“THE GLOBAL FINANCIAL AND ECONOMIC CRISIS HAS DONE A LOT OF HARM TO THE PUBLIC TRUST AND CONFIDENCE IN GOVERNING AND FINANCIAL INSTITUTIONS, AS WELL AS THE PRINCIPLES AND THE CONCEPT ITSELF OF THE MARKET ECONOMY.”
The global financial and economic crisis has done a lot of harm to the public trust and confidence in governing and financial institutions, as well as the principles and the concept itself of the market economy. It has also eroded a lot of public trust in corporations. The climate of global financial uneasiness can partly be attributed to the global meltdown of 2008 where governments and other regulatory agents failed in their responsibility to monitor and steer unrestrained speculative and damaging financial activities. Outside of the instrumental complexities of collateralized debt obligations and credit default swaps, the repeal of the Glass-Steagall Act, or macro-analysis of global imbalances (in levels of savings and investment), prominent voices have echoed in unison on the erosion of trust and confidence in the global financial system.
The main themes to financial reform following the aftermath was basically to encourage greater responsibility after and accountability for risks taken prior, in the form of not bailing out the bankruptcies, limiting the increasing complexity of financial instruments, transparency and answerability for derivative trading to prevent investment managers from making enormous bets with other peoples’ money, among other improvements.
THE RATIONALE FOR FINANCIAL DISRUPTION
In response to the deteriorating fiscal and banking conditions in some countries, and increased financial fragmentation, major governments like the European Union (EU) and United States (US) had supplied liquidity at very long maturity and at low rates in an attempt to counter the impending risks for their banks. As the monetary policies struggled to deliver their intended outcomes, credit and economic growth were falling, leading to rising unemployment and reduced consumption and investment. The public grew more restless, with increased resentment and decreased confidence in the ability of their governments to tackle the depressed markets.
This frustration worsened by the bailouts of ‘too big to fail’ entities, have resulted in very smart individuals creating ways to create their own trust mechanisms through technology.
If you look at Bitcoin, for example, its blockchain technology was born out of the need to keep people honest in the absence of a central authority and designed to be public and allow anyone to participate. The design sacrificed efficiency in order to ensure that theft would not pay because rewriting the ledger would require so much computational power.
Subsequently, with verifications happening from various nodes all over the world, a system like the blockchain has developed a mechanism of trust where two people who have not met and do not know each other are able to make a transaction through a technology that has done the checks and instilled a level of trust that is required in such transactions, by eliminating fraud and margins for fraudulent activities. This is one of the major reasons that disruptions, especially in the financial industry, are happening and happening at a massive scale. Creating a system that is harder to tamper with and easier to audit will bring great benefits to an industry that is being increasingly regulated by central authorities. Beyond such rationale, other additional benefits lie in operational advantages like cost reductions, improved efficiencies, transparency and productivity.
DIGITAL TRANSFORMATION AND DEVELOPMENT
THE COMPUTING POWER OF DIGITAL SYSTEMS IS BECOMING STRONGER, FASTER, AND CHEAPER AT AN EXPONENTIAL RATE AND IT IS IN LINE WITH ONE OF THE MOST FAMOUS LAW, MOORE’S LAW, WHICH PREDICTED IT.
Digital Islamic revolution, digitalization, and digital transformation have become the most frequently used words in this last decade, but especially in the last few years. This term of digital transformation has no universal definition due to its diversity and it encompasses many dimensions like digital supply chain, digitalization of services and products, and so on.
There is a plethora and multiple definitions of this term used to describe the offline-to-online migration of commercial operations and businesses, including those found in many published research.
Researchers Solis, Li, and Szymanski defined this term in a concise way in these words, “the realignment of, or new investment in, advanced technology and business models to more effectively engage digital customers at every touchpoint in the customer experience lifecycle”.
“THE REALIGNMENT OF, OR NEW INVESTMENT IN, ADVANCED TECHNOLOGY AND BUSINESS- MODELS TO MORE EFFECTIVELY ENGAGE DIGITAL CUSTOMERS AT EVERY TOUCHPOINT IN THE CUSTOMER EXPERIENCE LIFE CYCLE”.
There are also different terms used in different countries with the same concept like “smart industry” and “industrial value chain initiative” in Japan, “industrial internet” in North America and “Industrie ” in Germany and so on.
The agenda of digitalization has not only received considerable attention from different industries and businesses, but governments and regulatory authorities have also had to keep up with the disruption and changed business environment and markets. They have begun to give importance and keep abreast with the new era of digitalization in order to be able to remain relevant in their fiduciary and ‘watchdog’ duties.
The most recent and latest example of this, is the newly formed German government which emphasized it in their list of most dedicated items.3 Unsurprisingly, other governments are following suit as studies have shown that the use and adoption of Information Communication Technologies ICTs by a large number of population has a very positive relationship with the Gross Domestic Product (GDP) of the respective countries.
Digital transformation is imperative for the financial services industry to remain competitive and longevity in the market. The survival of financial institutions is connected with the adoption of innovation, and in embracing digital transformation to radically improve efficiency and performance within the organization. Digital transformation and new technology adoption have changed the way of doing businesses and channels to offer banking and financial products and services more intuitively and trustworthily. These new ways may be very different from the past and has resulted in reshaping the existing models of businesses and creation of new innovative ones. In doing so, the transformations have created new industry and market leaders.
It was inevitable that technology would meet finance and spawn FinTech. The use of technologies like algorithmic machine learning, collecting massive amounts of data and interpreting them for decision-making or ‘crystal-ball’ predictions (predictive analytics) and distributed ledgers (blockchain) in financial industry will give rise and create innovative business models with increased levels of efficiency, productivity, cost-effectiveness whilst also improving on customer-centricity.
The most important thing and also a great challenge for both FinTech platforms and financial institutions is to adopt and implement a very pertinent, practical and transparent strategy for digital transformation within the organization as well as in external engagements. This is not only essential to harness the opportunities afforded by such advancements in technologies, but it communicates the vision of the organization moving forward into the new digital economy.
SHIFTS IN CUSTOMER BEHAVIOUR
A customers’ journey is the way the customers choose to satisfy their wants and needs and will typically encompass many different processes. Digital transformation is changing the customers’ behaviours in unimaginable ways and this changing and influence of digitalisation in the lives and psychology of customers is very significant for all industries and in particularly for the financial services industry.
The generation-to-generation habits to react and act to an action has also been changed. The younger generation lives in a different world than the ones their parents’ generation lived through. The millennials who are born between 1980 and 2000 encompass more than half of the world’s population. They are projected to hold US$7 trillion as liquid assets by 2020. The adoption of technology, like smartphones and other smart devices is high in the millennial generation and also in digital natives (the generation who are born after 2000).
Such generations of youth prefer digital channels to access services and products, and they cannot imagine life without smartphones or the internet. The recent survey by PwC about the digital behaviour of customers shows that 46% of the survey respondents use digital channels, mobiles, tablets and laptops to access banking services as compared to 27% in 2012. Similarly, the access to banks through brick-and-mortar branches has shrunk from 15% to 10%.
Increasingly, customers are leaving physical bank branches and moving to digital channels and this marks a significant shift in consumer behaviours.
The digital transformation shift has also changed the expectations and wants of the customers. Today, customers want banking (or any other service for that matter) from anywhere they are and at any time, regardless if they are in the offices, or at homes in the evenings, or at a beach or in a park at the weekend. This digital behaviour of customers set a new bar for different services industries. Each of the industry is trying to fulfil the needs of these digital mindsets by using Omni channels and advanced technologies. The competition is growing in financial institutions and FinTech platforms in the provision of more customer-centric services.
In addition, McKinsey notes that FinTech startups are moving beyond addressing a customer’s financial needs to offering a wider range of services, blurring the industry’s boundaries. For example, Social Finance (also known as SoFi), began offering financial products to students and young professionals but has since expanded to provide career coaching and networking services. Another prominent example is Holvi Payment Services, a Finnish start-up acquired by Spanish financial group Banco Bilbao Vizcaya Argentaria (BBVA) in 2016, began by offering banking services to MSMEs and expanded to provide other paired offerings, such as an online sales platform, bookkeeping services, expense-claims systems, and a cash-flow tracker.
The scope of products and services offered by FinTech companies is expanding rapidly, from being focused on payment applications, lending, and money transfers, their reach now extends into areas that include a broad engagement throughout the value chain. The new offerings cut across a wide range of financial services: corporate and investment banking, insurance, micro, small and medium enterprises (MSMEs), retail, and wealth management.
CONCLUSION
These innovations like artificial intelligence (AI), big data, blockchain, machine learning, internet of things (IoT) devices, are the disruptive tools that will play a crucial role in boosting the financial sector (banking, takaful, investment, etc.) including the Islamic Finance sector. Addressing the digital revolution that is happening right now will foster competitive advantage for the Islamic Finance industry.
FinTech is a rapidly growing sector of financial market which has evolved into a very dynamic area through the rise of smartphone penetration and operational cost reduction. Digital disruption has created a Sharing Economy having the potential to share resources via utilization of underused assets by previously disconnected potential users, and a decentralized scaling power to reach to remote and underbanked populations across the world for the enhancement of financial access and inclusion. The blockchain industry is one of the first identifiable large-scale implementations of decentralization models, conceived and executed to scale the complex levels of human activity, possibly even those that have yet to be imagined, which could further establish the Sharing Economy in the Islamic Digital Economy.
The use cases for the blockchain is expanded into several key areas that are necessary for the Islamic economy. A key application of the blockchain is the smart contract technology which, along with other enablers like payment, transaction settlement, registries and document storage systems, will be essential for building more efficient and cost-effective blockchain-based versions of takaful, Islamic capital markets, media rights, property rights, land and title deeds registries, intellectual property and trademark protection.
The applications of the next phase of blockchain use case are where transnational and intergovernmental organisations, like the ASEAN, EU, GCC, IMF, UN, and World Bank are concerned. There is a scale and jurisdiction consideration that certain transnational operations can be more effectively administered, coordinated, monitored, and reviewed at a higher organizational level through a unified blockchain-based system. This era of digitisation, shifting behaviours of consumers as well as the new challenges that come with it, such as collaboration models to spur innovation, agility and scalability along with circumventing cybersecurity issues requires an urgent and intelligent response from the Islamic finance community.
