
human labor; decentralized , replicative recording of transactions among all participants on the network. In
addition, BCT facilitates major cutbacks in the expenditure enterprises make in accounting and reporting fees
paid annually to in-house accountant staff, internal and external auditors; enhanced security, finality of
transactions that makes BCT a reliable repository and exchange for transactions that involve a diversity of
parties that are part to a transaction but have different yet complementary interests and located in various
parts of the globe. Thus, it is no surprise that based on the World Economic Forum projection, by 2027 at the
latest, if the current trajectory continues, 10 percent of the Global GDP will be stored on blockchain (WEF,
201516).
Besides, BCT has immense prospects in the global economy. This is discernible from statistics on the
value of capital invested in blockchain startups in 2017 that reached US$ 1 billion (Carson, 2018). Bitcoin value,
which is one of the BCT based applications17, was estimated to beUS$800 billion market by the end of 2017,
when Bitcoin value was US$20,000, which was a dramatic surge from US$20 billion in 2016 (Carson et al. 2018).
In 2017, US$6.5 billion and more than US$4 billion Initial Coin offering (ICO) value was made during
the first half of 2018 alone. ICO represents tokens that investors buy, which while unlike initial public offerings,
do not confer holders s any ownership rights to the value of the firm issuing them, are redeemable ‘promissory
notes’ in future in the event the underlying cryptocurrency comes into circulation. ICO, in other words
represents one of the speculative aspects of BCT products. This is because ICOs do not represent any valuation
since they are based on a value proposition that may either or not ever materialize (Adriano, 2018:20). This is
indeed borne out by the recent tumultuous decline in the value of Bitcoin and other crypto currencies, drastic
decline in crypto exchanges as investors try to run for exit to avert even greater losses, which is contributing
significantly to the plummet in prices of nonfungible tokens (NFTs)18.
However, prior to that development, rising value of Bitcoin invited the interest of nefarious, treasure
hunting hackers’ and in some cases scammers. Hackers on several occasions targeted various crypto exchanges
and ripped them off hefty crypto sums. Scammers, whose motives is to manipulate crypto-enthusiasts who
expect to reap as much benefits without investing ample time, precaution in acquiring investment advice from
pundits in crypto-asset valuation as well as making background checks on veracity an integrity of individuals
involved in establishing and administering cryptocurrency exchanges prior to digging into their pockets, from
the very beginning target gullible investors to invest in roves after which they declare their concerns bankrupt,
ostensibly, as was the case of MapleChange (Madore 29, 2018), which was a Canadian Bitcoin exchange, due
to inability to pay investors anymore after a huge hack of their exchanges that cost them all the digital currency
they had.
Unsurprisingly, the above events sparked off a downward spiral in the value toward US$300 billion
(having shed US$500 billion in the aftermath of the hacks and outages that created serious concerns about the
purported security of the crypto currency against manipulation and theft (Chaparro, August 17, 2018). The
latest on an list that shows no signs of ending was the hack that infiltrated the Hong Kong based Mixin crypto
network, which is a P2P digital transactions network causing a loss of $ 200 million (Park, September 26, 2023).
In the aftermath of the hack, the network suspended transactions involving deposits and withdrawal of digital
assets on the platform. The hack came not long after a similar hack affected Hong Kong based CoinEx , when
hackers possibly ran off with $70 million of stored digital assets on the network (CoinEx, September, 12, 2023).
Indeed, Bitcoin and other cryptocurrencies (Srivastava, September 24, 2018) 19 have become
increasingly circumspect for many in the aftermath of the cryptocurrency exchange hacks, decline in the public
confidence of BCT based currencies to become a reliable source of wealth creation (crypto assets), as a secure
and vital wealth repository and exchange , driver of firm value augmentation and scaling up, and medium of
transactions among various global participants located in far-flung parts of the globe, and the increasingly
fluctuating nature20.
Thus, ICO, nonfungible tokens (NFTs) represent just one aspect of the BCT downside, which include
among others structural features of the networks that defies centralized control, hence fosters opacity in the
transaction process and contract pricing; does not require centralized approval and recording of instances,
events (transactions); high vulnerability of online data to cyber-attacks, albeit the strong end to end
cryptographic encryption ; and high the potential for costly propriety data loss.
Proponents of BCT would argue that the design of the technology is supposed to provide answers to
such concerns. Features that have made BCT a vital part of digital transformation in future include decentralized
ledger system that is based on an immutable and indelible storage of records; replication of records to all nodes
or blocks (reduces the possibility of losing the record in the event one node becomes dysfunctional) (Higginson
et al. 2017); distributed ledgers resilient are generally cyber-attack proof (Mullen, 2018); and instances or
records once approved cannot be manipulated through modifications, enhances integrity and authority
(Henderson, Rogers, & Knoll. 2018; Crosby et al. 2015).
Moreover, every digital event on BCT has its own specific digital footprint on the network with a date
and time stamp when it is created , which enables participants to recognize the owner or initiator. Any new
digital event to be appended to the blockchain network, needs validation by consensus. The process is not
entrusted to all but certain participants (nodes) based on their identities. Identities of participants are
embodied in digital certificates that define ‘properties’(roles and responsibilities) of actors in the unit in the
13

organization and associated specific tasks, which influence access to resources on the organization
blockchain21).
Blockchain networks are based on a distributed (decentralized) ledger framework, that are of two
types, public and private. Private networks allow access only to certain participants hence conditional to being
permissioned, an example being Hyperledger DL22. on the contrary public BCT networks are accessible to
anyone (permissonless), Bitcoin is a good example. While Hyperledger is an open source, flexible, and resilient,
the need to maintain high trust and confidence in the network, means that only participants (nodes) on the
network can conduct transactions but has centralized administrative network of operators to provide oversight.
Private BCT networks have centralized control over who joins, does proof of work chores, and therefore
contributes to the addition of new block chains on the network.
It thus implies that maintaining some modicum of centralized administration reduces the potential
susceptibility of the network to nefarious activities including cyberattacks, the double spend problem, and
permanent forking problems. Public BCT networks, such as Bitcoin, do not have regulators, which allows
anyone to open an account (node) that serves as a medium to conduct transactions (instances) on the network
anonymously23. Thus, anonymity of participants is embedded in the BCT network structure. Nonetheless,
overemphasis on anonymity has become a source of vulnerability of public BCT networks to cyber-attacks,
making easy conduits for illicit trade including narcotics and ransom seekers and financial fraud (Andriano,
2018). The rising frequency of hacks, some of which have targeted Bitcoin exchanges also raises serious doubt
about the veracity of claims of invincibility of BCT networks to such activities (John Mullen, June 21, 2018).
Indeed, past experience tells us that while in the short term and medium term firewalls maybe free
from hacking activities that is unlikely to last in the long-term due to advancement in hacking programming,
computing power, complacency of legacy systems once impenetrable firewalls are established, advances in
computer programming24 and cyber security applications. Thus, to avoid complacency requires striving to stay
ahead of hackers by always strengthening and updating cybersecurity applications before any hacking incidents
occur since once those occur may raise fears of a corpus of neglected loopholes that serve as good invitations
for future hackers.
Another important feature of distributed ledgers, which contain transaction information in blocks
(nodes) can be permissioned or permission-less, with the former meaning that participants must obtain
permission from some administrator or operators in the case of a private business network) to make changes
to ledgers . In the latter case, however, there is no need for such permission (the case of a public blockchain
network such as blockchain) (The World Bank, 2017). Equally important is the existence of double encryption
that is equipped with public and private keys that allow participants on “the network to recognize now and in
future the “participant who owns an asset, initiates a transaction, or registers data on the blockchain.”
What is behind strong security and protection of authenticity and integrity of transactions along BCT
networks is the smart contracts system. Smart contracts underpin transactions that involve ledgers that are
stored in every block or node along the blockchain, make possible automatic updates to values of assets along
the blockchain for blocks of participants who are involved and relevant. Such a feature ensures not only
automatic synchrony of the distributed ledger but also keeps participants aware of developments in the state
of the world of assets in their respective blocks and blocks of other members, depending on ACLs’ designations
of access along the network25.
Every BCT network participant recognize identities of other participants based on the public key that
is attached to the peer or block. This is because the Block contains instances of the ledger and instances of the
smart contract. Meanwhile, all BCT network blocks are linked together through end-to-end cryptographically
encrypted privacy services, which enhances security, integrity, trust, and credibility of transactions (Crosby et
al.2015). The strong security of blocks, coupled with smart contracts, ACLs, existence of a set of keys for every
block, with the public serving as an identification mechanism other BCT participants use to determine and track
the source of transactions, makes BCT based participant e-wallets potential for the development of a
decentralized customer controlled payments system as the kind that VISA envisages (del Castillo, December
19, 2022).
Another feature that has been lauded as having strong potential for business (Carson et al. 2018), is
that BCT is not geographically and topographically constrained or bounded (geographically and topographically
agnostic). It is such features that have the potential to make BCT, an effective and efficient anticorruption
technology, provided the remaining hurdles that include absence of common standards, consistent and
coordinated rules are resolved.” BCT-powered decentralized and distributed ledger system is efficient, saves
cost, equips participants with the opportunity to conduct and monitor developments in transactions that affect
them in real time, as all participants (nodes) have instances of records on the network depending on roles they
play in a particular transaction. Replication of records along the network reduces the need for all participants
on the network to keep records of the same transaction, and any change that affect the transaction
automatically induce changes in ledgers of participants who are party to the transaction almost instantaneously.
Distributed ledgers reduce the need for both internal and external auditing services since records in ledgers are
automatically updated.
On the contrary, traditional business transactions require that every participant makes records of
the same transaction separately, transaction updates take long to be incorporated into the record (as the
process follow the closing of books cycle that occurs toward the end of a month, a quarter or the year), a process
that is bedeviled by duplicity, inefficiency, high cost of keeping many accounts of the same record , which
increases spending on internal and external auditing services.
Moreover, BCT has been lauded for having huge potential for application in financial services, utility
management, healthy services, and I should add, dealing a death blow to financial fraud that is to come extent
remains rampant in the industry. One of the advantages of BCT that is being put to commercial use is the digital
record tracking capability. Once a transaction is endorsed on BCT, it is immutable, and final. Such feature makes
it valuable in maintaining integrity and authenticity of records of valuables such as copyright certificates, land
14

titles, registration of asset exchanges as they occur, transaction payments as well as keeping track of illicit
transactions such as piracy, fraud, health and welfare. In any case, not being limited and constrained by
geography and topography, BCT has been touted as a vital in reducing the number of intermediaries and cost
of interregional and transboundary trade.
Even more important, is the fact that as Carson (2018) cotes is that a BCT can be configured in various
ways that align with the requirements and objectives of a single use case, which strengthens flexibility,
adaptability and resilience to a variety of uses. Moreover, as a platform that facilitates smart contracts that are
executed automatically by computer predetermined conditions that are based on cryptographically tamper-
proof encrypted algorithms (Crosby et al.2015). That maybe the reason why some blockchain practitioners and
scientists consider the decentralized ledger system, which is underlie transaction recording system on
blockchain networks, to be the starting point on the journey that will eventually culminate into the realization
of autonomous management of companies with little if at all human intervention (Boucher, Nascimento &
Kritikos, 2017).
There are however doubts that many promises of use cases of BCT may ever materialize ,at least not
n entirety. The case in point are the problems that driver-less cars are facing, which underscores the reality that
automation, however invaluable has its limitations. To that end, while BCT has been lauded for its potential
impact on financial services and the energy sector, its inherent uncertainty 26 that is lies in the still nascent nature
of the technology, increasing frequency of cybersecurity vulnerabilities, and regulatory ambiguity are
influencing the direction it will take. That said, like previous inventions, initial use cases may fail to deliver value,
but developments based on failures of such cases informs valuable use cases in future in industry, business,
household use and public policy. The growing interest in CBDCs and BCT based business cases, while still at
nascent stage underscores that argument (World Energy Council& PWC, 2018; The World Bank, 2017).
Indeed, BCT promises a lot of opportunities for banking institutions, that may reduce overheads they
face thanks to the reduction of the role of the physical banking infrastructure in determining the authenticity
of transactions. That role will be done by a BCT authentication system, simultaneously, in real time, and free
from human intervention hence devoid of manipulation and fraud (PWC, 2016). By automating transactions
verification, the system should enhance efficiency in cost and time, reduce the impact of human error, reduce
operational risk that arises from human errors, and mitigate corporate reputation risk.
Moreover, if there is an element of blockchain that is winning hearts and minds of regulators and
banking practitioners alike, it is the super cybersecurity features the technology brings to the industry. 27 The
value of banking lies in public trust in the institution. BCT network creates an enabling environment that
strengthens and supports in-built end-to-end encryption of transactions, business operations and networks,
critical infrastructure and assets, which should deter and mitigate fraudulent activities from either internal and
external sources.
. The replication of all transactions across all nodes of the BCT networks instantaneously obviates the
duplication of the same records among different users, which enhances their immutability once they are
endorsed in line with the finality principle. That makes transactions tracking easy, which can reduce any
possibility of manipulation. To that end, the adoption of BCT as a system, should be advantageous for various
reasons. Besides, reducing duplicity of the same records by participants that play different roles with respect
to the transaction or event (service/asset owners, service/asset buyers, or asset transaction regulators), and
though the transaction occurs along a network that has many participants, thanks to the existence of privacy
services (public key, private key, and signatures) that link blocks along the network, the technology only allows
access to network participants that are relevant to the transaction.
It is thus, evident that becoming a participant on BCT network, reduces the need for a firm to invest
in costly database that store transactions, obviates the need for individual firms to manage the transactions
(initiating, completing as they are automated and grounded in smart contracts), hence all such activities are
relinquished to platform management, which thanks to scaling advantages significantly reduces the cost
members pay28.
Another important feature that has made block chain technology popular, is the fact that network
participants are involved in vetting members who are vested with the authority to endorse records or
transactions, which upon endorsement cannot be modified, deleted, or inserted. Designation of participants
with authority to approve transactions is based on consensus of network members and included in access
control lists (ACLs) that apply to participants and how they relate to transactions and under what conditions.
That by itself underscores and enhances trust and confidence the system has among its participants.
Blockchain has been hailed as technology that will make the big four international auditing firms irrelevant, in
the long run, if all projections of realization of its potential are realized. This is because BCT , upon deployment
records all financial records that are created using various financial systems that occur in all regions and
divisions of an organization in real time; creates financial audits that are based on approved records, that once
appended, cannot be tampered with; subsequently audits that have embedded security features are stored
and can only be accessed by those vested with authority after certain security clearances.
Based on the atomicity principle, approval and recording of a transaction (instance) on a block chain
is dependent on meeting all the predetermined rules that determined and specified hence form integral parts
of smart contracts. The principle thus enhances record security, integrity, and authenticity. It is not surprising,
therefore, that BCT is considered an important development in supply chain management. Given the stringent
requirements that final users of products and services are demanding from final sellers and providers, the ability
of BCT to keep a track record /history of a transaction from the start to the end, enables producers to ensure
that they deal with the right producers and suppliers. Evidence of transaction track record is provided as proof
of compliance with supply, distribution and standard issues to regulators and final product and service users.
For banks and other financial service providers, BCT network by providing evidence of transaction
track record equips them with both preemptive and mitigating means to detect and handle signs of improper
use of their institutions by perpetrators of crimes such as money laundering and fraud. To that end, BCT
15

network provides participants with the means to track transactions right from initiators, intermediaries, to
account owners. That way, banks have enhanced capacity to comply with anti-money laundering and fraud
regulations, which in turn saves banks billions of US dollars in fines29 they would have paid if found negligent,
and many billions more in damaged reputation (London, 2018; EU, May 2018; FSB, May 28, 2019; McLean, July
30, 201930). Concretely, BCT smart contracts framework, protects banks from operational, financial and
reputation risk, and by extension non-compliance costs that regulators may impose in the event of proven
impropriety and oversight slack.
Recording of transactions on BCT network is based on consensus of blocks. Such a mechanism reduces
transaction cost, removes many potential sources of disputes among participants that may arise due to
transaction value recording, tampering, denial of involvement, transaction date among others. Doubtless, the
array of advantages have lured financial and non-financial companies to arrange transactions that have high
potential to enhance business value added for their shareholders.
BCT has also been deployed in equity clearing on the Australian Securities Exchange, which is aimed at
reducing the reconciliation back office reconciliation work for member brokers; IBM and Maersk Line are
developing a blockchain that will serve as trade platform for “users and actors involved in global shipping
transactions with a secure, real-time exchange of supply-chain data and paperwork” (Carson et al. 2018). JP
Morgan (2016) considers blockchain to have immense potential in asset management in such areas as CDS
processing and payment messaging, transaction management and regulatory reporting, custody and settlement
of assets, replace existing markets by private markets that are based on blockchain networks, issuing of digitized
fiat currency, open, peer to peer blockchain powered economy.
The aforementioned may in part explain, JP Morgan’s involvement in designing the prototype of the
Project Ubin BCT network with Monetary Authority of Singapore and Temasek, which is touted to provide
commercial cross border multi-currency transactions, serve as a foreign currency exchange and mechanism
for settling foreign currency denominated securities (Geddie, 2020); and dltledgers, Singapore, which has so
far facilitated US$3 billion in cross border financial transactions that involved 400 or so traders, more than 65
banks and tertiary partners31.
Meanwhile, Deutsche Börse Group has somewhat similar projections with respect to t=potential use
cases of BCT as medium to foster cross border collateral settlement of security assets, post trade processing,
including security settlement against cash and assets servicing, and possibility of provision of commercial bank
money (cash and assets) on the blockchain to facilitate payments settlement, and assets servicing (Deutsche
Börse Group, 2016). In a similar development, EY (2016) identifies prospects of block chain technology in the
realm of health care service data management. The uniformity of record authentication and credentialization,
makes block chain technology appropriate for recording, maintaining, and sharing data on health care providers
and patients with high degree of accuracy and uniformity during the entire health care provision and claims
management process. Supporting features of BCT include immutability of records, foundation for creating a
unified provider ID, secure permissioning of health care provider data among service payers during the
physician working span, possibility automation of internal control and request processes, efficiency arising from
using a single infrastructure network in labor costs, claims handling, adjudication, reconciliation efforts, and
improved member experience.
In yet another potential application of BCT, Singapore based Points secured US$8 million initial funding
from various sources including Danhua Capital, Cherubic Ventures, Ce Yuan, Ontology Foundation, Nest.Bio
Ventures and Zheng Cheng Xin Credit Technology. The venture leverages BCT to build a credit risk score profiler
algorithm that will be trained and tested on credit rating agency sourced data (Zheng Cheng Xin Credit
Technology Ltd). Zheng Cheng Xin Credit Technology Ltd is in partnership with Tele info, with Information
technology (MIIT) providing Points with 500 million data entries used in developing , training and testing a
credit an algorithm tailored towards developing credit risk score profiles (Caiden, July 23, 2018).
In yet another development, IBM, Deutsche Bank, HSBC, Rabobank, conducted a successful
experiment that leveraged BCT in transboundary money remittance transaction that involved several countries
in Europe. The pilot project test piloted cross border money transfers that involved the four banks and Societe’
General, and KBC across five continents using IBM we. trade platform that was based on an open-source
permissioned Hyperledger blockchain. The success of the experiment proved that BCT technology can generate
efficiencies in through conducting cross border transactions through a common platform, interoperability and
connectivity capabilities and collaboration of participants within a trading ecosystem; underscored the
potential for even more gains for trade from low transaction costs, real-time transactions trackability, which
generate additional value added to all participants (Canellis, 2018).
Meanwhile, the World Bank, as one of the leading development financiers that issues US$50-60 billion
in bonds annually to finance various development programs in its 189 members countries, with the
collaboration of the Common wealth Bank of Australia (CBA) as the transaction arranger, leveraged BCT to
issue the first Blockchain technology based bond valued at A$110 million (World Bank, August 23/24, 2018).
Investors of the two-year maturity bond-i security32 included CBA, First State Super, NSW Treasury Corporation,
Northern Trust, QBE, SAFA, and Treasury Corporation of Victoria. This is a new development that will attract
the interest of investors, investment management, funding agencies, academics and financial security
practitioners, regulatory authorities, and the public. Doubtless, above development being a potential pathway
for diversifying sources of funds, investment, financial deepening and ultimately another channel to transmit
monetary policy to both the financial sector and non-financial sector of the economy 33.
In another breakthrough in South East Asia, MoneyMatch, a Malaysian Central Bank approved Fintech
start up, used RippleNet blockchain platform API, to assist retail users to convert Ringgits into Euros in
transactions that involved money payment transfers to Spain, Germany, Latvia, and Ireland. The transactions
were consummated expeditiously and at a much lower cost and time span compared to a standard money
transfer transaction using the conventional SWIFT rail system (Blockchain News, October 17, 2018). In yet
another experimental trial conducted on May 14, 2018, HSBC and ING serving as facilitators, used R3
16

consortium blockchain platform to arrange shipment of US incorporated Cargill’s Soybean stocks from
Argentina to Malaysia in what has been lauded as first commercial trade finance transaction using BCT. The two
transactions above generated transaction cost and time reduction, reduced paper use, hence carbon
footprint, while boosting transaction security and integrity in the process (Green, May 14, 2018).
On January 22, 2018, a transaction that involved the shipment of Soy beans from United States to
China, with Dreyfus Louis Dreyfus Co, Shandong Bohi Industry Co, ING, Societe’ Generale and ABN Amro as
participants, using digitized sales contract, letter of credit and certificates on the Easy Trading Connect (ETC)
blockchain platform was recorded as the first fully fledged blockchain transaction (Reuters, January 22, 2018).
It did not take long before another transaction, this time involving Hong Kong Shanghai Bank (HSBC) was
affected.
Other potentially important uses of BCT include Robo-asset management; automation of accounting
and auditing functions; foundation of a secure, immutable easily accessible and controllable digital identity
that owners can use to do things that demand a lot of trust and confidentiality such as general elections; settling
transactions that involve many parties but require trust, such as in real estate’s business (Andonni, 2018);
registration and verification of employers compliance with regulations and laws on employee rights; tracking
medicines to counter counterfeits; and as fool and flaw-proof mechanism to monitor the veracity of
components of an Internet of Things to prevent nefarious elements from hijacking vital network systems during
critical operations 34 ; storing and transferring priceless records in fraud-proof, but immutable and easily
accessible formats (patients private records, titles and certificates, wills, and music copyrights); and equity and
futures trading (Williams, 2018).
To that end, the non-exhaustive summary of business cases above underscores the growing
recognition of BCT immense potential. Use cases so far have include bolstering transaction efficiency,
authenticity, security and integrity; foundation for decentralized ledger based business models; basis of
collaboration in creating innovations, trade, and in conducting regulatory and supervisory activities; trusted
repository of priceless digitized assets such as intellectual property, cultural artifacts, among others. General
banks, as key players in financial services intermediation, custodians of valuables for corporate and individual
customers, and providers of investment and financing advice to customers are well placed to play a pivotal
role.
By adopting BCT , general banks are expected to reap hefty benefits including provision of safer
storage of crypto assets35; medium of conducting online transactions with other financial institutions and large
clients; widening the reach of banking services beyond national jurisdictions; strong immutability of
transactions hence lower possibility of fraud, and lower transaction costs. Besides, BCT is also being
experimented in reducing financial exclusion, which today affects 1.7 billion people Worldwide. By
democratizing and decentralizing financial service delivery through easier access to initial coin offering (ICOs)
for crowdfunded initiatives, offering BCT native commodities, and digital securities. BCT is being
experimented to deliver 24/7 services to all those with access to BCT. However, the success of the value
proposition will depend on several factors including its ability to develop an algorithm that can create credit
credible profiles; participation of the unbanked in the project, which is the pivotal appeal of the value
proposition; bank willingness to shake off their fear of the default risk posed by the unbanked amidst the
phasing in of the high operational leverage; and liquidity risk penalizing Basel III banking regulatory and
supervisory regime.
And this at a time when BCT is still in its infancy and still plagued by lack of common standard that
relate to transaction size, powers to entrust endorsement powers on the platforms, interoperability issues
across platforms, and fears that rooted in closed networking systems that drew valued added from secrecy of
company data and information in vaults of silos that were only accessible by senior line and C-Suite managers.
Other obstacles include the possibility of double spend scenario whereby some nefarious miners with
intension to discredit the blockchain do not disclose their poof of work to other nodes, leading to their adding
blocks to their private network, until a time when such private network becomes longer than the original
network, gaining what in Blockchain parlance, the accolade of truth. That means that based on block chain
protocol, the longer blockchain becomes the truth, causing loss and ruin to other nodes that are still using the
original blockchain. The problem raises the possibility of regulators or totalitarian regimes, gaming small
blockchain networks that allow miners to add new blocks at a very fast rate, which may go unnoticed by other
nodes, enabling the rouge networks to seize the established BTC network once 51 percent of all block chain
nodes are under their control (Jimi, 2018; Tapscott & Tapscott, 2018). The possibility of that happening also
raises another problem that BCT may not be as immutable as many experts claim, creating another source of
uncertainty.
It is now time to turn to the crypto assets -financial stability nexus. A crypto-asset , according to
Tapscottt and Tapscott (2018) is “a digital asset that uses cryptography, a peer to peer network, and a public
ledger to regulate the creation of new units, to verify transactions, and to secure transactions without the role
of middlemen.” Crypto assets are increasingly attracting attention of private and public investors, individual
and institutional, in part thanks to advances in the underlying BCT technologies, mainstreaming of protocols,
and serious efforts toward standard convergence (that is enhancing interoperability 36 across Blockchains),
increase in scalability (enhancing efficiency in conducting larger volumes of transactions37), and improvements
in procedures and processes of verifying and creating new blocks on blockchains(forks). Consequently, crypto-
assets have become an invaluable potential investment class that is associated with the growing acceptance of
the game-changing BCT networks.
However, the recent plummet in the value of crypto assets including digital currencies 38 , rising
frequency of hacks of crypto currency exchanges, cases of loss of access to e-wallets and the collapse of
prominent crypto currencies that has cost investors fortunes, underscores the danger that adopting and
deploying crypto assets poses for individual, institutions and by extension, financial system stability. The risks
associated with crypto assets are varied, including, the working and operations of blockchain technology being
17

minimally understood by investors and regulators alike; buying shares in companies with investments in funds
and indices that have investments in crypto related assets; and crypto currency mining, activity (Karnowsk,
July 11, 2022); permissionless and pseudonymous nature of Blockchain makes identifying, recording, and
linking identities of participants with transactions on the networks. Without such information, taxation
authorities groping sheer darkness in trying to administer taxation, implying that BCT becomes a tax haven.
Murky governance and accountability of institutions and agencies involved in crypto-asset
transactions (including exchanges)39 coupled with the decentralized nature of BCT networks, and anonymity
of participants prevents detection of signs of emerging risk exposure especially for parties that while hold
crypto assets on exchanges are not participants on BCT, the effect of which is likely to gradually reverberate to
the general banking sector and financial systems ISDA, 2023).
Besides, touting democratization of economic activities, the reality is that BCT networks are
increasingly showing signs of replicating problems that are responsible for inefficiency and high transaction
costs in traditional intermediated financial service provision-emergence of dominant players with leverage to
exert power and influence over practices, processes, even access to and conduct of transactions on blockchain
technology networks. One of the main factors attributable for the huge losses investors during and in the
aftermath of the collapse of FTX, t Three Arrows Capital and Celsius among other factors is the fact that
investors placed their crypto assets in exchanges (ISDA, 2023). While exchanges have access to BCT networks
where crypto asset transactions are recorded , investor who are not participants on BCT networks are obviously
oblivious to any emerging problems that relate to their investments. This also explains frequent albeit
intermittent runs on crypto asset exchanges, which amplifies the rapid collapse and rebound of values of
crypto asset dealing agencies. The above problem is compounded by the lack of coordination mechanisms
across various blockchain networks, which if left un regulated , is a problem that in the long term is likely to
have repercussions on traditional financial institutions and systems (Makarov & Schoar, 2022).
While it promises many uses , it is still plagued by some challenges that include, absence of a robust,
universally acceptable standards due to the existence of various competing standards; and the likelihood of
loss of crypto assets or limited or restricted accessibility thereof, in the event of a double spend problem or
loss of private keys. It is also worth noting that BCT at least the permissionless version, upholds principles of
decentralized management and control as well as pseudonymi40ty of participants. It is such aspects that
complicate efforts to exact some regulation of both actors and activities as identifying and linking actors to
activities, which is crucial for designing an effective regulatory and supervisory regime , is not a mean feat. It
is a point that (Narain & Moretti (2022) highlight as one of the key obstacles to regulating crypto asset activities.
Thus, despite the fact that intensive efforts are currently underway to plug the loopholes in existing
regulations on financial innovations (BIS, 2022), the current regulatory and supervisory regimes for financial
institutions including the general banking sector, have yet to establish common standards, processes, and
regulations that can be used to mitigate risks that are associated with investing, financing, owning and trading
crypto assets, especially those that are not banked by any other financial and nonfinancial assets, lack intrinsic
value, and do not promise holders either real or contingent return (Banca D’Italia, June 28, 2022).
Another potential risk is the increase in retail holding of stable coins ,especially dollar denominated
stable cons and the substitution of domestic currency with crypto currency and assets (crpyptoization) in some
small countries such as Salvador. Through the creation of loopholes in regulating and supervising capital and
exchange rate controls, the above proclivity has the potential to undermine the effectiveness of domestic
monetary policy (IMF, 2023).
As regards banking, existing principles and protocols on prudential banking regulation and supervision
issued by FSB do not explicitly tackle banking activities on BCT networks and in dealing in crypto assets simply
because of the rapid pace at which the technology is evolved, which coupled by the apparent ambiguity of
national and multinational regulatory authorities to decide whether to accept BCT and crypto assets as
acceptable investment assets and one of the channels of doing business, and the reluctance of participants of
BCT networks to reveal the level of involvement as that is antithetical to the existence of such network that is
underpinned by decentralized, self-regulating hence low external regulatory oversight, and security of identities
of participants and transactions.
Consequently as late as 2018, national banking regulatory authorities , and by extension, the Financial
stability Board did not yet have sufficient data on the level of bank involvement in crypto assets, making
quantifying risk exposure and crafting risk mitigation programs difficult; regulatory authorities at the national
and global level(FSB) have yet to establish standard categorization of both direct and indirect risk that is
associated with participating on BCT networks and dealing in crypto assets (there is still a lot of grey area on
what prudential measures regulatory authorities need to take, despite the slow but steady adoption of BCT in
conducting transnational transactions involving merchandise and payments reported over the 2018).
Regulatory authorities remain divided over crypto asset policy, with some considering BCT and crypto
currency as an inevitable innovation that financial service will have to adopt due to the slew of advantages it
has, while many, fearing losing the control they have enjoyed for long on regulatory oversight, which coupled
with bitter past lessons learned about the demerits of decentralized self-regulatory regime with respect to
financial stability (FSB, 2019). The jury is still out there, and we are still waiting. Hopefully we won’t be
unfortunate to see a repeat of past financial innovations that proved too high-paced and sophisticated for
regulatory authorities to regulate and supervise, which contributed to one of the major causes of the 2007-
2008 global financial crisis.
Moreover, crypto currency remains largely in the hands of the private sector, simply because
blockchains on which such assets are initiated, recorded, stored, and exchanged are on either permissionless
public blockchains or permissioned private ones, which are not regulated let alone subjected by financial
statutory authorities. And the situation will remain that way if the latest developments are anything to go by.
Facebook announced plans to launch its Libra, a secure permissioned blockchain payment system41 that will use
a digital currency as a medium of exchange represented by tokens that in turn will be backed by the value of
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hard assets. Libra is touted to have the huge potential to increase financial inclusion for millions of people who
have either no or limited, access to financial services in the developing world.
Doubtless, there is realization that the rise in popularity of crypto assets either directly or through
counterparty transactions, is bound to have risk implications for banks and by extension financial system
stability. Crypto assets pose risks that arise from the fact that investors hold them for speculative purposes
because essentially they lack intrinsic value; remain outside ambit of regulation and supervision, hence conduct
is not affected and influenced by the principle of “same activity, same risk, and same regulation”, that underpin
regulated financial activities (FSB, July 11,2022). Potential risks from crypto assets include “liquidity risk, credit
risk, market risk, and operational risk (including fraud and cyber risks); money laundering and terrorist financing
risk; and legal and reputation risks” from investments and financing transactions that involve crypto assets,
which have necessitated the Basel committee for bank supervision to issue the second consultative report that
includes proposals to proactively prevent and where occurrences become inevitable to mitigate future
potential risk arising from crypto assets to banks and financial systems.
Thus, losses related to crypto asset investment are increasing. Provisional estimates put the decline in
crypto currency to have wiped out US$2 trillion (del Castillo, December 19, 2022). The collapse of collapse of
FTX exchange in November 2022, sparked by poor financial management, which is estimated to cost its top
50 creditors US$3.1 billion and more for its million other creditors is the latest addition to catalog of crypto
assets risk saga (Crawley, November 30, 2022). FTX bankruptcy is only the latest in the growing list of troubled
cryptocurrency exchanges and crypto currency lenders. FTX’s bankruptcy comes not that long after the
collapse of the $60 billion UST coin and Luna token, both of which were TerraForm Labs experiments that were
vigorously and previously touted as stable coins. The stability supposedly owed to the movements of the coin
being algorithmically pegged one to one to the US$ (Khalpal & Lee (September 20, 2022) remains as
unresolved as it is vivid, underscore the high risk exposure that investors in crypto-assets face.
Thus, while crypto assets investment and financing still constitute a small proportion of assets and
liabilities in the financial system, they are gradually becoming a source of material financial risk for non-
accredited households, companies, and through counterparty risk, financial institutions and systems (IMF,
2023). This is because of the increase in the use of crypto assets as storage of value, leverage, lending and
liquidity (Narain &Moretti, 2022).
As regards the Indonesian financial system, while Bank Indonesia like other monetary authorities in
many developing and developed countries has showed keen interest in developing CBDC (Bank Indonesia,
2022a). , general banks are still largely barred from dealing in and facilitating crypto asset related transactions
due to high uncertainty that arises from limited knowledge about the assets, inadequate information exposure
of the value of the transactions, participants involved, and counterparty asset and liabilities that can serve as
indicators of risk exposure. Nonetheless the non-banking enterprises do not face such stringent restrictions. As
Pratama (2022) argues, at the peak of the COVID-19 pandemic, some investors put their money in crypto
currency as one of the ways to mitigate the steep decline in equity prices.
That said, considering the precautionary and risk averse stance that Individual banks in Indonesia are
accustomed to taking take with respect to new but yet- to-be-tried and proved financial innovations, coupled
with micro prudential guidelines on risk management that are integral to the Indonesian Banking law 1998 and
implementing regulations and specific Bank Indonesia and OJK regulations adopted since 1997 East Asia crisis,
the banking sector does not face high risk exposure from the collapse of crypto assets values.
However, in other jurisdictions such as US where actions of regulatory agencies are limited to calling
both financial and nonfinancial institution for caution in dealing with crypto related transactions, not a few have
invested in various types of crypto assets including currencies. This includes fiat-referenced stable coins that
are estimated to reach US$161 billion (Andersen, December 19, 2022). Unsurprisingly, the recent tumultuous
decline in NFTs and crypto currencies has raised fears of potential financial risk, albeit still limited, to the wider
financial system, and by extension to the economy. Such concerns are reflected in Securities and Exchange
Commission (SEC) request to financial institutions to disclose information about the level of exposure to risk
related to crypto transactions and positions (Kiernan, December 8, 2022).
While the problem is mainly related to unstable, non-fiat referenced digital currencies which makes
them very risky as prices are principally influenced by speculation and investor sentiments, fiat-referenced
stable coins are not entirely free from risk either. This is because of the high concentration of the share
controlled by the three main currencies (90 percent) and ownership of such assets (1 percent of top investors
hold 90 percent of the assets). Such high concentration of assets in a few currencies and ownership, poses
danger to financial stability in the event either any one or more of asset holders or currencies face problems.
Thus, the increase in incidents of e-currency fraud, poor management amidst shadowy operations in unstable
digital currencies and rising concentration risk of stable fiat referenced currencies are compelling governments
and standard setting agencies (BIS,2022) to take measures that are aimed at classifying crypto-asset trading
and investment as posing a potential threat to consumer and financial system security and stability. Indeed,
the demand for more stringent regulation of crypto assets has never been louder.
The Bank for international Settlement (BIS) in its June 2022 paper on crypto assets, submitted
proposals that envisage the implementation of measures to mitigate risks to banks arising from crypto assets
investments and liabilities. Such measures include classification of crypto assets based on whether or not they
meet all classification conditions set out under the current regime; including provisions in Basel supervision
committee standards that specifically address crypto assets exposures; refining and elaborating the
classification conditions to take into account in the revised classification of high risk non-tokenized and unstable
crypto assets; incorporating a risk-weighted assets (RWA) as an additional to the infrastructure risk for all
Group 1 crypto assets.
Other proposals relate to the recognition of hedging for certain high risk crypto-assets; delinking
crypto assets from their classification as tangible or intangible assets under the accounting standards; revising
operational risk clarifications to differentiate between risks covered under operational risk framework and
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those falling under credit and market risk frameworks; specification of the application of the liquidity risk
requirements and treatment of bank exposure to crypto liabilities; introduction of a high risk crypto assets
exposure limit for banks of 1% of Tier 1 capital (BIS, 2022). In the same vein, Aquilina et al.(2022) argues that
in addition to uphold ‘the same activity/service, same risk, same regulation’ principle on crypto assets, other
measures that can be adopted to reduce crypto risk include making traditional finance more attractive by
adopting regulated decentralized finance. A good example of such a development is the central bank digital
currency (CBDC).
Meanwhile, FSB on its part, is intensifying efforts to coordinate national authorities and standard
setting organizations to reach common understanding on diverse crypto assets risks sources. Besides, efforts
are underway to strengthen existing regulations and standards, and where deemed necessary to create new
ones that will be specifically tailored to tackling the unique risks crypto assets pose to investors and financial
systems whilst allowing investors and the financial system to derive the benefits of the underlying technology
(FSB, July 11, 2022). If there is something clear from the proposed measures to mitigate crypto asset related
risks, it is the finding that various models of regulatory regimes on crypto currency exchanges, do not have
distorting and detrimental effects on the intensity of activities (Feinstein & Werbach, 2021). It is a point that
may provide a strong case for some form of regulation.
The international monetary fund (IMF) as a multilateral institution that is tasked with ensuring global
financial system effectiveness, integrity and stability, proposes the development and adoption of
comprehensive standards and risk based regulation and supervision that require entities that provide “storage,
transfer ,exchange, settlement and custody” of cryptocurrency and assets to obtain registration, license, and
authorization; imposing additional prudential requirements for entities that provide multiple functions;
imposing stringent prudential requirements on stablecoin issuers; clear requirements for financial institutions
have exposure to crypto assets; establishing a comprehensive cross-border crypto assets regulatory and
supervisory regime (Bains et al. 2022a; Bains et al. 2022b). Similarly, ISDA (2023) on its part, widening the
coverage of prevailing regulation on risk exposure management to crypto transactions. Meanwhile, in a series
of papers on crypto asset risk exposure management, ISDA, deems it timely and necessary to increase
awareness of the sources of risk exposure and ways of dealing with such by issuing guidelines. In the most
recent guidelines, ISD proposes the need for consolidating potential risk exposure and collateralization. To
mitigate risk exposure, ISDA recommends the adoption of risk exposure netting and posting collateral
adjustments that is commensurate with changing crypto investment and financing positions.
However, the major challenge lies in the differences in perspectives and approaches central banks in
both developing and developed countries have taken toward blockchain technology and crypto assets,
especially crypto currencies in particular. There is for instance still no common ground, let alone a commonly
agreed standard approach or policy toward crypto assets including digital currencies. In an attempt to tap the
benefits of digital currency while minimizing its inherent risks, central banks are seeking ways to, by
development and deploying e-currency that remains under their stringent centralized control, direction and
regulation.
Rising volumes of crypto currency being created overtime, increases the stakes that in the event of
double spend problem there is potential danger of crypto currency dilution, which if materializes poses
potential risk to investors and the integrity of financial systems. In an attempt to prevent this problem from
occurring, among other factors, governments and standard setting organizations have shown keen interest in
exploiting the benefits of developing alternatives to unstable digital currencies and assets to become sources
of individual and corporate investment- stable digital currencies. Such benefits include lower transaction cost,
easier monitoring within and across national borders; higher financial inclusion; faster digital transformation
initiatives, trackable monetary policy transmission and collaboration across jurisdictions; and immutable and
secure measure and store of assets and exchange.
Central Bank digital currencies (CBDCs)

A central bank digital currency (CBDC) “ is a digital payment instrument, denominated in the national unit of
account, that is a direct liability of the central bank “ (BIS, 2020, p.3). Interest in CBDCs increased since 2020 in
line with the rapid increase in digital transactions and payments that were necessitated by restrictions on
people’s movements and interactions imposed to control the spread of Covid-19 disease during the pandemic.
This has a dramatic increase in the demand for digital payments instruments, which due to absence of
centralized alternatives were largely provided by the private sector. Many central banks have adopted varying
approaches and perspectives toward central bank digital currencies (CBDC 42) development, the main factor
being the functions that the proposed CBDC is expected to provide in the implementing jurisdictions.
According Zandt (2023), as of June 2023, 11, 53, and 46 countries have adopted, involved in advanced
planning, and currently in the research phase of, central bank digital currencies, respectively, while based on
IMF (2024) update on countries at different stages of CBDC development and adoption, 100 national central
banks are at various stages of launched, proof of concept, and research (Figure 13).
[Figure 13]
While the Bahamas, Eastern Caribbean, Jamaica and Nigeria have launched retail CBDC, Senegal and
Tunisia and a host of more than 50 countries have opted to allow some forms of digital currencies to be issued
by parastatals and private companies. Meanwhile, other countries are at various stages of CBDC piloting (29
jurisdictions), with 72 central banks having expressed a positive stance about the benefits of CBDC especially
in contrast with unbacked crypto coins (December, 2019; Kiff, 2019; Auer et al. 2022; IMF, 2022).
As regards CBDC development, Bank Indonesia, in its Garuda Project report on Digital Rupiah,
emphasizes the need to design and disseminate two types of Digital Rupiah: Wholesale Rupiah and retail digital
Rupiah. Wholesale digital rupiah will be limited to interbank transactions, while retail digital Rupiah will be for
general use. The rationale for developing Digital Rupiah include efforts to accelerate digital transformation and
20

development of a digital economy by facilitating and supporting the role digital assets and currency in
transaction payments; leverage the benefits of digital finance to support monetary policy; support digital
finance development; and increase access to and availability of digital means of payments (Bank Indonesia,
2022a).
Other expected benefits of stable central bank sponsored digital Rupiah include the acceleration of
financial inclusion and innovations; widening sources of storage of value; upholding the mandate of Bank
Indonesia as the sole issuer of legal tender under times of increasing digitalization; supporting efforts for
Indonesia to become an integral member of the increasingly digital global economy that is supported by stable
central bank digital currencies; and supporting the development and integration of digital economy and finance
(Bank Indonesia, 2022a).
It is thus clear from the foregoing that being among the late- movers in proposing the form ,function
and type of CBDC, Indonesia has opted to adopt the design of digital currency that meets both wholesale and
retail needs, supports cores functions of the central bank, and aligns with other long term policies of Indonesian
government such as financial development, financial inclusion and digital transformation. To that end, as CBDC
development is still at its infancy in most key national jurisdictions, the direction of the form that CBDC will
take remains uncertain. The uncertainty that specifically relates to differences in regulations on crypto assets
and CBDCs across national jurisdictions that contrast starkly with major breakthroughs in global collaborations
in regulations on currency exchange rates, which in part has contributed substantially to the relative stability
of translation exposure that is one of the important considerations and determinants of cross border and
intertemporal investment, finance and trade flows.
Moreover, the above problem is compounded by the lack of interoperability among proposed CBDCs
, which is in part is attributable to the nonexistence of messaging standard that is crucial for conducting
transactions using various CBDCs and regulated stable coins (UDPN,2023). Such uncertainty increases risk
associated with conducting transactions that involve investing, trading, and financing using private sector
sponsored crypto currencies that continue to dominance cryptocurrency space. To that end, the proposal to
establish an interoperable universal digital payments network (UDPN,2023), if it receives the approval of both
major national jurisdictions and regional economic blocs, promises the establishment of a ‘decentralized
payments messaging backbone connecting digital currency systems to enable seamless, efficient payments
including regulated stablecoins and in the future Central Bank Digital Currencies (CBDCs)’.
Nonetheless, while the bank for international settlements (BIS) has established principles that
governments can use as reference in designing CBDCs43 (BIS, 2020), the increase in government forays into
developments in digital-assets space, is raising fears that national governments may not only limit their
endeavors to CBDC development but with the pretext of preventing the perpetration of cybersecurity crimes
and financial fraud may also consider it within the remit of public interest to exert control and set the rules of
the game for BCT infrastructure development and network in future. The probability of this scenario occurring
has increased with the rise of populist governments that aim to maximize unilateral trade 44 benefits derived
from international trade in goods and services45, and increasing efforts to use economic policies in re-
establishing self-sufficiency thus countering trade, financial, and technological interdependency (WEF, 2023)
that has evolved over close to 30 years. Such reversals of globalization will undoubtedly have detrimental
effects not only on direct participants but also may roil the global financial system, economy and public social
welfare (Tapscott & Tapscott, 2016).
This is because globalization has been responsible for more than $18 trillion in global wealth creation,
increased access to higher variety low priced goods, better public health, quantum leaps in productivity thanks
to the ease of transferring and adopting technology and management practices; drastic reduction in poverty
incidence, and higher living standards (Di Giovanni et al. 2008). While achievements of countries from
globalization vary based on performance with respect to diffusion of technology, quality institutions, supportive
macroeconomic policies, existence of an educated workforce and a market economy, there is little doubt that
those countries that have become strong participants in global value chains including production, investment,
trade and financing of goods and services have reaped even heftier benefits (Aiyar et al.2023).
VII. Open banking services, financial services delivery, and financial system stability
Technically, API, serves as the technical medium and protocols that allow developers to access data and service
platforms in deploying applications that execute on a server elsewhere 46. APIs comprise code modules,
protocols and applications that facilitate data and code exchange within the organization and between one
organization and external parties. APIs can be developed in-house, purchased from external API developers
based on organizational standards and requirements, and outsourced from pre-built providers (API as
services). The first alternative is associated with the advantage of aligning API architecture with organizational
goals, context and circumstances, rather than adopting third party proprietary standards, but require adequate
internal expertise, resources, and architecture. Purchasing API developed based on order, are customizable,
easy to adopt as they are not constrained by organizational resource constraints, and being proven, validated,
documented and production-ready, they speed-up time to value through the “productizing” process by
lowering entry barriers to new business lines, markets, and new product development (Axway, 2022).
However, organizations can also use pre-built APIs that are developed by external parties and are available as
services. While pre-built APIs are generally not customizable and create external proprietary technology lock-
in problems, they reduce demand on organizational resources, technology development, and architecture. That
way, pre-built APIs provide an organization the opportunity to accelerate its digital transformation journey
despite legacy system bottlenecks and paucity of requisite expertise.
Indeed as Andreesen (2007) argues, APIs facilitate the use of code modules and applications to
enhance functionality and customization of data to align with third party developer needs, imagination and
creativity. Understandably thus, considering the prevalence of legacy systems in the banking industry,
Application programming interface (API)47 are fundamental for the sector to accelerate digital transformation
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in its core functions, processes, systems, products and services. Open banking business model is specifically
tailored to benefit from APIs. This is because APIs underpin open banking service delivery through the
integration of different types of data and platforms, legacy systems and technologies and modern ones, and
support the forging of strategic alliances, and collaboration across product-service value chain.
To that end, APIs are central to the development of an ecosystem framework that harnesses
collaboration between banks and external parties including other banks, technology back office and front office
technology vendors, fintechs, regulators, and existing and potential customers. Doubtless, API constitute a
crucial element in the interaction and exchange across internal and external different systems and
technologies, hence pivotal for data generation, aggregation, analytics, and sharing. Thus, for general banks,
most of which have legacy systems, APIs serve as both as a medium that allows access to data in legacy storage
systems and applications, and vital for accelerating the pace of digital transformation and by extension,
modernization of systems, functions, and processes.
Such an environment creates immense opportunities for innovative products and services developed
through collaboration across functional teams, business units within the organization on one hand, and the
organization with external parties, on the other. APIs are also credited for enhancing firm data lake exposure
to data from disparate systems that fosters gleaning and integration of vital insights that support quick and
flexible design, development and deployment of new applications, and simplify product and service
development of end to end solutions based on modular architecture.
Besides, APIs foster development of consensus on data usage policies, control, access, and
performance measurement, leveraging of existing data interfaces in product and application development,
which increases efficiency in time and resources and support the development of data platform buffers in the
form of centralized data lakes or decentralized best of fit platforms that handle transactions outside
organization’s core systems based on specific data usage and workloads of data users, reducing workloads
on organization systems (Castro et al. 2020). To that end, organizations are increasingly using APIs to strengthen
their value propositions to customers in a bid to increase customer experience with products and services they
offer by leveraging internal resources, as well as collaborating with third parties to reduce gaps in customer
journeys that nimble startups are exploiting to disrupt traditional value chains. Internet and web service
developments have in part played an important part in that. This is because the increase in the use of the web
as the principal network that integrates systems in the organization, has made it imperative for companies
to adopt APIs to connect their technology assets to online portals and mobile applications.
Moreover, adopting API business model is not only confined to small, lean, startup companies, but
also large firms. Large companies can ‘decompose or deconstruct’ their businesses into platform business
models by “breaking up (the large company into) into smaller discrete pieces with clearly defined interfaces
for interaction”, based on three principles that Baldwin and Clark recommend for a good decomposed network
including i) an explicit architecture design that specifies the various sub-systems and their function; ii) a
definition of interfaces that describe how the sub-systems interact with each other, and; iii) a set of standards
that lay out the ground rules for the overall system48.
Specifically, for banks, they can both publish their APIs to allow partner companies to access their
back-end data and technology assets, which provides them with access to and use of external APIs to
strengthen their value propositions, and developing new services. Doing that nurtures an ecosystem that
connects various units of the company on one hand, and the company with other companies, customers,
supplies, and application developers, on the other. Open banking framework allows third parties access to
bank APIs, an arrangement that is grounded in EU PSD2 regulation of 2015 that transferred ownership bank
accounts to private persons owing them That principle in effect opened immense opportunities that are related
to ownership of bank accounts in depository institutions (Kellez, et al.2019; 2021) since banks no longer have
exclusive rights the control of customer accounts.
Open banking, according to Gartner, refers to the delivery of financial services to users by leveraging
API platforms, app stores, and apps (Moyer, 2013). In general, Open banking is based on the notion that data
belongs to the customer, who therefore has the right to decide who he or she allows access to them, and
otherwise (FDATA, 2019; Gałkowski & Podgajny, 2019). Moreover, the customer can reverse the decision to
share data depending on whether preferences and interests are served or otherwise. In other words, the
premise that underpins open banking is that sharing customer data should be done in ways that add value and
complementary to customer interests, benefits and preferences.
Some of the benefits associated with open data regime include strengthening customer choice and
protection from abuse of personal data, transactions data, and valued added data; by leveraging access to
financial data at a granular level, producers and sellers of products have the ability to use insights they glean
from customer spending patterns, pain points, composition of products and trajectory of spending patterns to
create personalized innovative products that enhance customer experiences, higher customer satisfaction and
customer wellbeing; higher customer loyalty hence low churn, which translated into higher revenues and
profitability; enhance the ability of banks to leverage their position as the institution in which most adult
customer place their trust, to create financial services that are based on insights scoured from data at lower
cost and limited reputation risk (FDATA, 2019).
To that end, many companies are becoming API publishers, which involves exposing their back-end
data and technology assets to “internal, partner or third-party developers of client applications”, creating
learning interfaces for API publishers (including banks) due to access to insights gained from data and
technology external applications; collaborating in developing products and services with external parties to
enhance the comprehensiveness of offers to customers, increasing cross selling and upselling opportunities in
the process. This is indeed one of the elements of adopting an offensive platform business model. Adopting a
platform-based model provides most rewards for those companies that develop platforms that redefine value
propositions for customers through the strengthening of customer experience by offering better products and
services, obtaining more detailed information about product information that enriches user experiences, and
22

social content (Bughin & van Zeebroeck, 2017) forging collaboration with external parties where deemed
necessary. Based on Bughin & van Zeebroeck (2017), adopting an offensive (as opposed to either defensive or
reactive ) platform business model generates 6-7% higher financial than adopters of defensive platform
business models (Bughin & van Zeebroeck, 2017).
Thus, the integration of external APIs is being touted as potential enablers of banks to have access to
new customers through the enhanced capacity and capabilities to create value thanks to the ecosystem of
sharing information, collaboration in technology, product development, and business process improvement.
Partnerships in ecosystem made possible by APIs creates opportunities and capabilities that can be leveraged
to enhance product attributes, expand scope of services, deepen customization of services to align with an
increased array of customer needs, reduce customer churn, and increase the share of banks in their
customers’ wallet through upselling and cross selling of services. APIs thus bring the specter of cooperative
competition among general banks, Fintechs, Telcos a stage closer to the benefit of all involved parties, but
especially traditional banks.
Moreover, banks can derive even more benefits from open banking by developing their own
proprietary APIs, which they can leverage to attract third party users including Fintechs at a fee to deliver an
increased diversity of financial service offers. That way banks have the opportunity to benefit from experiences
of Fintechs with respect to agile product and service development and deployment, turn Fintechs from
competitors into customers, getting access to data from third party partners, which may help shorten the
bank’s Open Banking learning curve as well as create a new source of revenue for the bank based on strategic
assessment, analysis and mapping of third party on-demand BaaS needs (Nonninger, 2019).
It is not therefore surprising that with the support of vendors, banks are implementing account API
aggregation platforms that automatically standardize and normalize financial data, making them compatible
with data formats developers use to develop financial applications, as well as data augmentation, through
transaction categorization that makes a more valuable source of revenue that can be sold for a fee (for instance
data on transactions can be broken down into product bought, frequency of purchase, credit history, place of
residence, socioeconomic status and so on), or a vital source of insights for if subjected to data analytics tools
for upselling and cross selling and new service offers that complement the customer journey. Moreover, using
the services of account API platform aggregators, has another advantage, which is lightening the burden banks
face in maintaining API connectivity with other institutions (Grinberg, 2017).
That said, it is worth noting that open banking regime also create immense opportunities for
financial technology companies, which lacking legacy infrastructure of their own to constrain their forays into
new financial service offers and markets, have the ability to use financial data to create financial services at an
even lower cost and short lead times that conventional financial institutions(banks specifically). In light of that,
Open banking regime, may pose serious risk for traditional banks in the long-term, if they fail to take advantage
of the potential benefits while they still enjoy high customer trust. A survey of customers surveyed in Poland
showed that they have more trust in commercial banks (41%) than technology companies such as (Google
(38%) and Facebook (22%). Such high public trust, should allow banks to continue to have privileged access to
customer tagged financial data, which they can use to create a variety of innovative products at lower prices
that enhance the holistic customer experience (Gałkowski & Podgajny, 2019).
One of the potential risks for inaction or playing the waiting game, for traditional financial services was
revealed in Gałkowski & Podgajny (2019) report on the impact of the second payments services directive
PSD2(EU) on Polish and European union banks. The report showed that while results of the survey indicated
that customers highly trust banks compared with technology companies, such trust depends on the age group
of those surveyed. The willingness to trust technology companies (the key competitors of banks for customer
data), increases with lower age brackets. Customers in the 18-28 age bracket have high willingness to trust their
transactional data to technology companies that those who are older. The implication is that public trust in
technology companies is likely to increase with time as those customers who are young become mainstream
customers (Gałkowski & Podgajny, 2019:7). There is little doubt that such findings may resonate with the
general perception of customers in both developed and developing economies.
Nonetheless, fear of the unknown especially partner and counterparty risk, and technology
incompatibility, still dents the interest of many companies that otherwise recognize the potential benefits of
adopting such a business model. In a McKinsey (2017) study of more than 2100 companies, J Bughin & van
Zeebroeck, found that while most large companies were reluctant to adopt API platform driven based model
achieved higher financial performance than those that didn’t. There are several reasons for the reluctance of
banks to develop and publish APIs.
The problem of technology legacy problems complicates platform development because API business
model assumes systems integration, interoperability, connectedness, and data sharing across functions and
business units, which is contrast to a traditional business model that espouses separability of systems, data,
even technology across functions, divisions or business units of the same organization. Moreover, banks have
concerns that APIs can open their businesses to competitors. This is compounded by the complexity of
outsourcing key services that have for long been in-sourced from third parties, which demands transforming
business processes, functions and corporate reporting relationships (Levy, While & Helbekkmo, 2019). Besides,
uncertainty about the 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,
remains high.
Nonetheless, while traditional banks procrastinate over what steps to take, another even more
formidable existential threat is coming from online, lean and mobile banking startups. Thus, traditional banks
that are persisting with the old banking business model, perhaps forced into inaction by legacy technology,
functional, managerial, and strategic and infrastructure problems, status quo indecisiveness and fear of the
unknown, or indulging in wishful thinking the startup activity like the dotcom bubble will come to pass, and will
therefore leave the financial sector fundamentally intact, are likely to face a reckoning sooner than later. The
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new banking business model is based on deftness to meet the needs of the customers at a fraction of the cost
conventional banks charge, with a lot more flexibility with respect to time, location, product features, and
uniqueness of customer experience of financial products offered.
Relating to this issue, there is no better example in this regard than Nubank. Established in Sao Pol
Brazil in 2013, the digital bank startup is to today (2022) its shares are listed on the New York Stock exchange
, has a market cap of US$41 billion and has so far raised US$3.9 billion in 14 equity rounds 49. In 2021, the
bank had US$19.9 billion in assets, US$1.69 billion in revenue and employees 6068 employees in Brazil,
Argentina, Mexico and German. The success of the bank lies in its leveraging digital technology in delivering
its services that include credit card that is free of charge and lends credit at below market interest rates, uses
mobile phones and website , chats, email, and application to provide 24/7 customer services. This includes
requesting for an increase in credit card limit and cancelling a lost credit card (Savchuk, 2019).
To strengthen the loyalty of its customers, Nubank has tapped only customer community framework
where concerns , ideas, are raised and quick answers are provided. Thanks to the flexibility and adaptability of
Nubank’s banking model to customer needs the Nubank has 14 million customers and is rated as one of the
most valuable startups in Latin America (Savchuk, October 22, 2019). The success of the Nubank’s digital bank
model in leveraging digital transformation in defining and differentiating customer space, business process,
product and service development and delivery, and customer relationships management, has become a model
which not only by other bank startups but also traditional banks 50 are replicating with relevant contextual
modifications to create and enrich customer value and by extension company value and competitiveness.
I. The AI age is here: Generative AI and Financial services delivery

While Artificial intelligence (AI) is not a new phenomenon, the advent of ChatGPT in November 2022 with its
ability to generate text and images that bear high similarity to what humans can do, and in some respects even
trumping them, has generated heightened both high excitement about the immense potential that AI can
achieve but also fears about the damage it can inflict on society if improperly used, manipulated and exploited.
Generative artificial intelligence (GenAI), or machine learning, which unlike computer programming that
references code or commands to conduct operations, leverages data content, context and composition to infer
patterns that inform rules it uses to classify, cluster, and form associations that generate relationships among
seemingly disparate datapoints it is trained on and extends such rules to predict behavior of new data, is today
front and center of the thinking of C-suite, middle managers and plant floor supervisors, regulators,
government leaders, researchers, mass media and lay persons in developed , emerging and developing nations.
Even as the technology itself is still evolving, Generative artificial intelligence is already having transformational
impact on the financial sector.
In a white paper on competences and capabilities for effective accounting and finance management
that are imperative for a finance futurist, the association of International certified professional accountants-
certified International management accountants (AICPA-CIMA) the ability to leverage technology, identify and
exploit growth opportunities and integrate new capabilities that augment customer experience as crucial for
enhancing customer experience, providing predictive insights, fostering access to data and reports
development, supporting risk management and business intelligence and understanding AICPA-CIMA, 2024,
p.6).
. It is not surprising that mastering artificial intelligence in general and machine learning in particular
with its capabilities to discern, identify, patterns and deriving relationships from large amounts of structured
and unstructured data are considered competences and capabilities that organizations must have if they are
capture and conceptualize insights into customer needs that are actionable to inform future product and
services that meet customer value; proactively diagnose problems in operations and business strategies to
reduce maintenance and sunk costs; detect variability and divergencies from expected trajectories; and
prescribe actionable solutions (AICPA-CIMA, 2024).
In other words, the delivery of financial services cannot be insulated from changes in society that
have fundamental impact on customer behavior and preferences, business processes and operations, and
value creation. Thus, technological advances that affect customer behavior, perception of value, quality and
experience in services delivered; efficiency of business processes in creating value and competitiveness; and
effectiveness of products and services in meeting customer expectations and preferences, generative AI is
doubtlessly having multipronged and transformational impact on the financial sector. In fact, we are already
talking about leaders and laggards in the realm of generative AI deployment. The rise in the adoption of artificial
intelligence promises to unlock potential that limited deployment of agents in processes, market intelligence,
and product development had left untapped.
The financial services industry has embedded AI in its operations and services longer than in industries, 54
percent and 38 percent, respectively. Financial services industry is also more optimistic about the return a dollar
in AI investment will generate, with 56 percent expecting return that ranges between US$2-10 compared to 54
percent in other industries. The financial services industry also showed strong commitment to invest in AI tools
and data infrastructure , with 58 percent and 37 percent, planning to spend above US$5 and US$$50 million
on AI tools and data infrastructure respectively. That said, financial services industry has relatively lower
expectations about the transformational impact of ChatGPT (GenAI) arising from applications that will use it
as framework to develop applications and impact on conduct their operations than other industries, 58 % and
61 %, respectively (Dataiku, 2024).
AI intelligence tools that have been adopted mostly in the financial services industry include large
language models (LLMs), semi supervised learning, product recommendations, and synthetic data (Dataiku,
2024). Areas where generative AI is likely to play an important are many with the list expanding every day in
line with advancements of GenAI. Efficiency of operations is one such area where capabilities of machine
learning and GenAI in particular, is expected to play an increasingly vital role. Some banking operations such as
assessing and determining the state of credit worthiness of potential borrowers(customer service); book
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keeping including making journal entries, entering journal entries into the General ledger, drawing trial balance
and creating financial statements (finance and accounting); follow routines that are not only amenable to
programming but also with advances in GenAI ,can be complemented by reasoning, context and sentiment
capabilities that are incorporated into algorithms that generate synthetic data. The data that is generated is
then used to train and fine tune large language models to create agents that have the ability to conduct non-
strategic bank operations without the problem of human error and tendency to use influence and control of
resources to commit fraud. Outcomes of agents can be compared with the ground truth (reports that generated
using human endeavor) to gauge model performance, with feedback into model parameter tunning used to
increase accuracy (security and fraud prevention and detection). That way bank operational costs that are
associated with overheads is reduced significantly, thereby paving way to competing favorably with lean
financial technology companies (Dataiku, 2024).
Summarization of contents in texts, audial and visuals is another area where GenAI is in a space that
human kind can hardly contest. GenAI does not only have the ability to leverage existence texts, images, audial
artifacts and programming codes to generate new data, but has also the ability to create short and accurate
summaries taking into consideration including context and sentiment from heterogeneous data sources. This
is a capability that has the potential to reduce storage costs of paper documents, lead to huge costs in spending
on manpower that create, maintain, store and retrieve those documents; enhance the ability to discern and
glean insights from market intelligence data collection to develop business and corporate strategies (Sales and
marketing).
Another area where GenAI already playing an important even crucial is in Fraud prevention and
detection. include enhancing customer experience with financial products, with the ability to mine the most
recent data GenAI has enhanced anomaly detection in ongoing transactions in real time, while also
strengthening the security of processes, data, applications and networks both on-premises infrastructure and
those running in cloud. Higher and more granular personalization of products and service offers in accordance
with both short term and long term customer needs, thanks to the practice of embedding GenAI in customer
relationship management systems that creates immense opportunities for improved customer engagement,
satisfaction and loyalty, which translates into high retention and brand equity.
Automation of customer 24/7 interaction with banking services through chatbots that are embedded
with conversational AI, enhances the readiness and presence financial service providers at times when
customers face emergencies that can’t wait for in-person services. In the same vein, GenAI is fundamentally
changing personal finance planning to the betterment of investors. Using personal goals, personal risk profiles,
investment horizon, income, and risk habits, GenAI is augmenting the role of robo-advisor assisted investment
planners, leading to more flexible and tailored investments, at a fraction of charges finance planners demand.
Banks and other financial institutions can enhance activities of automated finance planners by fine-tuning
foundational machine learning models using prompt engineering to have the ability to provide personal finance
planning advice that is underpinned by general information and proprietary data and information that proven
and tried weights of different, micro, macroeconomic indicators and regulatory risk (Research and
development).
Financial services provision especially banking systems are prone to not only operational but due to
pervasive asymmetric information situation attributable to incomplete markets that complicates developing
complete contracts that aligns agents to interests of principals, also face financial risk from potential customers
of services they provide. GenAI can help financial services in scoring the performance of potential customers of
loans and other investments, insurance policies, factoring business, leasing and in providing underwriting
services. Besides, GenAI enhances the ability and competence of banks to predict future outcomes of policies
that are implemented today by enabling the incorporation of various scenarios that are simulated based on
historical and synthetic data. The ability of GenAI to use previous data and patterns to create synthetic data
enhances the datapoints that machine learning models are trained on, increases accuracy of their predictions.
VIII. Key Challenges emerging technologies pose to financial service delivery

It is undeniable that adopting emerging technologies is today being recognized as vital for banks to remain
competitive which is underpinned by capability and capacity to develop and deliver products and services that
meet the increasing demanding needs of today’s corporate and household customer, comply with increasingly
complex domestic, regional and international regulations, foster corporate culture that supports the
development and delivery of value creation, innovative products and services and pivotal for attracting and
retaining good talent.
Nonetheless, adopting and deploying emerging technologies may face obstacles from various levels
of the organization. One of the potential sources of resistance to change may come from functions and
divisions that deem changes a threat to their authority over data and information, organization budget
allocation mechanisms and processes, which they have had for long and deemed vital source of power, privilege
and compensation. This is because digitization by its nature, tends to enhance the pre-eminence of information
and technology division in the organization.
This is because the function, in addition to the research and development, and marketing, finance and
accounting, and human resources, plays a crucial role in setting the guidelines, nature and type of technology
that is feasible for the organization in accordance with its core competences and strategy. The involvement of
all organizational functions in the formulation, development and deployment of digitalization driven financial
inclusion initiatives is one way to prevent the problem from affecting the initiatives, identifying champions for
change in all functions of the organization is another. However, the strategy requires bringing the C-suite on
board with the initiatives as it provides the galvanizing force for the organization and resources needed to
support the fundamental change that is needed.
Worth noting as well, is the fact that the main objective of adopting emerging technologies is to
accelerate digital transformation. Digital transformation performance is influenced by the extent to which an
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organization reorganizes its vision , strategy, structure, functions, relationships, and business processes and
corporate culture to become data centric. Data-centric organizations excel at developing, institutionalizing
and disseminating the value of data collection, aggregation, updating, storage, processing, analysis, and
interpretation to glean actionable insights that inform business strategy, policy and practice. Data sources
include customer needs, experiences and expectations; scope and diversity of competitor space; and macro
drivers of competition including political, economic, social, technological, legal, environmental factors
(PESTEL). Obstacles to creating a data centric organization, that include the upfront cost of the supporting
technology; resistance from beneficiaries of existing systems and sub systems; legacy systems; and corporate
cultural anachronism.
Adopting an ecosystem-services-based business model is very invaluable and strategic for companies
in financial and non-financial sector alike. This is attributable to the increase in access it provides to a wealth
of data on customer demographics, purchasing behavior, similarities with and differences from cohorts, and
purchase history that firms can mine for insights on drivers of past behavior to predict future scenarios. Other
benefits include collaborations, partnerships, and procurement arrangements that can be leveraged to
generate data and information from customers, suppliers and partners alike, that can be mined for use in
advanced data analytics methods to produce actionable insights that serve business strategic interests.
Adopting an open banking business model seems imperative, thus, is imperative.
Nonetheless, the risk of entering into working relationships with third parties, which an open banking
regime envisages poses potential threat to invaluable core business data, inter alia, contents and structure
of arrangements and agreements between the firm and third party suppliers, proprietary information such as
intangible firm assets, customer data, operational and performance dynamics, and an invaluable set of
customer data by data of acquisition, churning rate, retention policies, and data systems architecture and
technology.
Losing control of enterprise data that is stored in some data center that is located far from the
geographical location to ransom seekers; phishing, routing, sybil and 50 plus one attacks on blockchains that
have affected what initially was considered unhackable networks, is sending fears among both early adopters
and late adopters of BCT technology alike (IBM , undated). It is no wonder that data privacy concerns important
as these maybe today in the aftermath of Facebook 51 and Cambridge Analytica data scandal52.
In addition, the implementation of the game changing general data protection directive (GDPR) EU
council /EU Parliament Regulation No. 2016/679 on May 25, 201853; and a release of a report by Digital
Content Next that meticulously reveals the 24/7 ubiquitous nature and scale of Google data collection and
collation practices without ever requesting permission from users ,which has become common practice on
Google search engine, Google Chrome browser, Android operating system, Google play, Google Gmail, google
AdWords, Google Maps Google, and Google Analytics (Kelly, August 21, 2018), are surprisingly not the only
data security related problems that banks that try to switch and transition from the traditional offline, data-
siloed banking model to an open-data sharing in development and delivery of financial services and in
conducting operations, face. Hurried adoption of an ecosystem, open banking system while may enhance
competitiveness, if poorly executed can create data security problems that may cost banks billions of dollars,
lost public trust, and reputation risk.
Equally important is the increased risk of creating Frankenstein monsters that may in the long- term
pose an existential threat to banks. Collaboration with Fintechs by conventional banks while may reduce the
need for the latter to invest huge capital into untested financial service delivery models, the former may end
up not only cutting into core banking services but eventually both core and non-core services. By gradually
nibbling away at its core business bit by bit, what begins as a vibrant, highly competitive, and dominant bank in
its market, becomes a shell of its former self that delivers just a small, and an unprofitable portion of a lucrative
financial service value chain at that, the succulent part having been nixed away by big tech companies, former
plaint suppliers, and a plethora of lean and agile Fintechs. That is an invitation for high bank liquidity variations,
and ultimately bank solvency, and financial stability woes.
An interesting development in that regard, relates to Canadian largest cryptocurrency exchange
Quadriga, which faced liquidity problems that arose from the sudden death of its CEO and co-founder while
on a tour in India, is a good case in point that underscores one of the key risks that inheres in investing assets
in cryptocurrency such as BITCOIN. The problem was that the only person who knew where the password for
the offline vault that hosts $145 million in crypto assets that belongs to 10,000s of investors was Gerald Cotton,
the late CEO. Upon his sudden death, the exchange is looking for ways of recovering the assets to repay its
investors, a process that has so far bore no fruits thanks largely to efforts made to ensure maximum security
for such assets.
Obviously, such measures were in part motivated by, and deemed necessary, as an appropriate to
response a series of attacks on online cryptocurrency exchanges in various parts of the world, reportedly earlier
in this paper (Shane, February 6, 2019). One can hardly imagine the ramifications of such an event were one of
the systemic importantly banks to be affected by such a problem that ironically arises from efforts to ensure
maximum security for client assets as per the mandate invested in them.
Indeed, fraudsters have a new conduit to perpetrate their illicit activities, as the growing number of
frauds that are perpetrated in part or wholly through Blockchain technology platforms in general and
cryptocurrency secrecy. There is no better example of that than the case that involved Mr. Arthur Budovsky, of
Costa Rica Liberty Reserve platform who in 2016 was sentenced to 20 years in US jail for money laundering a
staggering US$ 6 billion (Katz, January 28, 2019).
Surprising though the figure involved maybe, the top secrecy that has earned BCT platforms keen
interest from individuals and enterprises involved in illicit activities meaning that what has so far exposed may
be just the small tail that hides a far bigger problem; has raised concern over whether national and international
financial regulators, today, already have what it takes to prevent such malpractices before they do much ruin
to the financial sector that is still recovering from the turmoil that had its origin in US Subprime housing credit
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market slightly over a decade ago. The act of financial regulators playing catch up with financial innovations as
was evident in the Global financial crisis, and unfortunately a repeat of similar fates in previous crises, at the
national, regional, and global alike, is as costly, disruptive, and destructive of many lives, humbles economies,
and by extension, public misery and an important source of frustration that is the fertile ground for populism.
There is little doubt that any digitization initiatives are bound to change power and relations in the
organization, values that all members share, and how things are done. In other words, changing from silo based
analog organization to sharing empowering digitization processes, is likely to create winners and losers. It is the
role of bank management to galvanize the entire organization toward change by communicating the need and
importance of the strategy for the organization, benefits that accrue to the organization in general and to
functions and activities that involve individual employees, and how that will lead to higher organizational
competitiveness and firm value; source of financial resources to finance the initiatives; and opportunity for
employee development to enhance their skillsets in line with requirements on the job digitization creates.
The enormous cost of acquiring, developing, deploying54, and maintaining the latest digitization
technology and tools is another factor. While on paper, benefits that digitization-based financial inclusion
initiatives are obvious, the high investment cost that generates initially little return on investment in the short
term, and increases as scaling takes shape, has become an obstacle for banks that despite cognizant of the vital
role of such initiatives to corporate growth and development, are still not sure how best exploit its potential to
the maximum. Such enormous cost threatens to cut deeper into already narrow margins that general banks are
enjoying due to inroads that Fintechs are making into interest earning business line(lending). To mitigate the
drastic impact on bank operations and profitability, a gradual, two speed approach, is recommended in many
instances, simply because, deploying digitization in a big bang manner in all organizational functions at the same
time, is not only expensive, but can also lead to serious disruptions that may overwhelm the organization (in
terms of resources required); human resources (developing the skillset required); and business strategy at the
business unit and corporate level, which may undermine organizational competitiveness in the short term.
To that end, a two-speed approach that at first involves the rolling out of digitization program in
functions such as finance, research and development, and marketing, where investment made yields almost
immediate return, followed by other functions and activities in the order of importance with respect to the
contribution made toward digitization initiatives.
Nonetheless, if an organization faces a serious onslaught on its core business, and it has the resources
(physical infrastructure and talent both in-house and sourced externally) to implement an organization-wide,
all-function digitization program, it can go ahead to develop and deploy such a program. The problem is that
digitization being firm specific which means that there is no one size that fits all. The implication is that any
error in identifying, formulating, implementing a strategy and deployment of the wrong technology being
irreversible, maybe extremely costly to not only firm competitiveness but its very survival as a going concern.
The option some banks have chosen is to outsource some of some aspects of their value chain which
they consider contributes low value to firm revenues, and a good number of other banks in light of advances in
technology and data capabilities, have opted to forge collaborative arrangements with specialist supplies of
technology, cloud computing services, and established partnerships with technology companies in the
development and delivery of financial products.
Nonetheless, there is a hidden long-term problem for banks to open their core business such as
development and delivery of financial products and services to suppliers, whether this takes the form of
traditional supplier agreements, collaborative and partnership agreements, or outsourcing contracts. The
problems lies in the possibility that the supplier may in the long term become too powerful and decide to
become a direct competitor in the development and delivery of the products and services the bank currently
considers its core business (the case of Samsung and Apple corporation is still fresh in our minds); suppliers or
companies involved in collaborative arrangements may use insights they get from data on bank operations and
performance to enter the same business on their own.
Besides, outsourcing data and system architecture raises the danger of creating heavy dependency on
the supplier’s technology and applications that prevents the bank from reaping advantages from the latest
developments in data and technology due largely to rigid contracts that are aimed at safeguarding supplier
proprietary assets. Moreover, another probability is that outsourcing or collaborative arrangements that
involve the collection and storage of key performance data have the potential to generate e threats to core
business value as suppliers and partners may sell data insights to competitors, or worse still decide to become
participants in the industry thanks to the higher competitive edge thanks to, technology capabilities,
experience, and insights on key drivers of competition and industry supply and demand.
To mitigate that likelihood, banks can strengthen their competitive edge by joining or establishing an
ecosystem that delivers an integrated host of services that meet customer core needs thereby contributing to
a wealthier experience than is the case with offering a few distinct disjointed services the bank may create
new and stronger competitors. In addition, banks should ensure that they retain control over crucial data and
system architecture and technology, which is essential for them to develop and deploy data analytics
capabilities to discern and gain regular, real-time, and long term insights on customer experiences, drivers of
demand for services that are key to improving performance, enter new market segments and develop and
deploy new product and service offers (Buia, Heyning & Lander, 2018).
Alternatively, to reduce the possibility of becoming dependent and locked-in on the technology of a
single strong supplier, banks should spread the services to various suppliers under flexible supply, collaborative
and partnership contracts and arrangements that are underpinned by open source technology rather than
proprietary, firm-specific assets. Such an approach should enable the banks to have in place agile data and
architecture systems due to the ease of switching and implementing the latest iterations of the technology and
services at low cost (Buia, Heyning & Lander, 2018: 4-6).
Digitization has many advantages as mentioned earlier, but is also prone to manipulation,
misrepresentation, and criminality, unless appropriate control and security arrangements are embedded,
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incorporated, and implemented in the design, development and deployment of platforms, and applications;
and meticulously and comprehensively written out in collaboration, partnership and outsourcing contracts and
agreements. A good case in point of what can go awfully wrong if sufficient precautions are not put in place is
the rapid rise in cases involving illegal lending web and mobile based platforms that have defrauded their clients
in Indonesia55(Suryono et al. 2019), and became a source of substantial loss for borrowers in India 56 (Thanawala,
February 11, 2020).
Such a development, while directly impacts customers some of who lose the entirety of their lifetime
savings, it must be noted that, unless the probability of recurrence of such problems in future is reduced and if
possible eliminated through tightening requirements for opening new platform financial service firms, conduct
24/7 monitoring and supervision of their activities, evaluation of corporate performance and financial reports,
as well as requiring financial service providers to adopt standard governance mechanisms such as the G20
high level principles for digital financial inclusion (GPFI, 2016; UK Finance, 2018), but also specifically implement
the 10 G20 High level principles on financial consumer protection 57(OECD, 2011); such scams pose serious
danger of creating high public distrust in not only peer to peer lending mediated through online platforms , but
also crucially financial services delivered via web and mobile platforms, in general.
Yet risk from digitization for the banking industry is not limited to the above but also arises from the
development of new financial products and services that are leveraging the latest technological advances in
developing and deployment of financial products and services. The adoption and deployment of machine
learning, internet of things (IoT), cloud computing, processing, analysis and storage services, which coupled
with artificial intelligence and BCT, are expected to contribute to hefty benefits to bottom line thanks to
increased scope, scaling and automation possibilities of the digitization initiative.
Besides, the exponential growth in the adoption of digital technology tools underpinned by the big
data wave is the increase in the likelihood of data breaches a firm faces, and attendant capital costs that rise
with number or records breached, duration a firm takes to identify the breach, and the time it takes the firm to
implement countering measures. Such fears are corroborated in a report issued by Basel Committee on Banking
Supervision (BCBS) argues (BCBS, 2018; UK Finance, 2018), the digitization and financial technology revolution,
poses “strategic risk, operational risk, cyber-risk and compliance risk, for banks.” Reducing the probability of
occurrence of such risks, banks are required to put in place “governance structures and risk management
processes that appropriately identify, manage and monitor risks”.
Conducting business through digital platforms has another vulnerability, which is the susceptibility to
cyber-attacks and other cyber security infractions and private concerns 58. One of the sources of firm value
from digitization programs is data sharing capability both within the organization and between organizational
functions and external sources working on collaborative products and services (such as application
programming interface, platform business models, among others). It must also be noted that banking
operations are increasingly relying on outsourced technical operations of financial services, which has led to
commodization and modularization of banking operations.
Such a development, while generates benefits through cost reduction, operational flexibility and
resilience, opens banks operational systems to third parties snooping with the consequence of generating
liabilities and risks that banks must pay, if they occur (BCBS, 2018:5). One good example is the deployment of
internet of things (IoT). IoT enhances data and information collection, communication, sharing and transfer in
real time, which in turn strengthens capacity to leverage data analytics to ‘anticipate needs, solve problems and
improve efficiency.’
IoT by facilitating connections among various digital devices in bank premises, and between banking
institution and designated targets such as customers, suppliers, and partners thereby creating a seamless 24/7
flow of information that can help in quickening decision making, low cost, and increase efficiency. Some of the
areas where IoT is making inroads, according to xcubelabs (July 201, 2016), include loan application process
through an agreement between the bank and its client that allows the former to install sensors in the home of
the latter to monitor the condition of the house while the client is given the option to send additional relevant
documents to support the process for mortgages; and using Bluetooth low energy technology to monitor
customer transactions in context enabling the bank to offer loans that are informed by customer needs as
discerned from items being searched while shopping, which increases personalized financial service delivery
that augments customer experience.
In addition, IoT has another advantage which is its contribution to reducing the probability of
fraudulent activities thanks to the ability of transmitting particulars of the customer through immutably
encrypted messages; supporting effective monitoring of customer assets (collateral) by transmitting
information of the condition of assets of interest, send information to the bank to support repairs that banks
use to quicken loans for such purpose; provision of insurance policies that are based on data insights on vehicle
usage pattern, driving habits, condition of vehicle parts, incidents and so on that are transmitted by on-board
IoT devices to banks, insurance companies and vendors), which lowers possibility of fraudulent claims, reduces
maintenance cost, repair claims assessment costs, thereby increasing efficiency and value added.
With the support of augmented reality (AR), repairs are affected without the need for mechanics to
make physical visits to the location where the vehicle is located, which reduces costs significantly. IoT, is also
helping customers to place orders of household items by linking customer’s bank account with devises
retrofitted with sensors in the customer’s home that need regular refilling (such as refrigerators), and by using
artificial intelligence empowered devices that can send purchasing orders through remote voice commands
(Amazon’s Echo and Aleza, and Google’s Home).
Nonetheless, while its benefits seem limitless, the dangers of IoT cannot be underestimated. Worth
noting is the vulnerability of IoT devices to data breaches, which can cost banking institutions enormous costs
in liability as well as leaked secrets of bank confidential information on such issues as business current and
future strategy, invaluable intangible assets, customer information and data; increasing susceptibility to
“private violations, erratic automated processes, discriminatory model outcomes”(Levy, While & Helbekkmo,
28

2019). All that culminate into loss of public confidence, which is compounded by huge costs in fines from
financial institution regulators and paying liability suits. If such a breach cascades in the entire financial system,
financial stability while may not immediately face a crisis, may an increase in cost of funds as customers choose
other investment alternatives. Inevitably, lesser third-party deposits and borrowing from the banking systems,
weakens the role of banks in transmitting monetary policy signals, which should undermine financial stability.
Thus, There is little doubt that as 5G internet becomes mainstream both for mobile and fixed
connections (Ericsson,2022), pundits on internet security are warning of the potential security risks of placing
so much personal and confidential data and information in the public, private and hybrid Cloud facilities and
BCT networks, that will be instantly accessible from all corners of the Globe at high speed, low latency, and in
a bi-directional manner (Sims, 2018).
In an IBM-Ponemon Institute report (2018) on data breaches conducted in 15 countries in Five
continents, results revealed an increase in average total cost of a data breach was US$3.62 million (2018)
compared to US$3.62 million (2017) an increase of 6.4 percent; a 4.8 percent increase in the average cost of
data record breached from US$141 (2017) to US$148 (2018); and an increase of 2.2 percent in the size of data
breaches. The report also revealed another worrying trend, which is the increase in the likelihood that a material
breach will occur in the next 2 years from 27.7 percent (2017) to 27.9 percent (2018); a higher cost (US$ 1
million on average) for companies that take longer to identify and contain the data breach (more than 30 days)
than those with the capacity to detect and contain the data beach sooner (less than 30 days after it occurred).
While fully-fledged deployment of automation of data security reduces the average total cost of data
breach from US$4.43 million to US$2.88 million, extensive use of IoT increases the cost of every record breached
by US$5, US$40 million for a mega breach that involves 1 million records and US$350 million for mega data
breach involving 50 million records. Much headway has been achieved in the development and deployment of
hacker-proof cryptographically based encryption and automated security, which should reduce the likelihood
of data loss and compromise of business systems to bad elements and competitors.
Nonetheless, spates of hacking of Bitcoin exchanges in Japan and South Korea brought such concerns
to the fore. The problem that is increasingly becoming important and worrying, however, is the danger that
digitization programs increase the chance that custodians of customer data may be forced to release them
under duress to authorities without the consent of data owners. While many customers may not feel worried
about allowing their data to be accessed by companies that have the objective of using them to improve and
enhance their experiences through new product and service development or enhancing product attributes that
are based on customer needs and preferences (personalized product offers), very few customers are willing to
allow their data to be accessed by governments for other reasons other than verifying the likelihood of criminal
activities. And this is exactly what is happening.
A good case of Uganda serves to illustrate how a well-intentioned, private sector-based initiative faces
the danger of being undermined by government policy. The Uganda government perhaps, pressured into action
by established banking institutions who see digitization as a serious threat to their core businesses, concern
that mobile money accounts may serve as conduits of fraud and other organized criminal activities, in a
proposed amendment to the excise duty tax, proposed to impose tax on transactions that use mobile money
accounts. The government proposed a tax of 1 percent (Minister of finance had proposed 0.5 percent tax),
which was later passed in parliament, on any transaction that involves receiving and sending money, paying
water, electricity bills, and school fees using mobile money account. And that is in addition to a withholding tax
of 10 percent (raised from 6 percent), imposed on telecom service providers on airtime distribution and mobile
money services (Price Water House Coopers, 2018). Besides, under the excise amendment bill 2021, the
Ugandan government proposed an exaction of 12 percent tax on internet data packages, which is in addition
to 18 percent valued added tax (VAT). The tax makes internet data package in Uganda the most expensive in
East Africa at 2.67 per Gigabyte compared to $2.41, $2.18, and 2.18 for Kanya, Tanzania and Uganda,
respectively (Kehunde, February 02, 2023).
Uganda, like many developing countries suffers from high financial inclusion, with only 5 million bank
accounts for a population of more than 34 million. Yet thanks to mobile technology, there are 22.8 million active
mobile money accounts in Uganda (June 2018), with a total value of Uganda shillings 2.8 trillion (more than 50
percent of the country’s GDP). The policy illustrates how easy people who hold authority in the land or powers
that- be, to put it bluntly, can easily devise ways that are based on the state of the art technology that exploit
the working and architecture of digital products to intervene in cases that are based on digitization than was
the case during the analog technology dominated era.
For instance if an authoritarian regime wants to repress mobile phone connectivity, the only thing
the government has to do is to issue a directive on service providers to shut down servers or in the event of
taxing mobile communications message, issue an instruction to mobile phone service providers to effect the
addition of the fee on any transaction that mobile money account owner makes. In other words, the latter case
tantamount to a personal tax, regressive at that, that is exacted through a third party without the written
consent of the account owner.
It is not difficult to see the detrimental effect that such a policy may have on the future of internet and
mobile money use in Uganda in future. Imposing tax on data packages, airtime, money account transactions
whether at the level of users or providers is likely to complicate efforts to leverage digital technology to
enhance the reach and access of financial services, and by extension undermine poverty reduction, gender
mainstreaming, and regional income disparity initiatives. Meanwhile, the ease with which the government can
impose an arbitrary tax on mobile money accounts without seeking consent of the account owners first, makes
it plausible that the same government can issue a rule that orders telecommunications companies to suspend
users from having access to their accounts or even pressure them to surrender such accounts or details thereof
to the government. The case of Greece in 2011 where all of a sudden, the government issued a regulation that
ordered banks to desist from allowing customers to withdraw their money from their banks accounts as one of
the ways to stem bank runs, is a good but bitter reminder.
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Results of an assessment of the contribution of Fintechs to determinants of systemic risk as delineated
by Thomson (2010), showed that based on Europe and US data, Fintechs have yet to pose systemic risk to
financial systems (Franco et al. 2020). This is due to the still small size of fintech transactions (US$4.33 trillion
by 2018) compared with total assets of financial sectors; the decentralized mode of operations, low correlation
of activities conducted by Fintechs on their own as well as collaborations with incumbents in delivering financial
services; large number of Fintechs involved in delivering various financial services means still low concentration
and substitution risk in financial services delivered, low condition and context systemic risk (Franco et al, 2020).
Nonetheless, the growing number of cases of customers of mobile and platform money market
accounts losing access to their savings is very serious cause for concern. Similarly, the rising restiveness in peer
to peer (PP) lending and borrowing platforms due to complaints of extortive interest terms, the malpractice of
unilaterally changing covenants at will, and use of debt collectors in pursuing repayments (Cahyani, 2018),
constitute elements on a long laundry list on problems that users of seemingly online platforms are facing
after trusting newly founded fintech industry to solve their financial constraints (Danang, November 25, 2018).
This is not to mention the rise in non-performing loans, which financial tech platforms recorded over the past
year in Indonesia (1.45 percent), which if left unchecked has the potential to pose a risk to the financial sector
through various counterparty relationships.
Inevitably, that makes financial technology performance a new frontier for financial system supervisors
and regulators, which thus, adds another veneer of complexity to the immense responsibilities for regulators
and supervisors to keep a daily, 24/7, watchful eye. Doubtless, the plethora of problems has emerged as a
result of little understanding most users of fintech services have about the business model as distinct from the
traditional 24/7 regulated and supervised banking industry, the absence of effective control and supervisory
arrangements that must be flexible to take account of both the constantly changing market and operating
environment facing Fintechs and ensuring sufficient stability to prevent rising uncertainty that may directly
and otherwise adversely impact the traditional banking industry, financial sector and economy.
Another thorny issue is the failure of financial sector regulatory authorities to oblige providers of web
platforms and mobile-based financial services to establish governance structures in a timely manner , which if
effected, would ensure easy and early detection of risks before they culminate into intractable behemoths
that may threaten the entire financial system and by extension, the economy (Amelia, 2018; Rivers & Mullen,
2018). Putting in place governance structures would ensure transparency and disclosure of firm information,
performance, fundamentals of business models used, business process, risk management processes, and
financial positions that can be gleaned from firm asset and liability accounts, all of which would provide
predictability of the direction of firm performance.
It is worth noting, though, that implementing emerging technologies is not possible without
embedded AI. Manifestations of AI are increasingly evident in automation programs of product development
efforts, business process improvements and reorientation, customer experience and loyalty enhancement, data
analytics, cyber security and corporate asset protection. There is little doubt that the rolling out of 5G wireless
broadband internet , either the non-standalone or standalone (Rami, 2022; Otto, July 13,2022) will accelerate
the pace of emerging technology adoption and deployment because it is today an integral component of digital
transformation.
This is because 5G implementation supports digital transformation ,including API open banking
services, ecosystem framework services that are integral to business model transformation, embedded
finance ,deep learning, among others. This is because 5G offers better quality connectivity, speed, security
that respond to increasingly various demand for multimedia media content and services and data. This is
attributable to various features and factors. 5G wireless internet has faster speed that supports enhanced
mobile broadband (eMBB) that leverages cloud edge computing capabilities, which makes data processing in
local networks close to points of usage possible; delivers ultra-low latency communication (ULLRC) or mission
critical machine-type type communication (eMTC); bi-directional large bandwidth shaping capabilities that
support massive machine-type communications (mMTC)or massive IoT services; and supports the addition of
functions through software updates (virtualization); and operating of several virtual networks for differences
needs that reduces expenditure on capital investment and operating costs.
Overall, 5G provides better quality internet experience due to its ability to use different radio
frequency bands (ranging from low, mid to high) that support different capacities, uses and coverage. There
are two types of 5G are currently available for users. The super fast 5G uses radio frequency bands that range
between 24Ghz/s -40Ghz (mmWave). The major weakness of mmWave 5G lies in its limited coverage range
as access is affected by distance from transmitters, presence of windows, trees making it confined to dense,
urban areas and locations (some of the above weaknesses are being addressed by technology advancements
including multiple input multiple output (MIMO) antenna arrays, massive MIMO (mMIMO), and beamforming
antennas, among others (Rami, 2022)). Meanwhile the sub 6G, which is more widely available, uses radio
frequency bands that range from low (from below to 1GHz) to mid-bands (3.4GHz to 6GHz). The advantages
include longer coverage range as it is not affected by distance from transmitter, physical obstructions, windows
and trees (Clover, May 9, 2023). In addition, 5G’s antennae innovations enhance signal concentration improving
spectral efficiency and data capacity, that in turn minimizes interference arising from simultaneous access by
multiple users(Rami, 2022).
Nonetheless, ensuring flawless, regulation-compliant, and socially-acceptable implementation of
emerging technologies will require addressing several issues that relate to artificial intelligence (AI). AI is
embedded in emerging technologies, yet there are concerns about potential risks. Among such risks are biases
against minorities that are subconsciously built into algorithms during model training, fine-tuning and
optimization; reliance of large datasets for machine learning performance is likely to compel model developers
to access and use customer and corporate data without consent, leading to data privacy infringement disputes;
despite projecting that AI will not reduce employment beyond 5 percent by 2030 (Manyika et al.2017), fears
are abound about the potential for massive AI-induced layoffs (The Batch, October 30, 2019)2 as advancements
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and deployment of the technology become mainstream. Materialization of such fears will undoubtedly have
the potential to undermine public trust and perception of banks as agents of social and economic sustainability;
leveraging technology to maximize benefits of product and service differentiation by segmenting customers
along similarities of social groups based on race, socioeconomic statuses, religious and political affiliations. Such
a practice if automated, has the potential to accentuate social chasms and polarization.
However, there is a strong and naïve assumption that banks can have it their way to adopt and deploy
current and future drivers of competition, including emerging technologies, without the intervention of
financial regulatory agencies. That just cannot happen considering the fact that the importance of general
banks in supporting economic growth and stability due to the vital role they play in financial intermediation,
monetary policy transmission, fiscal policy implementation, financial development, public financial security
and financial system stability, general banks are some of the stringently regulated institutions. Having the
readiness, willingness, and interest to adopt and deploy emerging technology may not be sufficient for banks
to implement request policies in that regard. This is compounded by the retrospective, if conservative nature
of regulations that guide investment, financing and transactions involving financial product innovations and
business processes.
When it comes to GenAI, challenges banks face include ensuring that deploying large language models
does not infringe on privacy rights of employees , customers and other stakeholders that have interactions with
banks in its operations. The best way to derive actionable benefits from foundational large language models
(LLMs) is to contextualize answers of the LLM model through prompt engineering. Using industry or enterprise
specific data to query LLM model, a process that is referred to as retrieval augmented generation (RAG) ,
enhances the ability of model to provide answers that are relevant to the domain and specialty of the company
that deploys it (Databricks, undated). That way, the industry or company tailored LLM has enhanced capability
to provide answers that are relevant, more accurate, up-to-date and specific to the domain and industry where
the company conducts its operations. The problem is that using RAG to attune the static foundational LLM
model to industry and enterprise specific LLM requires access to data some of which is protected by various
data privacy protection protocols, laws and regulations. Thus, a bank may end up developing a very efficient
and effective agent only to face legal consequences that may undermine its reputation, cut into its coffers
(fines). One of the way technology companies such as Microsoft and Google have responded to threats of suits
from various sources alleging infringement on intellectual property without consent is to provide guarantee to
users of their models, such a reprieve may not be available to large banks that opt to develop their in-house
models that offer higher competitiveness than those outsourced from external sources 59.
The efficacy of a machine learning model lies in its predictive ability, which in turn is influenced by
several factors including features, whether attributes of data is comprehensive enough , quality of the data,
data size, composition of the data that is whether sample data used in training the model is representative of
the population that the model predicts; pruning efforts to increase model accuracy; and whether responses
are fine tuned through human interaction to avert abuse, hallucination, misrepresentation or cooking up facts.
The above list while not exhaustive shows the enormity of the task that developing an effective GenAI entails.
The case of a food delivery chatbot that was manipulated to decry services of the company that developed it
to serve as its customer service agent is a good case of point of what can go wrong if all necessary guardrails
are not properly put in place to ensure that technology delivers the service it was designed to provide.
There is little doubt that rationalization of processes, organizational structures, relationships, positions
and activities is already underway. Companies that are in the forefront of GenAI are not surprising leading the
employee chopping regime. Microsoft, Facebook, Google, IBM, name it, have announced manpower reductions
that run in thousands of lost jobs. Based on IMF predictions (Cazzaniga et al., 2024), cognitive intensive jobs
face higher AI exposure than those that have low cognitive intensity. To that end, advanced economies that
have many cognitive intensive jobs are expected to experience higher AI exposure (60 percent) , emerging
market economies 40 percent, and developing countries 26 percent.
As Cazzaniga clarifies, exposure will not necessarily translate into negative disruption as future
outcomes of the AI and labor market interaction will depend of how several underlying assumptions will pan
out. The assumptions include whether future AI advancement trajectory track past developments, degree of
complementarity of labor income growth and AI deployment, impact of GenAI on capital growth, and the
contribution AI advancement and deployment will have on overall productivity growth. High complementarity
between AI deployment and labor income growth, high capital income growth, and lower overall growth in
productivity are likely to increase pressure on skilled labor, widen income disparity between owners of capital
and employees, and Facebook’s year of efficiency that lays more emphasis on investing in capital intensive
compute infrastructure than labor intensive manpower growth (Matheson, February 02, 2024; Tan, January 19,
2024) will become a template that is likely to emulated not only in other big technology companies as is already
becoming evident, but also other companies large and small in other industries and sectors of the economy as
they accelerate the deployment of AI in processes, procedures, operations and systems (Bratton & Cheng,
February 14, 2024). This is the point the problem that Carmichael (February 05, 2024) elucidates if not decries
for increasing regularity and widespread nature.
There is growing realization that chatbots are after all machines without the empathy that human have
which is crucial for in-person interpersonal relations bring to the conversation. I don’t know whether there are
many individuals who can continue to talk in the middle of the night to a bank when all that one gets are
general answers that perhaps one can get from FAQs sheet on a company’s website. Chatbots are amazing until
one encounters a problem that the chatbot developer never anticipated will ever occur since it has never
occurred in the past. Wont it the right it be the right and opportune time for customers to ask about whether
machines are the real deal to deliver real customer engagement and relationships management experience that
is worth their unflinching loyalty.
It is also true that using GenAI in hiring manpower, surveillance presence, compliance with
organizational norms and practices, will ender perpetuation of exclusion, strengthen opposition to the use of
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GenAI even in areas where it can create value. One may forget that deploying GenAI is not cheap and is still
fraught with risk. This may explain the reality that large companies including financial institutions lead others
in deploying GenAI in their operations. Large companies have the financial resources to license foundational
LLMs or train employees to tailor and attune open LLMs to enterprise operations. Having a workforce on stilts
always in fear of falling victims to machine learning bias in regularity of attendance, performance evaluation,
compensation and career development is far from providing the ideal and conducive inclusive corporate
culture that evokes employee loyalty that is crucial for high competitiveness and strong corporate brand equity.
Besides, large companies have space to isolate deployment of GenAI from operations of company’s
main operations (on-premises sandboxes, one may call them). Small and medium companies do not have the
capital, human resources, and space to test and try the deployment of LLMs in such a manner that in the event
risks occur they are localized and isolated hence don’t impact adversely on company performance. To that end,
if the deployment of GenAI continues at the pace it has had since late 2022, there is certainty that we
everlasting leaders are already taking shape as are those destined to be everlasting laggards, not for choices
of their own but because of the small and medium scale of operations and limited access to capital, human
resources and space that entails.
In general however, while many the financial services industry (FSI) enterprises do not find difficulties
in identifying business cases to deploy AI, they continue to face a number of obstacles that hamper their
projects from achieving goals. Such issues include difficulties relating to access to quality data, project
operationalization and iteration difficulties( deployment and production), complexity of organization
infrastructure, limited visibility and control over data analytics and AI projects, and literate talent pool
(Dataiku, 2024).
IX. Conclusions and Policy Implications

The thrust of this article is the impact that Block Chain Technology (BCT), open banking and Fintechs, and
artificial intelligence on general banks performance and financial system stability. There is no doubt that
digitization, which is influenced and accelerated by the ICT revolution, has 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 the adoption
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; 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 an inclusive growth, higher household incomes, significant decline in poverty and income
inequality.
Internet, digitization and ICT, have also enabled financial institutions to develop and deploy API driven
Open banking and direct banking business models which generates 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 services that
complement different hence idiosyncratically driven customer journeys. That should sound good news for
stronger bank health, which is also vital for bank sector and financial system health. BCT and benefits that are
associated with its 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 an array of product offers, business process improvement,
reinvigorated business models, that should contribute significantly to efficiency and profitability of financial
intermediation and monetary policy transmission, and by extension, financial system stability.
Nonetheless potential dangers from increasing 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-based 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 open banking , potential risks are likely to arise from the 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 (Diamond et al. 2019); 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
32

financial institutions that are participants of falling foul of compliance requirements, creating costly sources of
reputation risk , which barring the existence of effective response and recovery functions in the affected
institution, may culminate into potential financial ruin , and by turn pose both direct and indirect danger to
financial stability.
While risky and requires costly huge upfront and recurrent investment in infrastructure, business
process changes , talent recruitment, reskilling and upskilling, and organizational structure and culture
reorientation, reorganization, restructuring and even repurposing, returns on the investment in adoption and
deployment of emerging technologies isn’t uncertain as long as the process adheres to best practices.
Considering the many strategic benefits and leverage banks can derive from emerging technologies
capabilities, specifically digital transformation, investing and deploying the related asset, infrastructure and
technology is no longer an option but an imperative to future proof bank performance.
This is because while time may seem to be on their side, there is no certainity that unless the
traditional banks accelerate and deepen their digitalization ecosystem through a multipronged approach ,
including ravamping backend and frontend technology, gradually tweaking ,rejuvenating and where necessary
abandon conventional banking business models, strengthening collaboration in product and service delivery
and attendant technology, disacarding the bank is king and adopting the customer-centricism is the only source
of sustainable value mantra. Not doing that increases the possibility that in ten years or less, banks will be
reminescing about lost opportunities due to failure to leverage up their capabilities and inherent advantages
to rise to the challenge Telcos and Fintechs pose to their erstwhile seemingly entreched unassailable formidable
fotresses in financial services delivery.
Worth noting however, is that technology adoption is important because of its contribution to
corporate value, rather than for its sake. Thus, the adoption of emerging technologies should be integral to
efforts to increase the ability and capabilities of banks to compete in the digital economy. Data analytics has
become the driver of competition in not only banking but also in all industries and sectors since it is underpinned
by digitization and digitalization. Thus, to remain competitive, banks must deploy emerging technologies in key
areas that strengthen their capacity and capabilities to collect, store, curate, transform, analyze, interpret
customer, supplier, competitor, and policy insights to inform business strategy. Doing so should help in the
reengineering of business processes, decoupling loss making non-core financial services to focus on key
revenue activities which are facing serious competition from technology companies and Fintechs (deposit
mobilization, payments management and lending and borrowing, and insurance services. At the end of it all,
however, adopting emerging technologies will only create sustainable value if adopters develop capabilities to
monetize the benefits and advantages in ways that align seamlessly with changing customer behavior. This is
where embedded finance plays a pivotal role.
Embedded financial service provision is another area where Fintechs and technology companies are
denting deeply into market shares of traditional banks. The attractiveness and rising demand for embedded
finance, accelerated in part by the policy response and customer behavior change triggered by the Covid-
19pandemic, has created demand for embedded financial technology platforms. Consequently, the supply of
platforms offering embedded financial services has increased, a development to which funding sources have
shown strong positive response at the domestic, regional and global levels. By integrating payments, lending,
investing, insurance, and banking services into super-applications, embedded finance creates one-stop service
interface for customers, which enhances customer experiences, satisfaction and loyalty. This is reflected in
factors users of embedded finance cite as drivers of improvement in their experience in interacting with
embedded finance including convenience, ease of making payments, aversion of cash payments, investments
and trading, borrowing and lending, and seamless integrated insurance services.
In ASEAN alone, financial technology including embedded finance, attracted US$4.3 billion in funding
during January-September 2022, a figure that represents an increase of more than 200 percent of the
comminated value for 2018-2020 period and 7 percent of US$63.5 billion invested globally in Fintechs during
the period. ASEAN remains attractive for FinTech investments (UOB, PwC-Singapore, & SFA,2022). The
increase in investment in Fintechs, is supported by efforts to lay the requisite regulatory framework. In
Indonesia for instance, the UOB, PwC-Singapore, & SFA report cites the role that improvement in the enabling
environment as reflected in the completion of the licensing process of 102 P2P lending platforms by OJK in
January 2022, and the recognition of digital banking as a subcategory of commercial banks in Indonesia has
contributed to making the country a fintech powerhouse. Thus, it is not surprising that Indonesia received
US$1.4 billion, which represented 25 percent of FinTech funding in ASEAN, which placed the country in second
position in the region, while Singapore with US$1.8 billion, representing 43 percent of the funding was in
prime position. Fintechs offering embedded finance, especially payments get-ways, received the largest share
of funding.
Thus, embedded finance is an area where traditional banks can invest some of their capital and human
resources in emerging technologies to increase their capacity, capabilities, coverage and reach, either through
spinning off branches, partnering with independent Fintechs, or creating new digital banks through
collaborative arrangements among banks, Fintechs, Big Tech and Telcos. Moreover, since customer
relationships management is crucial to attracting and retaining customer loyalty, it is also an area where the
deployment of emerging technologies can play a crucial role in establishing new footprints as well as
strengthening existing bank footprint. Emerging technologies can be used to leverage banks experience and
knowledge of customers to offer subscription services that should help to increase the diversity of revenue
sources.
Underpinning organizational resilience and agility , is the extent to which management and employees
feel secure and safe to engage, propose and get involved in suggesting new ways of doing old things , new
changes to routines, and new concepts to improve existing product and service offers as well as entirely new
untried products and services. This is what encapsulates a learning entrepreneurial organizational culture.
Innovations and inventions can be bought but sustaining their contribution to organizational value creation
33

requires nurturing and supporting an entrepreneurial organizational culture. The same applies to the adoption
and deployment of emerging technologies.
Considering the urgency of the need to change and the reality that regulation renewal often lags
innovations in competition and business processes and practices, the starting point of the process should be
revising, if not overhauling, provisions in prevailing laws and regulations, standards, recommended principles
and practices. This is because while most regulatory frameworks, standards and protocols that undergird bank
financial health today were adequate in enabling banks to develop relevant capacities and capabilities to face
the old types of risks , they are definitely inadequately prepared both structurally and institutionally,
processes, orientation, scope and coverage, to serve the purpose as well as they should in both the current
and potentially future environment that is and increasingly characterized by investments, financing and trade
in crypto assets coupled with a flurry of multi-stable coins and CBDC regimes. Effecting regulatory regime
changes should help to accelerate the alignment of bank strategies, processes and practices with the rapidly
changing technologies that are transforming business processes, and product and services. Changing
technology spurs innovations in products, inputs, processes, and practices, which need revised standards,
operational principles, protocols, and practices. And that time is not in the future but right now.
Artificial intelligence has become a game changer. It is offering immense opportunities that include
exponential growth in efficiency, productivity, creativity, business process and business model innovations and
transformation, heightened real time fraud prevention and detection capabilities, faster new product
development processes, all of which will contribute to strengthening both corporate top line and bottom lines.
However, potential risk lurk in either delaying or deferring deploying or overzealous deployment of the
technologies. Risks identified include the increase in biased recruitment and selection, performance appraisal
and compensation, and career development of human resources; loss of jobs for both routine and cognitive
intensive tasks; the culture of being a victims of real time surveillance; lost personal privacy and a return to
the perception long debunked that employees are just another factor of production that can be kept as long
as their services adds to revenue rather than an important asset that is critical to the formulation,
implementation of business strategy. General banks like other financial institutions have a head start in
deploying AI. Nonetheless, being highly regulated institutions, general banks cannot tread any ground where
financial regulatory regime remains equivocal, if not ambivalent in terms of applicable practices that are
allowed. This puts general banks at a disadvantage compared to fintechs and Big Techs as the operations of the
latter do not face as much scrutiny as those of the former. To that end, while personal privacy concerns still
loom large in AI deployment, heightened susceptibility to ransom attacks, phishing, social engineering,
deepfakes, and financial and reputation-costly confidential data breaches are credible and proven fears that
either limited or delayed engagement and deployment of AI at the rate and level firms have achieved in the
industry and economy can only aggravate rather than ameliorate position a serious threat to financial stability.
X. Acknowledgement
The process of researching and making a writeup of the has benefited from the contribution of various parties.
Specifically, however, the author would like to extend gratitude to the following researchers and practitioners,
whose incisive and constructive feedback contributed in various ways to improving the paper. The list ,while
not exhaustive, includes Miroslav Mateev , Gianluca Mattarocci, Amanda Antonely de Albuquerque Bispo,
Ting-Kun Liu, Pujiyono Suwadi, Chen Xichan , Nada Mallah Boustani, Aleksandra Nocoń, Md. Hafez, Miroslav
Mateev , Eleftheria Kostika, Nur Setyowati, Malik Cahyadin, Muhammad Fazlurrahman Syarif, Sambas Kesuma,
Andrew Tek Wei Saw, Azharsyah, Tarak Nath Sahu, Mohammad Nur Rianto Al Arif, Mohammed Al-Awlaqi,
Vedapradha R, and Alim Syariati.
Notes
1. In this article, Big Tech refers to both global technologies companies with large market capitalization
including Apple Inc.($2.123 trillion), Microsoft Corp ($1.757 trillion), Alphabet Inc.($1.189 trillion),
Amazon ($970.07 billion), Tencent ($463.53 billion), Meta Platforms ($348 billion),and Alibaba ($304.52
billion) ; as well as domestic technology companies , which because of the leverage they have over
emerging technologies and existing large customer base, are increasingly expanding into financial service
provision (https://companiesmarketcap.com/tech/largest-tech-companies-by-market-cap/)
2. Refer to ‘a sequence of structured or semi-structured tasks performed in series or in parallel by two or
more individuals or applications to reach a common goal, hence help in determining “tasks, rules, the
people and the applications used to deliver goods, services or information to internal and external
customers of an organization”(ULTIMUS, undated).
3. The rating score is based on ESG material risk exposure an organization faces based on its operations, gives
a score of 0-10 for institutions that have material ESG risk exposure that is negligible, score of 10-20 for
medium ESG risk score, score of 20-30 for high ESG risk score and severe ESG risk exposure for institutions
that have a rating of 40 and above.
4. However, with advancements in ML models, jobs losses are no longer limited to routine tasks but also
tasks that have eluded automation so far that involve complex decision making processes due to the
multiplicity of variables and context, and dependent on a variety of structured and unstructured data,
including driving a car on a busy street (autonomous car driving is on the cusp of achieving that);
interpreting output of medical equipment on patients such CT Scans; writing resumes and newspaper
articles (chatGTP3 is nearly there)(https://openai.com/blog/chatgpt/).
5. the two companies merged in 2021 to create GoTo , which today has a market capitalization of US$32
billion (Medina, April 12,2022)
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6. This includes remittances, money transfer, payroll payments management, and others that are based on
insights about customer experiences, needs, lifestyles and networking patterns and relationships .
7. LakuPandei agents have better knowledge of their customers than traditional bank branch officials because
they live in the communities where they serve. This obviates the need for high loan to value ratios, if any,
collateral security and demand for a lot of intrusive customer private information
8. https://www.ojk.go.id/id/pages/Laku-Pandai.aspx
9. https://qris.id/homepage/
10. https://www.bi.go.id/id/fungsi-utama/sistem-pembayaran/ritel/infrastruktur/default.aspx
11. The agency regulates and supervises the trading of commodity futures
12. Transactions based on BCT smart contracts are automatically triggered once in-built criteria are fulfilled.
This enhances transaction efficiency, tracking of current status and history, hence reduces possibility of
manipulation and misrepresentation
13. Defined as the application of computer and internet to boost the efficiency and effectiveness of value
creation process by improving and enhancing firm operations, interactions, and configuration of economic
value
14. The former being the movement from analog to digital data for streamlining existing firm processes(, while
the latter relates to the deployment of digital technologies and communications in business models to
enhance firm competitiveness through changes in customer relations, internal processes and value
propositions (Ross, 2017; Ritter, Pedersen & Sorenson, 2016; Ritter & Pedersen, 2020; Brennen & Kreiss,
2016)
15. On the benefits of artificial intelligence (AI) in banking (Digalaki, February 3, 2022) cites use cases in revenue
generation including enhancing customer experience through the use of chatbots that facilitate 24/7
customer interactions and underpin data analytics that identify potential actionable revenue generating
insights in the front office and underpin and support underwriting services in the back office and cost
and reputation loss reduction through fraud detection and risk management in the middle office.
Meanwhile, Smolaks(2020) argues that emotion AI, by using behavioral prediction algorithms, provides
banks that deploy the technology with insights that are discernible from the cadence, pattern, and
behavior in past calls of the voice of the customer to recommend course of action for customer service
agents to take, as well as helping in predicting purchasing and payment behavior, to inform credit
application decisions, and vital support in effecting proactive fraud detection and deterrence.
16. World Bank(2018)
17. Deep shift: Technology tipping points and societal impact, World Economic Forum, September 2015,
weforum.org.
18. Bitcoin, like other cryptocurrencies(others include ripple, Bitcoin cash, EOS, Stellar, Litecoin, Cardano,
Monero, TRON, and Ethereum), have been battered by speculative activity caused by uncertainty of their
intrinsic /fundamental values, with the most recent hacks that affected several crypto currency exchanges
doing little to assuage such fears; steep decline in prices since the beginning of the year that has increased
reluctance of institutional investors to consider the crypto asset as a stable return investment; resistance
from financial system regulators due to blatant shunning of regulation and centralized control, new found
fame largely attributable to strong adherence to the anonymity that participants on the platform enjoy to
both fellow participants (with the exception of public keys that other participants use as reference to
determine the participant involved in an instance on the platform), and non-participants. It is an attribute
that has raised serious concerns from regulatory and transnational crime fighting agencies about the high
possibility of the platform becoming a bastion and conduit of money laundering and other illicit activities,
at a time when global efforts are underway to exactly counter such activities (Upadhyay,October 17, 2018).
19. NFTs are unique tokens, the creation and development of which is underpinned by smart contracts ,making
them immutable. Thus, the implication is that value hence the price of an NFT may not line in the intrinsic
value per se but scarcity (McKinsey, 2022).
20. This is despite the wholesome confidence that cryptocurrency prospects received, hence investors and
experts, that associate the landmark decision made by the Singapore government which in late September
2018 when it launched its first cryptocurrency coin. The move, which is the first by country is being
marketed by the CashlessPay Group with effect from October 25, 2018
21. From a price of above $65, 000 in early December 2021 Bitcoin price has plummeted to $17,000 per unit
in early December 2022, attests to the high volatility of the price and by extension absence of fundamental
anchors of the currency. Touted as protection against secular inflation due to the maximum of quantity
that will ever be in supply (21,000,000), the reality demonstrates that Bitcoin price is actually tracking
general performance of the economy, rather than a shield against economic shocks including inflation, as
originally thought (Locke, May 07, 2022).
22. http://hyperledger-fabric.readthedocs.io/en/latest/identity/identity.html
23. https://www.hyperledger.org/
24. It is both the anonymity and failure of bitcoin networks to put in place sufficient cybersecurity mechanisms
that are to blame for the increasing frequency of bitcoin hacks that have hit several virtual currency
networks such as Coincheck exchange based in Japan, which lost US$500 million in cryptocurrency in late
2017, CoinRail cryptocurrency exchange based in South Korea in Mid-June 2018, that saw it losing more
than 30 percent of its cryptocurrency, and Bithumb virtual currency exchange, based South Korea which
was defrauded of US$30 million of its virtual currency. This is a point that Adriano (2018) also notes when
he cites evidence that since 2011, more than I millions of Bitcoin (valued at US$ 9 billion by May 2017), was
stolen from a number of exchanges.
25. This point can be illustrated by an example drawn from blockchain. While blockchain technology has strong
and proven cybersecurity features, one way to increase its commercial value is to widen the variety of
crypto assets stored and traded among participants. As most assets are physical in nature, the only way
they can be converted into crypto assets is to use35Internet of Things technology that beams messages to

and from the assets to reflect changes in values of such assets that a consequence of transactions on
respective blockchain. As it has already become evident, IoT technology is highly prone to hacks due to the
various transmission media that signals from the assets are move to and from the asset to the blockchain
(Mullen, 2018)
26. http://hyperledger-fabric.readthedocs.io/en/latest/build_network.html
27. Bitcoin which once stood at nearly US$20,000 ($19,783.21 to be exact, on December 17, 2017),contributing
to nearly 48 percent of global cryptocurrency valuation at the time Kharpal, August 07, 2018), by June 2018
had dropped to US$6000 and by November 25, 2018 traded at US$3800 cryptocurrency exchanges. The fate
of other cryptocurrencies with lesser contribution to cryptocurrency market capitalization such as Ethereum
have faced an even worse hammering reflected by deep decline in selling price of under US$100 on the
same date. The drastic decline is largely due to a deep draw in the cryptocurrency market by nearly US$63
Billion in spell of just seven days as Young (March 25, 2018) reports. Though the price of Bitcoin has
bounced back from its doldrums, uncertainty has not been helped by a drastic decline in confidence in the
cryptocurrency’s long term value as an asset class. “In every bubble-to-build-to-rally cycle in crypto,
newcomers and investors suffer intensely, both psychologically and financially. It is entirely possible for
institutional investors to lead the next rally in crypto but for investors that were affected by the recent crash
to invest in crypto could take time,” Young (2018) succinctly puts it aptly.
28. http://hyperledger-fabric.readthedocs.io/en/latest/identity/identity.html
29. In general, charges that users pay for using Google Cloud Platforms either computing engines, cloud
storage, API applications, objects, and transactions processing and events streaming services are based on
usage, with long usage accorded heavy discounts in many cases. Public blockchains, while offer limited
cloud facilities are in general free of charge
30. The case of the recently implemented General Data protection Regulation (EU 2016/679) sets the highest
bar on obligations it sets for institutions that collect, process, use, and store personally identifiable
information (PII), (natural person not legal persons), that should comply with several key principles ,
inter alia lawfulness principle (data processing should only be done if there is legal basis to do so such as
having consent from the individual, meeting legal obligation, or fulfilling requirement of a contract); fairness
principle(date processing should be done on condition that the institution that does the processing provides
individuals whose data it processes with sufficient information about the processing, and ways they can
exercise their rights, including right to reject or seek to know what data is processed and for what purpose,
and right to request deletion of data; transparency principle (information that users of PII data should be
concise and in formats that easy to read and understand; principle of purpose limitation(collecting personal
data should be related to a specific purpose, explicit, and for a legitimate purpose and should not be subjected
to further processing; data minimization principle(personal data collection should not exceed adequacy, and
relevancy requirements, and must not go beyond the purpose for which it is collected; accuracy principle(data
should be accurate and kept up to date; storage limitation principle(data should only be kept in formats that
allow permits personal identification as long as it is necessary to do so; security principle(data processing
should be done in a manner that ensures security and protection against unauthorized access, processing,
accidental loss, damage and destruction; and accountability principle(data controller or data protection
officer the party that should be held to account in case of failure compliance with GDPR principles). Failure
for an institution to comply with GDPR provisions makes it liable to a hefty fine that is in the order of 4
percent of its global revenue (EU, May 2018).
31. In a case involving Paige Thomson who hacked 100 million and 6 million accounts of Capital One customers
in March 2019, in a breach is expected to cost the company between US$100-150 million in technical costs,
credit monitoring, and legal support, not to mention fines if either SEC or FTC or both establish sufficient
evidence of noncompliance with prevailing data protection legislation to have influenced or facilitated the
case
32. https://www.dlt.sg/about-us/
33. The bond has Aaa/AAA rating, settlement data August 28, 2018; maturity data of August 28, 2020; and
coupon 2.20% p.a. payable semi-annually in arrears
34. ibid
35. during a remotely executed surgery involving many IoT components spanning long distances and using
many internet connections provided by equally many providers
36. Crypto assets are defined as “codes that are stored and accessed electronically” (Narian & Moretti,2022) .
37. Currently through relating messages about the state of one blockchain to another (cross chain messaging),
and facilitating exchange of tokens between users on the blockchain as well as across blockchains without
the involvement of a third party (a process known as cross chain atomic swaps(Wachter & Hammer,2019).
38. Until Blockchain lightning, which makes possible speedy transactions that range between microseconds
and a second, becomes mainstream, one of the key obstacles participants on blockchain face is limited
throughput at any given time. The problem is attributable to the long time it takes (a minimum of 10
minutes) for each transaction to be completed right from initiation , the frenzied search for solution to the
puzzle that eventually leads to the winner(mining), verification and appending of the transaction to the
blockchain. The implication is that increase in volume of transactions is likely to reduce the speed of
transaction even further, undermining scaling possibilities(https://cointelegraph.com/lightning-network-
101/what-is-lightning-network-and-how-it-works).
39. The collapse of US$60 terraUSD (UST) and its token coin luna project, which its creators touted as an
autonomously stable coin that was algorithmically pegged to the US dollar was as dramatic as it was far
reaching in the reverberations its collapse unleashed. Instability of the luna triggered selloffs that pushed
the UST peg to the brim until it could hold no longer considering the almost simultaneous frenzied exit of
holders of the stablecoin that begun in April and peaked in late May 2022 breaking the UST 1 USD peg.
Investors who had more faith in the resilience of the UST peg than the underlying code and Bitcoin reserves
warranted lost billions. One of the most financially destabilizing aspects of UST was the fact that the more
36

luna tokens were in circulation, the more it effectively increased the supply of the USD on the market
(Sigalos, May 29, 2022).
40. There is no better example of this than murky transactions that involved the Genesis Global
Holdco, supposedly an institutional digital assets financial services firm which is currently undergoing
bankruptcy protection proceedings, and Gemini crypto exchange (Shuey, January 27, 2023). Genesis and
Gemini co-sponsored Gemini Earn crypto asset investment that promises return for investor stakes. Billions
of investor money in Gemini Earn was collateralized by 30.9 million shares in Grayscale Bitcoin Trust (GBTC),
a Genesis subsidiary, with the remaining risk exposure if it materialized supposedly being the responsibility
of Gemini as the co-sponsor of Gemini Earn. Genesis held US$900 million in Earn assets prior to July 2022
crypto asset markets implosion. Rising volatility of crypto assets markets undermined Genesis liquidity
capacity any by extension its ability to meet withdrawal of investors’ money in Gemini Earn stakes. Genesis
has since sold the collateral and transferred the proceeds to Gemini, an act that in effect shows that
Genesis’s obligation that relates to Gemini Earn is settled, with the remainder being the responsibility of
Gemini. Thus, 340,000 Earn investors stand to lose US$615.7 million out of US$900 million, which
proceeds of US$284.3 million from the sale of GBTC collateral do not cover. This is not to mention the fact
that while Genesis Global Holdco, while in its bankruptcy protection filing acknowledges US$3.4 billion of
creditor money, prior to seeking for protection through bankruptcy protection filing, the company had
transferred US$1.6 billion in crypto assets through a loan that Genesis Global Capital, its subsidiary that
was included in bankruptcy protection filing, disbursed to Genesis Currency Group , another of its
subsidiary that ironically was not included in the bankruptcy protection filing (Deepti, January 20, 2023).
41. While there was a mistaken assumption that participation on Blockchain is anonymous it turns out in reality
that is not true for either public or private blockchains. Every participant or node on public blockchain has
a public key that is attached to the private key, and an ID number. Moreover, transactions have
timestamps. The combination of public key data, Blockchain ID for each participant and time stamp of
transactions can be used to identify individual participants in a transaction. Anonymity of participants on
private blockchain networks is even not possible. This is because endorsement of identity by selected
members with privileged access and permission is the only way to achieve membership, as is the conduct
of transactions that unlike on public blockchains that uses consensus of all participants, is based on
endorsement of selected members. To that end, access to private or permissioned block chain networks
is under the control of regulatory authorities, implying that even pseudonymity is not possible. For
regulatory compliance reasons, information about members who have access to private networks is easily
available compared to public block chain networks who initial aim was to decentralize control , access and
management of activities , a problem for which traditional centralized systems are decried (IBM, undated).
42. Which means that while Libra is underpinned by a secure blockchain network , backed by hard assets, its
ledger system is not fully decentralized or autonomous which means that only members of the consortium
that include Facebook , Master Card and PayPal) have the rights to verify and validate transactions. This
is contrary to the stated goals of the digital currency which is to increase financial inclusion to those who
are financially excluded who happen to be poor hence will have limited access to the private blockchain
because of its ‘permissioned’ design protocol (Decambre, August 20, 2019).
43. While many central banks have expressed interest in central bank digital currency, perspectives and
approaches vary widely. From the technical perspective, central banks can select an one of four CBDC
architecture designs. Some central banks have expressed interest in adopting the hybrid design in which
CBDC is a cash-like claim to the central bank, central bank manages the payment operations, central
transactions ledgers, and back up infrastructure while with the private sector does all the customer
retailing activities; a few central banks are opting for the direct CBDC design where the central banks
operates the CBDC payment system including the retailing process; and the third approach which has
attracted no interest and preference from any central bank so far, is the indirect CBDC design
/intermediated CBDC design, where CBDC constitutes a claim to the central bank, central bank manages
the wholesale ledger and not the central ledger of transactions, and the private sector conducts all
payments. The indirect (synthetic design), involves CBDC that are claims to intermediaries that operate
retail payments similar to narrow payment banks. Thus, customers have claims to the intermediaries that
in turn have to back fully their liabilities to retail clients with claims on the central bank (Auer, et al.
2020,pg.18)
44. Such principles include ensuring that CBDC does jeopardize the country’s monetary and financial stability;
the design and implementation of CBDC should be underpinned by the reality that it has to be in co
existence with and complement existing forms of money; issuing of CBDC should in no way restrict and
constrain innovation and efficiency in the financial system and economy (BIS, 2020)
45. Undoubtedly this is contrary to principles and drivers of globalization that are based on national and
regional comparative and competitive advantages
46. Trump’s America was a very a good example
47. application developer is responsible for runtime, storage of application code, database, programming
language, networking, bandwidth, security, and for non-plug-in APIs, application maintenance, and
publicity of application to users
48. API Strategy 101: What is an API? http://www.apiacademy.co/resources/api-strategy-lesson-101-what-is-
an-api/
49. http://platformed.info/apis-platforms-how-interfaces-access-enable-networked-economy/
50. https://www.crunchbase.com/organization/nubank/company_financials
51. https://nubank.com.br/en/
52. For which Facebook besides being required to implement risk management and personal data and
information protection measures, Federal Transportation Commission (FTC) fined a record US$5 billion for
“ designed not only to punish future violations but, more importantly, to change Facebook's entire privacy
37

culture to decrease the likelihood of continued violations”(Fung, July 25, 2019). In another development
related to Facebook data management culture(Fung, 2019), SEC fined the company US$100 million for what
it called “ charges…for making misleading disclosures regarding the risk of misuse of Facebook user data.”
In another data breach case that affected 147 million Equifax customers, FTC fined Equifax US$700 million
, and obliges the credit data collection and rating agency to put in place a “comprehensive information
security program (“Information Security Program”) designed to protect the security, confidentiality, and
integrity of Personal Information” (FTC, July 23, 2019).
53. The scandal involved the misuse of personal data for 80 million Facebook users
54. Personal data protection compliance requirements along other things require changing the organizational
culture with respect to the personal data is collected, processed, stored, and shared; calls for the
establishment of a data protection officer, which means higher costs for companies; maintaining contacts
with sources of personal data on data collection, processing, use, and storage which is a throwback to the
past hence contrary to current trends in all industries and sectors that are transforming from siloed data
systems architectures to business models that are increasingly allow instantaneous, multi-format data
collection, storage, processing and sharing that machine learning and artificial intelligence methods
require to train, test and validate effective algorithms that are used to generate actionable insights
55. Which in most instances faces constraints that are associated with how to deploy a new system to replace
legacy systems without causing disruption to business activities that may spark invite clients’ complaints,
decline in effectiveness, and decline in firm as the new system takes over the analog based one. A strangler
model is recommended but implementing that is not entirely free of problems that may reduce
performance temporarily, which is not the kind of news that managers want customers to share with their
friends.
56. The rapid increase in the number financial technology startups that are mediating lenders and borrowers
(peer to peer lending), while led to increase in funds available for borrowing due to an increase in lenders,
has also created new problems. Some of the problems, that OJK noted were the imposition of a high
interest on loans (19 percent), which adversely impacts on borrowers’ ability to repay, a fact that is
reflected in another problem, which is the rise in nonperforming loan rate from 1.2 percent in January 2018
from 0.8 percent in December 2017
57. The rising renegade activities among other measures, motivated the Reserve Bank of India to strengthen
regulation on P2P lending platforms practices, activities, and accountability (Kaur, December 20, 2019), and
many cases where risky borrowers take advantage of informational asymmetry to borrow amount they
cannot repay leading to bankruptcy of lending platforms (Klein et al. 2021)
58. The ten principles call for the establishment of a supportive Legal, Regulatory and Supervisory Framework
(principles 1); stipulate the roles of oversight bodies in such a system (principles 2); call for Equitable and
Fair Treatment of Consumers(principles 3); Disclosure and Transparency (principle 4); conducting Financial
Education and Awareness campaigns(principle 5); Responsible Business Conduct of Financial Services
Providers and Authorized Agents (principles 6); Protection of Consumer Assets against Fraud and
Misuse(principle 7); Protection of Consumer Data and Privacy(principle 8); opportunity for complaints
Handling and Redress(principle 9); competition in delivery of financial services to provide consumers with
wide choice of services, fair prices, and value for money(principle 10)
59. In one of the latest and audacious security breaches, Singhealth, the largest health case in the city state
that is home to 5.6 million people, saw nonmedical data particulars for outpatients who paid visit to
organization facilities during May 2015 - July 4 ,2018, totaling to 1.5 million clients, compromised (Joshua
Berlinger, July 21, 2018). Information compromised during the hack included names, addresses, dates of
birth of patients, and identity cards. However, Medical records of another 160,000 outpatients were also
targeted. Names of people whose particulars were compromised included city state Prime Minister Mr.
Lee Hsien Loong, reports Berlinger. And this happened in a country that boasts one of the best cyber
security systems on planet earth. The episode has shown not only the audacity but the capabilities that
hackers have developed to penetrate into systems that hitherto were considered impregnable against
cyber-attacks.
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Appendix
List of figures
Figure 1.
10500000 2.50%
10400000 2.00%
10300000
1.50%
10200000
10100000 1.00%
10000000 0.50%
9900000 0.00%
9800000
-0.50%
9700000
9600000 -1.00%
9500000 -1.50%
Total Assets Asset growth(%)
Source: Indonesia financial supervisory agency (OJK)
Figure 2. ROA (%) and net interest margin to Net operating margin %
5.00
4.00
3.00
2.00
1.00
-
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Agt
2022
ROA Net Interest Margin Ratio (%) / Net Operation Margin Ratio (%)
Figure 3. Core capital to risk weighted asset ratio, operating expenses

53

to operating income ratio
26.50 86.00
26.00
25.50 84.00
25.00 82.00
24.50
24.00 80.00
23.50 78.00
23.00
22.50 76.00
22.00 74.00
21.50
21.00 72.00
Core Capital Ratio to ATMR (%)
Capital Adequacy Ratio (%)
Operating Expenses/Operating Income (%)
Figure 4. Net profit (Billion IDR) and Net profit Growth (%)
160,000 100.0%
140,000 80.0%
60.0%
120,000
40.0%
100,000 20.0%
80,000 0.0%
60,000 -20.0%
-40.0%
40,000
-60.0%
20,000 -80.0%
- -100.0%
Apr*)
Mar*)
May
Jun
Jul
Feb*)
Dec
Jan
Nov
Augt
October
2021 2022
Net profit/loss (Trillion IDR) Growth(%)
Figure 5. Bank investment in government bonds (SBI and SBIS)

50,000
47,332
45,000
40,000 41,842
35,000
30,000
25,000
20,000 18,785
15,000
10,000
5,000
-
2020 2021 2022-August
Figure 6. Capital adequacy ratio (%), liquid assets ratio (%),

loan to deposit /financing to deposit ratio (%)
54

30.00 82.00
81.00
25.00
80.00
20.00
79.00
15.00 78.00
77.00
10.00
76.00
5.00
75.00
- 74.00
Capital Adequacy Ratio (%)
Liquid Assets Ratio (%) (primary&secondary)
Loan to Deposits Ratio (%) / Financing to Deposits Ratio (%)
Figure 7. Internet users current and projected in millions (Indonesia)
Source: Nurhayati-Wolff(Aug 16, 2021)
Figure 8. Cellular subscriptions in Indonesia and World, 2020,compared
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
World Indonesia
Source: World Development Indicators

55

Figure 9. Cellular ownership, internet access and mobile account ownership
Source: Global Financial Index database (2022)
Figure 10. Mobile account ownership by social income status and gender
Mobile account, male (% age 15+) 23.22%
Mobile account, income, richest 60% (% ages 15+) 56.45%
Mobile account, income, poorest 40% (% ages 15+) 27.82%
Mobile account, female (% age 15+) 66.17%
Using mobile accountfor money storage (% age 15+) 26.00%
0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00%
Source: Global Financial Index database(2022)
Figure 11. Mobile penetration, Internet penetration, Internet penetration, and Social media usage
Millions
0 50 100 150 200 250 300 350 400
MOBILE PHONE PENETRATION 338
INTERNET PENETRATION 85
FACEBOOK USERS 70
TWITTER USERS 30
Source: various sources
Figure 12. Various uses of blockchain
56

Source: Kalyanicynixit (Mar 03, 2020)
Figure 13. CBDC developments by stage of implementation
Source: IMF(2022)
59
60. https://aisera.com/blog/generative-ai-in-
banking/#:~:text=What%20Does%20Generative%20AI%20mean,tasks%20that%20were%20previously%2
0laborious.
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Digitalization, Emerging Technologies, and Financial Stability:

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II. Research Methods

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III. A Snapshot at the Recent developments in the Performance of Indonesian Banking

Bank asset growth

Return on Assets and net interest margin.

Core capital, and operating expenses

Bank net profit

Investment in government bonds

Bank capital, bank liquidity and loan to deposit performance

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IV. Background on Key Initiatives in Indonesian Digital Banking

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V. Drivers and Ramifications of Digitalization in Financial services delivery

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Central Bank digital currencies (CBDCs)

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I. The AI age is here: Generative AI and Financial services delivery

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VIII. Key Challenges emerging technologies pose to financial service delivery

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IX. Conclusions and Policy Implications

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AICPA-CIMA.(2024). From Scorekeeper to Futurist:The Journey to Finance 5.0.

Aiyar, S., Chen,J., Ebeke, C.,Garcia-Saltos,R., Gudmundsson,

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Andonni, I.A. (2018). Blockchain As An Application Platform. Forbes Technical council.

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Bank Indonesia.(2022a). Project Garuda: Navigating the Architecture of Digital Rupiah.

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Carmichael, S.G.(February 05, 2024). Mass Layoffs Shouldn’t Be Routine. Bloomberg.