Subsequently, the dependency on information technology has strengthened and made banking ‘IT sensitive’; information technology continues to foster the industry’s growth and innovation. Despite the current financial distress and the gloomy economic conditions, financial sectors continue to invest in information technology. According to an article posted on the American Banker, a highly respected source in the banking and financial services sector, International Business Machines Corp recently acquired servicing deals with Allied Irish Bank, Standard Bank Group Ltd of Johannesburg, and the Bank of London and the Middle East PLC.
Accordingly, the strengthening of information technology in the banking industry is a growing trend. Financial analysts predict that banks will spend a total of $170 billion on technology in 2008. In my opinion, the present value of the cost appears relatively high given the extensive losses in the financial sector and the current economic state. However, it illustrates that the industry is planning for future success. A well organized and highly innovative company possesses a greater competitive advantage and captures larger profits and more growth. Some of the current financial distress is a direct result of mismanagement and flawed internal structures; therefore, utilizing innovative tools to internally restructure will improve efficiency and lead to success. For example, consolidating data and making it more easily accessible cuts cost and improves productivity. Ultimately, society is more heavily relying on information technology to modernize the business world and improve market efficiency.
The banking industry’s welcoming attitude toward information technology is a change from earlier decades. Previous research suggested that IT was perceived to have a negligible impact on banking. According to “Information Technology and Productivity Changes in the Banking Industry,” a study published in the Economic Note, a prominent source that discusses the latest developments in the banking, finance, and economics, the authors hypothesize and mathematically prove that productivity and profits rose and costs lowered once the industry fully acclimated itself with technology. The authors validly claim that previous studies failed to factor in industry related variables and the need for an adjustment period when they hypothesized that productivity remains unchanged after the inauguration of new technology.
The increasing trend toward IT dependency makes it difficult to imagine the business world existing prior to the creation of information technology. Subsequently, personal biases made it difficult to analytically evaluate the study. In my opinion, growing up during the IT’s coming of age makes me non-partial towards the subject matter; consequently, I was closed minded toward alternative hypothesis outcomes and unable to challenge the authors’ opinion.
However, I did have some apprehensions regarding the structure of the study. I was concerned about the subjectivity in the design; I thought is almost impossible to objectively assign numeric figures to factors such as efficiency. Slight miscalculations or errors in estimates can have serious consequences on the conclusion. In addition, I thought the conclusion was based on a limited sample. Although the authors included theoretical research from other studies, the empirical data was limited to Italian Banks. Despite factoring in economic variables, focusing on only one country’s banking industry narrows the scope and the results.
Although it is impractical to expect any one study to consider every effectual variable, the analysis appears to accurately factor in a number of the important ones, such as deregulation and macroeconomic shock. Ultimately, the authors’ conclusion was exactly what I predicted. IT tremendously impacted the banking industry’s productivity, profits, and costs. The authors accurately point out that previous studies failed to grant banks an adjustment period to acclimate itself with new technology. The implementation of IT involves drastic reorganization and proper training in order to benefit. In addition, the quality of output that resulted from the shift changed so tremendously that it was originally difficult to accurately measure. Although, the study is well developed and researched, I would go as far as to say that it is difficult to accurately place a number or percentage on the effects of IT; therefore, I believe there is possibility that the article undervalues the full impact.
Bills, Steve. "IBM Sees Three Foreign Deals as Promising Sign. " American Banker [New York, N.Y.] 17 Jan. 2008,13. Banking Information Source. ProQuest. 7 Oct. 2008
Casolaro, Luca. "Information Technology and Productivity Changes in the Banking Industry." Economic Notes 36:125 May 2007 43-76. 7 Oct 2008
2 comments:
It is an old story but still true; technology drives the banking sector. I think the problem lies with a member’s board not understanding IT and with the IT manager not understanding business. While many organizations are leaning towards a more computerized automated process, it would be ironic perhaps for a bank using classic checking to become extremely techno savvy.
It is evident that the banking sector looks to invest in technology, but in pressing times, a bank needs cash to pay out in the current economic situation, not affording the opportunity for IT investing in the future. Certainly, bright spots remain with a hope of economic recovery. For now, banks should keep a watchful eye on where the capital markets institutions go, since banks will follow. By investing heavily in customer facing and integration capabilities, will position banks to create a core infrastructure to build on for the future.
First of all, I would just like to make a point from a statistical perspective directed to such studies (assuming that this study was in fact a type of regression analysis as I picture it). Theoretically, once you include every single variable in a study, you can make nearly perfect predictions (in this case cost savings estimations). However, this results in almost all variables being insignificant relative to the whole model, so you cannot really quantify the effect of each one. That's why it is often a matter of taking variables in and out until something good comes out, but that doesn't mean that the most optimal output is achieved. So in short, you have a reason for doubting the study, but there is only so much that can be done with numbers.
Now onto my comment. I found it interesting what you mentioned in the third paragraph about current spending of financial firms on IT. It almost seems like IT can be used as a metric of future market health, because, as you said, greater spending demonstrates expected economic growth. It would be even more interesting if IT spending can be quantified as a strong usher of consumer and business confidence (maybe to see if IT spending announcements by companies lead to stock price increases :). In any case, it all seems to boil down to the message that is sent to the public and how important people's perspective is in determining market movement.
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