Trends and challenges for future business success by
Executive summary
Finance denotes a broad term that defines undertakings related to banking, leverage, credit, capital markets, money and investment. The finance sector is key to individuals, organisations as well as the government. This report explores the trends and challenges in the finance sector and its impacts. Megatrends explained in the report include: technology innovation transforming international payments, the rise of mobile payments, and rise of banking as a service by embracing cloud-based solutions to keep up with IT demands but keep costs low. Key challenges in the financial sector are as a result of the innovations pioneered under information technology. The challenges addressed include cybersecurity, social engineering, regulatory compliance, use of big data and Fintech disruptions. The report also recognises the tremendous opportunities the innovative trends have conveyed in the finance sector; it also recognises the challenges and makes recommendations to help deal with those challenges. One such recommendation is to invest more in cybersecurity as the benefits of information technology outweigh the risks. The report recommends the solution to challenges in finance is powerful data analytics tools and cybersecurity solutions which should be developed to transform asset management trading, risk management, data security and other financial services.
Specialisation background
Definition and explanation of finance
Finance denotes a broad term that defines undertakings related to banking, leverage, credit, capital markets, money and investment (Bede Uzoma et al., 2020). At the fundamental level, finance characterises money management and the procedure of procuring required funds. A number of theories stemming from micro and macroeconomics form the basic concepts in finance. Perhaps one of the most important theories is the time value of money which states that a dollar today is worth more than a dollar in the future (Dickason and Ferreira, 2018). It is important to note that individuals, businesses and government organisations all require funding to operate and that divides finance into three categories: personal, corporate and public (governmental) finance (Dickason and Ferreira, 2018). Personal finance encompasses examining the existing financial position of individuals to formulate stratagems for future requirements within financial restraints. Corporate finance encompasses undertakings associated with running a corporation, typically with a division or department set up to supervise the financial activities. (Zhang, 2018). Public finance comprises tax, spending, budgeting, and debt issuance policies that affect how a government pays for the services it delivers to the public (Zhang et al., 2019).
Key tasks in finance
Finance departments carry out a number of tasks that include but not limited to: bookkeeping (payables/receivables), financial reporting and control, tax and compliance, strategic planning and financial planning & analysis, treasury & working capital management, capital budgeting, risk management and corporate development & corporate strategy (Zhang and Wang, 2019).
Recent evolution, growth and changes
The emergence of the internet and information technology have been real game-changers in the finance sector. They have allowed for the development of mobile banking, internet banking and a faster way of transferring funds around the globe (Murzacheva and Levie, 2020). Management and analysis have also been made much easier with software development. Financial management systems have become increasingly useful tools that can be used not only to report but also to predict ways in which returns can be maximised as well as deciding on dividend policies and retention of profits (Murzacheva and Levie, 2020). Efficiency has been improved with the new tools and has resulted in improved revenues as well as economies in some regions. There has also been the development of digital currencies such as bitcoin. Current challenges in the finance sector are as a result of the internet also, through cybercrimes, social engineering and difficulty in regulating cryptocurrencies both individuals and organisations have lost a lot of money as they fall victims to scams (Murzacheva and Levie, 2020).
Global megatrends
Broad global trends
As mentioned earlier, the internet has been the epitome of global financial trends. One of these trends is technology innovation transforming international payments (Bonini et al., 2019). The 21st century has seen the world even more connected, and convenience is what defines the modern customer. Consumers are no longer willing to endure delays and weighty fees for processing international payments. Services such as PayPal, skrill, and Mpesa Global may have started separately from banks to offer consumers the convenience of sending money across borders, faster and cheaply (Bonini et al., 2019). These services are now being integrated into banks and other organisations so that they can reach more people as customer demand for easier on-demand payments increases. Other than enabling the transfer of payments, some have become full-fledged financial platform offering options of owning accounts, saving and getting loans (Bonini and Capizzi, 2019).
The other trend is the mobile payment which is described as money payment made for a product or service through a portable device such as a tablet or a cell phone (Asuming et al., 2019). The mobile payment technology, as described in the previous section, can also be used to send money to friends and family members. Way before there was WeChat pay, Apple pay, Venmo and Google pay, among others, there existed M-Pesa. M-Pesa is perhaps the most efficient mobile payment platform that was developed in the most unlikely places in 2007 (Yakubu et al., 2018). It is different from other mobile payment solutions because it does not rely on the internet to work. M-Pesa was pioneered by a Kenyan telecom company, Safaricom and allows the transfer of money via a text message. Considering the poor infrastructure in Africa, lack of electricity, and fewer people owning smartphones, M-Pesa comes in handy (Gosavi, 2018). The simplest of phones are capable of doing the transactions, and it is slowly gaining traction in other parts of the world. Collaboration with other payment platforms such as PayPal, wire transfer, and World Remit has allowed Africans to transfer and receive money across borders (Gosavi, 2018).
Another megatrend is the rise of banking as a service to drive stronger competition in the market (Wu, 2019). As smaller startups embrace technological innovation to improve money transfer and mobile payments, banks have been left to juggle inexorable pressure of faster innovation, whereas keeping down technology costs (Bonini and Capizzi, 2019). Today, financial institutions are turning towards cloud-based solutions to offer them applications needed to keep up with startups innovativeness as well as keep IT costs down. Cloud-based resolutions are preferably placed to effortlessly and cost-effectively plug into emergent blockchain networks, AI engines and other developing FinTech innovations (Wu, 2019).
Impact of the global trends
The impact of technology innovation transforming international payments is the larger implementation of blockchain and disseminated ledger technologies, empowering financial institutions to transfer low-value payments in real-time at a portion of the cost incumbent procedures are taking (Schumacher et al., 2020). This technology can empower financial institutions to transfer money around the world in the exact way that individuals exchange data over the internet, and this can be a tipping point for driving competence and novelty in cross-border payments (Du and King, 2018).
The impact of a successful implementation of mobile payment solutions is increased e-commerce activities between people across borders (Qiao et al., 2018). Companies such as Amazon and E-bay now have more access to international markets based on their online business models. Payment options becoming easier, even in developing nations, companies such as Amazon have bigger access to markets around the world (Goodfellow, 2020). Mobile payment platforms have also prompted the rise of new startups in Africa, for example, Jumia which share a similar business model as Amazon. Access to essential services is now possible due to ease of making payments even in the remotest of the areas (Goodfellow, 2020). The impact of using cloud-based solutions is the reduced cost of IT innovations. As such, using cloud-based technologies will generate a robust competitive advantage for agile, forward-looking financial services providers that embrace digital innovation – escalating market competition around the globe (Auer, 2018).
Specialisation challenges
Four key challenges and discussion
The finance sector also faces key challenges. Digital transformation of the finance sector has seen increased efficiency and improved economy to different regions, but also, the same has conveyed new challenges that did not exist before. One of the key challenges cybercrime. Research suggests that between the years 2017 and 2018, data breaches involving finance service organisations increased by 480% (Modlin, 2019). Cybercrime attacks cost financial institutions millions in monetary value as more transactions and services are offered online. An outage is a service due to attacks is always catastrophic, resulting in delayed payments, identity theft of customers and a bad reputation for the financial organisation (Modlin, 2019). Cybercrimes in the form of social engineering are perhaps the most successful, and most people fall victim. With techniques such as phishing and baiting, perpetrators can dupe victims to offer their personal details which they can use to access their online accounts and withdraw all their savings from banks (Töpfer and Hall, 2018).
The second challenge is regulatory compliance as the constantly changing regulatory environment poses a continuous challenge for financial institutions of all categories (Feng et al., 2018). In most cases, institutions may not be aware of all the regulations requirements, especially the startups, and this may affect their business models. In other occasions, regulatory compliance falls behind as innovations are done swiftly. An example is the lack of proper regulations on the cryptocurrency, which has resulted in a lack of integrity and the loss in value on the bitcoin (Dörry and Schulz, 2018). To circumvent the challenge of compliance, startups and existing organisations are looking to bridge the gap amid regulators and the financial service industry through automation. Automated reported audits and procedure streaming are some examples which ensure that firms are compliant with new rules (Feng et al., 2018).
The use of big data is a trend in finance, and it delivers opportunities as well as obstacles to the finance sector (Murzacheva and Levie, 2020). Big data allows, firms to tap into social media platforms, consumer databases, news feeds, and entertainment areas and this allows financial service providers to serve their customers better and at the same time safeguard their own interests (Murzacheva and Levie, 2020). With that said and done, it does not mean sorting all the data collected is an easier task. It necessitates powerful data analytics technology and individuals who can interpret the data and make meaningful decisions to serve customers better and give the financial institutions strategic advantage. Another challenge with big data is the breach of privacy act as institutions collect data about their customers’ behaviours which can then be used to sell them services and products (Kuhn, 2020). Furthermore, if the data collected falls in the wrong hands, it can also be used to cause harm to customers. Luckily, data analytics and cybersecurity solutions are emerging with the probability to transform asset management trading, risk management, data security and other financial services (Kuhn, 2020).
Finally, Fintech disruption if the financial service industry. With developments in information technology a decade ago, Fintech startups entered the financial sector, and most in the banking industry did not envision them going far (Blackwell and Kohl, 2018). Over ten years down the line, the startups are still there, and most have matured into intimidating rivals of the banking sector for customers and the revenue they generate. Fintech has been successful because of the convenience they offer the customers, and more young people do not even bother of having a bank account, as they can transfer and receive money from online platforms (Blackwell and Kohl, 2018). Today, the banking sector is partnering with these tech-savvy startups, and more collaborations are expected to occur in order to serve customers better (Bonini et al., 2019).
Recommendations
The beginning of the 21st century marks a crucial era for the financial service industry. The last two decades have seen a lot of disruption, positive innovation that conveyed both opportunities and threats to financial institutions. Innovation is transforming international payments which is something that has to be embraced as businesses are looking to expand and serve a global market. Such innovations have not only streamlined transfer of money across the globe, but they have also enabled the growth of businesses in different areas. For example, more and more startup businesses are embracing Amazon’s business model, which is cost-effective, easy to operate and expand. Such innovations should be encouraged in order to increase competition and allow the flow of money into the remote areas and help bridge gaps between the poor and the rich. The banking sector is also catching up with technological innovations, and it is embracing cloud-based IT solutions. This is a positive move which has made banking services accessible to more people. Such solutions should be embraced and funded by states to improve equality and ensure even the remotest regions of a state receive important services. Challenges also exist, and cybercrime tops the list, with more investment into cybersecurity, the challenges can be eliminated and make online platforms more secure.
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