It seems self-evident that financial services will change with the penetration of digital technology. The digital impact is immeasurable. Higher benefit can be created by disassembling financial functions and reassembling or adding functions. Once the existing regulations and practices are set aside, there is surprisingly much room for the development of new services.
Financial services change
- Unbundling, and rebundling:
To gain a deeper understanding of the effects of digital, it is convenient to use the concepts of “unbundling” and “rebundling”. Originally, almost all financial services provided various service functions in one package. Digital technology makes it easy to disassemble and reassemble a set of services.
Un-bundling is conceptually the decomposition of financial services by function.
For example, lending has many built-in functions such as:
- Evaluating the credit risk of the lender.
- Raising and providing funds.
- Taking account of the interest rate risk.
- Companies performing intermediate management.
Unbundling is an attempt to break down these functions one by one.
“Re-bundlling” is conceptually the reorganization of unbundled functions into new services.
In the past, there have been financial services that combine different things. For example, the combination of mortgage and group credit life insurance. Rebundling is about expanding that potential with the power of digital technology.
For example, a loan combines derivatives. It is a transfer of the interest rate risk and foreign exchange risk to a pure fund lending transaction. Examples of rebundling are linking household account book software to an individual’s deposit account, or combining accounting software with a deposit account of a small business.
If you take each function, it’s not so new. In that sense, it seems that the financial industry is in trouble. Even so, the added value that the new combination brings to users is great. Since finance is a virtual world, it goes well with digital. The role of financial institutions is to explore and implement new combinations.
- Financial services for retail and tail customers:
There is a lot of room for the development of new services in the retail fields such as households (individuals) and small and medium-sized enterprises.
Detailed services have been provided to large customers such as large companies and high net worth individuals. Many companies and high net worth individuals are already using derivative lending and asset management. Large customers are a cost-effective source of revenue for banks and brokerage firms.
However, digital technology makes it possible to provide fine-tuned services even to small number of customers. By making full use of AI (artificial intelligence) and big data, it is possible to treat each customer as an entity with a unique face, rather than as an “average household or small business”.
Furthermore, looking to the future, the tail layers located at both ends of the customer distribution will also be new targets. It is a layer close to the so-called “otaku”. Although the number is small, customer loyalty is high, and they are particularly enthusiastic about specific services.
Virtual currencies such as Bitcoin can be said to be products for the tail layer unique to the digital age. As a speculative product, the risk is not suitable for banks to handle, but the interest of specific groups is strong.
In the entertainment and book industries, the tail segment is already growing into a major source of revenue. It is a field that can never be underestimated.
- Business regulations and financial services:
The existing regulatory system can be an obstacle when considering new combinations of financial functions by utilizing digital technology.
Is it possible to line up and sell deposits, loans, securities, and insurance products provided by each financial institution on the e-commerce site operated by the platformer?
Is it possible for banks to enter the distribution industry through their subsidiaries in order to make more effective use of collected customer data? It is possible for different industries to own a bank subsidiary.
Is it possible for banks and cooperative financial institutions to create a business-matching platform for all business categories and develop a matching business (is there a problem under the Antimonopoly Act)?
In addition to this, at the level of imagination, it seems that these various business possibilities are expanding in the financial industry (banking industry).
However, in the case of the banking industry, as long as existing regulations exist, it is difficult to get ideas beyond the framework and deepen the examination. Investing in a business that you do not know if it is acceptable can be a wasted oppertunity. First-mover gains will also be lost while waiting for deregulation. As an organization, it is difficult to make a decision to invest resources.
The administrative authorities intend to promote deregulation with an individual approval system, but there are limits as long as there is uncertainty. Even the imbalance between banking and commercial regulation has not been resolved. Unless there is a big sense of direction, it will be difficult to reach the true use of digital technology worldwide.