Today, obvious global trends in the development of the world banking system are observed – an increase in the number of services provided by banks, an increase in the cost of financial resources, consolidation and geographical expansion of credit organizations. Moreover, the increased influence of modern scientific and technological revolution on the development of the banking system should be noted. In this context, it seems appropriate to analyze the evolution of banking information systems (IS), which is due to the presence of general orientation and gradual development; occurrence and subsequent change in system properties, institutional changes associated with banking, and other critical factors.
Conceptual Evolution of Information Systems in Banking
Information systems for banks have come a long way from developing simple DBMSs developed on personal database management systems (for example, Clipper, dBase, Foxpro), to modern ones based on client/server solutions of industrial DBMSs (Oracle, Informix, Sybase, MS SQL Server), which allow automating the entire spectrum of banking business processes: liquidity, personnel, banking risk management, etc. The development of communication tools, the reduction of information processing time, the development of network technologies allowed banks to carry out comprehensive automation of their activities, develop mechanisms for remote customer service, and offer a new range of services. The widespread use of automation has led to a change in the implementation of banking technologies.
Until a certain time, the design of IS was carried out mainly at an intuitive level using informal methods. The emergence of a structural methodology in the 70-80s that provided developers with significantly more rigorous formalized methods for describing IS and adopted technological solutions contributed to the emergence of automation tools for developing IS – CASE-tools (Hurt, 2016). The development of integrated tool systems based on the concepts of the life cycle of software products quality management has led to the creation of a number of conceptually holistic technologies equipped with high-level design and implementation tools for software products. Today, for obtaining reporting and analytical data, the technology of operational analytical data processing based on the use of a multidimensional analytical database (OLAP technology) is used. OLAP technology can be practically implemented in two ways (Kelman, 2016):
- Based on autonomous specialized OLAP-platforms (Oracle Express, Cognos, etc.);
- By implementing multidimensional data structures based on conventional relational DBMSs. On the one hand, this approach may not allow using all the features of OLAP-technologies. However, such a data structure can be integrated into the ABS data scheme, which will allow the bank to obtain a number of technological advantages if the proposed solution is successful.
The market for software products for banks is represented by a wide range of systems that differ both in functional part and in technical implementation. Moreover, a number of banks (about 50%) develop their own software (Indian Institute of Banking & Finance, 2017). The qualitative evolution of the activities of banks, their increasing requirements and financial capabilities will develop and guide approaches to the organization of banking technology software, to the choice of a particular IS or software product developer. In addition, with cloud computing, banks can focus on their core business, rather than on ensuring infrastructure scalability. Banks can use cloud technology primarily to increase productivity during peak periods, but ultimately the cloud can spread to other areas.
Moreover, the introduction of Big Data technologies in the development of banking is primarily aimed at increasing the level of service, including its qualitative aspect. In turn, the use of new banking technology allows interpreting the results taking into account the level of bank capitalization and its liquidity, as well as determining the risk potential for various types of banking operations. The bank’s credit operations occupy a special place, and Big Data technology allows intensifying the use of new banking products and services, including the optimization of these banking operations (Hurt, 2016). In connection with active operations, this technology is indispensable in relation to the collection and processing of customer information in the implementation of credit and investment operations. The selection and personification of existing banking products by specific bank customers is ensured using Big Data technology, including the implementation of the “Next Best Action” concept (Wewege, 2017).
The Big Data information technology allows, from the point of view of customer’ interest, to carry out prompt marketing reaction to a certain type of banking innovative products. Given the preference for tastes, the bank, having information and processing it, can concretize and personify specific banking products and operations that can be demanded by existing and potential customers.
The Role of Globalization in the Development of IS in the Banking Industry
The penetration of information technology into the financial industry has fundamentally changed the infrastructure of banking processes. Ensuring the competitiveness of banks in globalizing financial markets without using a wide range of information systems is not possible. Information technologies can potentially reduce production costs, lower the cost of entry into the market, contribute to the globalization of production and open the possibility of revenue growth without increasing the size of the bank or even accompanied by a reduction in its size.
Globalization is accompanied by deregulation of banking and the liberalization of financial markets. At the same time, the institutional distinctions between various types of banking and financial activities are erased: commercial, investment, insurance, etc. (King, 2017). As a result, the nature and forms of competition in financial markets are changing significantly. Banks are forced to compete simultaneously in many segments of the financial market, and not only with each other, but also with other financial institutions – insurance and investment funds, financial companies, etc. Today, information technology has become the driving force behind radical structural changes in the banking business. They overcome space and time, opening banks to round-the-clock access to any geographically distant markets.
At the same time, the traditional competitive advantages of banks – multifaceted, long-term contacts with customers and a developed branch network – partially lose their significance. A new layer of customers has appeared who willingly use the services of Internet-banking. The nature of the bank’s communication with these customers is very different from the traditional one (Samar et al., 2017). Modern multimedia tools provide virtual interactive communication between the bank and the client, which gradually replaces personal communication with him. Technologies in on-line mode, providing market transparency, allow customers to select the most advantageous service offerings for them without much time and effort, which reduces the possibility of a “price maneuver” for banks.
Based on new technologies, banking services (for example, transferring payments) can be provided by organizations that are not banks, including telecommunications firms. The latter, as a rule, are oriented not toward particular operations, but offer an individual package of services for each client. Under these conditions, in order to maintain competitive prices for services, banks are constantly struggling to reduce costs by introducing cost control and efficiency analysis schemes. At the same time, the desire to meet the requirements of the time makes them increase the cost of introducing new information and telecommunication technologies, and develop electronic distribution channels in addition to the existing branch network. Thus, a contradiction between the desire for savings and the need for large costs emerges.
Risks and Challenges of Information Systems in Banking Industry
In addition to the positive impact exerted by information technology on the activities of credit organizations, it is impossible not to note the negative consequences of their use. For example, information systems have become a source of serious financial loss in case of failure. The consequence of these losses can be either partial or complete loss by the bank of the ability to perform its functions. The increased dependence of the normal operation of the bank on the stable functioning of information systems has led to the emergence of a fundamentally new type of risk for the bank – information risk, which can be defined as the likelihood of damage from the use of modern computer information technologies in banking transactions (Alfarra et al., 2017). The novelty of this type of banking risk lies in the fact that for the first time the technologies that provide banking operations began to determine how to provide banking services. This, in turn, made the successful provision of services to customers dependent on the smooth functioning of information systems.
A feature of the work of financial organizations is that information losses here can be expressed in huge amounts of money. This is due to the fact that banks preserve not only the material values of their customers, but also bank secrecy – data on depositors, creditors, their accounts and funds. Any leak of such information leads the financial organization to serious reputational, legal and operational problems and, consequently, to loss of income.
Hacking of automated banking systems and theft of funds through unauthorized transfers from one account to another negatively affects the bank’s reputation and entails the need to reimburse huge funds. The same consequences for banks are derived from transfers from accounts by forgery of plastic bank cards and phishing.
A modern bank operates with huge amounts of information that require fast encryption “on the fly” for their safety, which significantly increases the system requirements for computer technology and cryptographic devices. In addition, banks need to ensure backup of large amounts of data and secure storage of copies. Any security incident can be complicated by the fact that information about the vulnerability, as well as software tools for using it, is instantly distributed over the Internet, leading to large-scale exploitation of the vulnerability (Chaikovskyi & Kovalchuk, 2019). Therefore, financial institutions need to pay special attention to the choice of software or IT contractors, as well to in-time updates.
Fintech and the Future of Banking
Advances in information technology generate new products and services and change business processes. Most banks would be transformed in accordance with the virtual business model made possible by information technology and joint operations capabilities. However, a sustainable competitive advantage must be constantly updated; innovation needs to be fueled to provide this update; the business processes of the enterprise should be reformed to create a process advantage that would provide a powerful strategic tool for the enterprise.
Modern consumers are accustomed to the quality of user experience that technology giants can provide them with – Google, Amazon, Facebook, Apple. However, most banks are not yet able to provide it, and this means that over time, they may encounter problems as the development of Techfin. To avoid them, experts recommend the following (Aguayo & Slusarczyk, 2020):
- Minimize the negative impact of outdated systems. If replacing them is hardly possible, one should look for solutions for managing data with an adaptable structure. This will allow working with old software and advanced technologies.
- Be attentive to the storage of content. Finding the necessary information is time-consuming when it is dispersed across different blocks and systems. In this case, it makes sense to use data collection technologies regardless of their location.
- Search for affordable solutions for customers. Consumers are looking for quick and easy ways to interact with banks. The latter are trying to provide them with slow and poorly adaptable platforms. However, traditional financial institutions can adopt advanced digital models to provide a change in software architecture components. This can make the bank more competitive than when using individual (particular) solutions.
- Avoid informational chaos. Analytics is the key to discovering the value of data. Using platforms to manage them allows making more informed decisions.
- Do not forget about scalability. Many bank systems cannot be scaled as they grow, although namely the presence of such an opportunity should be the main criterion in choosing software providers.
New technologies are changing the way of using financial services, including bank services. Unlike previous historical episodes of increased competition in the banking services market, now the alternatives are developing especially quickly. Today, the business model of large banks is being challenged by large technological (Big Tech) and financial-technological (Fintech) companies, whose strategy is somehow built around technological innovations (Arslanian & Fisher, 2019). Banks often see in fintech companies not only competitors, but also technology partners (Chaikovskyi & Kovalchuk, 2019). At the same time, the following trends are obvious: the introduction of lightweight versions of Internet banking, OpenBanking, the integration of communication channels, mobility, deep integration with non-banking services. It can be assumed that in the future neobanks will change their “appearance” and after about 10-15 years, most likely, it will be difficult to find a traditional bank with branches and a large staff. All operations and processes will be carried out through the Internet through the introduction of fintech developments.
The challenge posed by rapidly changing technologies requires managers to change their business practices and mentality in order to take into account the new threats and opportunities that technological advances bring. Managers should monitor new technology developments and evaluate the potential impact of these developments on their organizations. Only by fully embracing the vision of innovation can they anticipate the impact of technology on the ability to gain a competitive advantage in a dynamic global market. To anticipate technological change, bank managers must understand how information technology affects core areas of specialization and the strategic competitiveness of a bank. They must synthesize both existing and hidden business needs with emerging technologies and the need to manage technological change in the context of a rapidly changing global environment.
Technological innovation can make an established product obsolete and, at the same time, makes it possible to launch new banking products and services. The process of “creative destruction” makes technology and effective management of information resources the key for the leading bank. New technologies alone are not enough to guarantee the viability of the bank; they are not enough even to use them to reduce costs and improve efficiency. Information technologies should be applied to accelerate the launch of new products and services on the market, build closer relationships with business partners and customers, and develop new products that satisfy consumer needs.
References
Aguayo, F. Z., & Slusarczyk, B. (2020). Risks of banking services’ digitalization: The practice of diversification and sustainable development goals. Sustainability, 12, 1-10.
Alfarra, A., Hui, X., Eissa, M., Hagag, A. (2017). Potential influence of information systems on bank risk. IAENG International Journal of Computer Science, 44(2), 188-196.
Arslanian, H., & Fisher, F. (2019). The future of finance: The impact of FinTech, AI, and crypto on financial services. Palgrave Macmillan.
Chaikovskyi, Y., & Kovalchuk, Y. (2019). Banking innovations: Perspectives and threats of electronic banking services. World Finance, 4, 121-136.
Hurt, R. (2016). Accounting information systems. McGraw-Hill Education.
Indian Institute of Banking & Finance (2017). Information system for banks. Taxmann Publications Pvt.
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King, M. (2017). The end of alchemy: Money, banking, and the future of the global economy. W. W. Norton & Company.
Samar, S., Ghani, M., & Alnaser, F. (2017). Predicting customer’s intentions to use internet banking: The role of technology acceptance model (TAM) in e-banking. Management Science Letters, 7, 513–524.
Wewege, L. (2017). The digital banking revolution. Lulu.com