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Development trends of the banking industry under the impact of the 4.0 industrial revolution
Posted date 05/06/2017
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Posted date 05/06/2017
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The 4th industrial revolution, also known as Industry 4.0 or the 4th industrial revolution, first appeared in Germany at the beginning of the 21st century.
MSc. Nguyen Thi Nguyet Loan
Lecturer of Faculty of Finance and Banking
The 4.0 industrial revolution, also known as Industry 4.0 or the 4th industrial revolution, first appeared in the early 21st century in Germany. This is a new industrial revolution with an unprecedented speed of technological breakthroughs in history, developing exponentially rather than linearly; Its scope of influence is wide-ranging globally and it is breaking the structure of most industries in every country; It has a profound impact on the transformation of the entire production, management and governance system of human society. In that context, the Vietnamese socio-economy in general and the banking industry as well as many other industries will not be outside the strong impacts of this 4th industrial revolution. So what will the development trend of the banking industry be under the impact of the 4.0 revolution? Hopefully, this article will partly answer these questions for readers.
Identifying the 4.0 industrial revolution
The concept of Industry 4.0 or the Fourth Industrial Revolution (FIR) was first mentioned in the High-Tech Strategic Action Plan approved by the German government in 2012. According to Professor Klaus Schwab, Chairman of the World Economic Forum, Industry 4.0 (German: Industrie 4.0) is a term that includes a series of modern automation technologies, data exchange trends, manufacturing industry and smart production.
The fourth industrial revolution is being ignited within the third industrial revolution by the combination of three fields of technology: physical, digital and biological.
Lecturer of Faculty of Finance and Banking
The 4.0 industrial revolution, also known as Industry 4.0 or the 4th industrial revolution, first appeared in the early 21st century in Germany. This is a new industrial revolution with an unprecedented speed of technological breakthroughs in history, developing exponentially rather than linearly; Its scope of influence is wide-ranging globally and it is breaking the structure of most industries in every country; It has a profound impact on the transformation of the entire production, management and governance system of human society. In that context, the Vietnamese socio-economy in general and the banking industry as well as many other industries will not be outside the strong impacts of this 4th industrial revolution. So what will the development trend of the banking industry be under the impact of the 4.0 revolution? Hopefully, this article will partly answer these questions for readers.
Identifying the 4.0 industrial revolution
The concept of Industry 4.0 or the Fourth Industrial Revolution (FIR) was first mentioned in the High-Tech Strategic Action Plan approved by the German government in 2012. According to Professor Klaus Schwab, Chairman of the World Economic Forum, Industry 4.0 (German: Industrie 4.0) is a term that includes a series of modern automation technologies, data exchange trends, manufacturing industry and smart production.
The fourth industrial revolution is being ignited within the third industrial revolution by the combination of three fields of technology: physical, digital and biological.
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Historical progress of industrial revolutions to date
Therefore, it can be seen that the technologies of the 4.0 industrial revolution inherit and develop from the 3 previous industrial revolutions. In which, the intervention of computers has reached a new level with internet connection that has transformed all technologies faster.
Basically, the 4.0 industrial revolution with its basic content of creating new structures and operations for production based on high-tech applications, the Internet of Things, artificial intelligence... will be based on three main areas: Digital; Biotechnology and Physics with the foundation of digital technology breakthroughs.
Thus, we can see that the 4.0 industrial revolution affects all socio-economic fields such as: industry, agriculture, finance and banking, labor, employment, transportation, textiles, tourism, healthcare, education and training to businesses and localities.
The impacts of the industrial revolution on the development trends of the banking industry
In this industrial revolution, billions of people can be connected through mobile devices with unprecedented processing power, storage capacity, and unlimited access to knowledge. Connectivity is further multiplied by technological breakthroughs such as artificial intelligence, robotics, the internet of things, 3D printing, nanotechnology, biotechnology, materials science, energy storage, and quantum computing.
We can imagine it simply like this:
1. Based on the analysis of all data about you, Artificial Intelligence (AI) will create many works of art for you to enjoy such as: making a movie without actors, making a comedy according to your taste. And actors will be unemployed!
2. Vending machines will sell anything you want, even a delicious dish is made automatically. Chefs and waiters lose their jobs!
3. You want a software program to serve your life or immediate needs. Artificial Intelligence (AI) will create it for you immediately, self-correct, self-test, self-code. Ordinary programmers no longer have a place to live!
4. Internet of Things (IoT) will replace farmers when, just sitting at home, landowners can still connect to the irrigation system, know the humidity in the soil and air to have a suitable irrigation schedule. Even control tractors and harvesters from home without having to go to the field. Farmers have nothing left to do!
5. Banking transactions are so automated that loans can be approved based on an individual’s entire history. Bank branches will close and credit will no longer be needed! But is it clear that debt collectors will still be needed? If payments are only made online, it will be difficult for borrowers to avoid debt!
Assessing the impact of the 4.0 industrial revolution on the development trend of banks, we can see the following notable points:
Firstly, the management model and method in banks have become more complete thanks to the strong development of artificial intelligence (AI) . Banks can apply AI in risk portfolio management, customer management and database management. With the ability to self-learn and adapt, the potential of AI is unlimited in applications.
Second, the strong development of the digital banking model: Creating many new financial service products such as M-POS, internet banking, mobile banking, chip card technology, e-wallet... are increasingly developing strongly, creating convenience for people in using modern banking services and saving transaction costs.
Third, the expansion of modern banking distribution channels : Internet sales channels, mobile-banking, tablet-banking, social networks, digital banking development and paperless transactions will be strong development trends.
It is forecasted that in the next 10 years, the majority of retail banking revenue will come from web, mobile phones or tablet applications. Therefore, domestic banks need to grasp and change according to the trend, improve the mobile application capabilities of service utilities, and strongly develop service support via the internet to maintain and enhance connection and customer care. Pay special attention to the change in customer consumption trends towards the preference for experience (trial).
Fourth, the scope of banking transactions and transaction methods have changed significantly . Accordingly, computer networks have connected financial markets around the world into a unified and continuously operating market, overcoming the barriers of space and time, reducing costs, creating conditions for international banking transactions to be conducted smoothly and quickly, and taking care of customers at banks remotely via video-call has become easy and convenient. Virtual reality technology and 3D images will be able to completely replace human communication.
Fifth, the banking data system is improved and expanded many times . Thanks to Big Data technology and data analysis of the 4th Industrial Revolution, banks can collect, analyze and process big data, creating new knowledge, supporting faster and more appropriate decision making, reducing costs and creating competitive advantages.
Challenges for banks
The biggest challenge that the Vietnamese banking system in particular and the world banking system in general must face and solve is ensuring network security, safety and confidentiality of financial transactions .
With the increasingly sophisticated development of digital technology and the trend of gradually shifting to cloud computing, security vulnerabilities have also increased, leading to increasingly serious concerns about the risk of hacker attacks. Accordingly, risk control mechanisms based on traditional methods and banking supervision mechanisms in each country may no longer be suitable.
Second, there is a major change in the labor market in the banking sector . Due to the application of the achievements of this revolution, banks will reduce the number of employees. However, the demand for high-quality human resources will increase (good at both banking and information technology). Moreover, competition through expanding the network of bank branches will gradually end, due to high operating costs, replaced by modern banking technology.
Third, the increasing trend of using cryptocurrencies has a significant impact on the effectiveness of monetary policy management by central banks. The development of cryptocurrencies not issued by central banks (with the 3 most famous ones being Bitcoin, Onecoin, Lifecoin) will affect the management of monetary policy (CSTT). The appearance of this currency can have a negative impact on monetary indicators in the goal of price stability.
Fourth, financial technology (FinTech) companies have become fierce competitors of banks in providing financial services.
According to a research report released in February 2016 by PwC, one of the four leading auditing firms in the world today, by 2020-2025, traditional banks (whose business mainly relies on capital mobilization and lending activities) may gradually disappear and the size of the banking sector will shrink significantly.
The 4.0 industrial revolution has created conditions for the penetration trend between technology companies (Fintech) into the banking sector, leading to the development and invasion of underground banking activities, especially for non-traditional payment activities (electronic payment gateways, e-wallets, payments provided by telecommunications companies, etc.).
Solutions and recommendations
Firstly, the banking system needs to build an information infrastructure system and national financial information and network security, and to combat high-tech crimes, as well as improve the qualifications, capacity, quantity and quality of the IT staff.
To do so, banks need to increase their financial resources to invest in technology, especially the cost of building and developing backup data centers. This has a significant impact on information technology security issues in the context of increasingly advanced and sophisticated technology development, which can easily lead to the risk of losing control of the banking system. The State can support banks by building a public service center to provide backup database infrastructure.
Second, banks must embrace technology in changing their business models and governance models: Domestic banks must review their business operations and make adjustments to suit the trend of smart governance, mobile banking, paperless banking, and digital banking.
Third , banks need to focus on and develop core strategies in developing new distribution channels and modern, highly integrated banking products and services.
Because in a hyper-connected world with instant messaging, social media, multi-touch tablets and a host of other digital and biotechnologies, customer needs change dramatically and frequently. On the other hand, consumer engagement and new consumer behaviors force banks to adapt the way they design, market and distribute their products and services.
Banks need to quickly re-evaluate the issue of branch expansion (traditional distribution channel). Because the development of the 4.0 industrial revolution will reduce the role of bank branches and make branches no longer the most profitable distribution channel in the future.
Regarding this issue, the State Bank needs to perfect relevant documents and accelerate the completion of the cashless payment project to ensure the foundation for modern banking services and digital banking.
CONCLUDE
The 4.0 industrial revolution has strongly impacted all aspects of economic and social life in general and brought about great changes to the banking industry in particular. This is the initial stage and also the time that is determined to be the hinge for Vietnamese banks to move forward to keep up with the development trend of modern banking in the world. Clearly identifying the impacts and development trends of banking activities in the process of the 4.0 industrial revolution helps banks to carefully prepare the necessary resources and have the right direction, timely innovation, and appropriate policies to seize opportunities and overcome challenges, helping the banking system ensure safe and sustainable development in its business activities.
References :
1. State Bank of Vietnam, 2016: Report on assessing the impact of the fourth industrial revolution and some operational orientations of the Vietnamese banking sector , Proceedings of the OECD workshop (2016);
2. To Huy Vu and Vu Xuan Thanh, “Banking industry under the impact of the fourth industrial revolution” , Banking Magazine No. 15/2016, page 12.
3. Nghiem Xuan Thanh, “The 4th Industrial Revolution and the Preparation of the Vietnamese Banking Industry” , Finance Magazine, Issue 2, February 2017.
4. Some websites:
http://www.cesti.gov.vn
http://dantri.com.vn
http://phienbancu.vnba.org.vn
http://khoahocnganhang.org.vn/
http://tapchitaichinh.vn
Basically, the 4.0 industrial revolution with its basic content of creating new structures and operations for production based on high-tech applications, the Internet of Things, artificial intelligence... will be based on three main areas: Digital; Biotechnology and Physics with the foundation of digital technology breakthroughs.
Thus, we can see that the 4.0 industrial revolution affects all socio-economic fields such as: industry, agriculture, finance and banking, labor, employment, transportation, textiles, tourism, healthcare, education and training to businesses and localities.
The impacts of the industrial revolution on the development trends of the banking industry
In this industrial revolution, billions of people can be connected through mobile devices with unprecedented processing power, storage capacity, and unlimited access to knowledge. Connectivity is further multiplied by technological breakthroughs such as artificial intelligence, robotics, the internet of things, 3D printing, nanotechnology, biotechnology, materials science, energy storage, and quantum computing.
We can imagine it simply like this:
1. Based on the analysis of all data about you, Artificial Intelligence (AI) will create many works of art for you to enjoy such as: making a movie without actors, making a comedy according to your taste. And actors will be unemployed!
2. Vending machines will sell anything you want, even a delicious dish is made automatically. Chefs and waiters lose their jobs!
3. You want a software program to serve your life or immediate needs. Artificial Intelligence (AI) will create it for you immediately, self-correct, self-test, self-code. Ordinary programmers no longer have a place to live!
4. Internet of Things (IoT) will replace farmers when, just sitting at home, landowners can still connect to the irrigation system, know the humidity in the soil and air to have a suitable irrigation schedule. Even control tractors and harvesters from home without having to go to the field. Farmers have nothing left to do!
5. Banking transactions are so automated that loans can be approved based on an individual’s entire history. Bank branches will close and credit will no longer be needed! But is it clear that debt collectors will still be needed? If payments are only made online, it will be difficult for borrowers to avoid debt!
Assessing the impact of the 4.0 industrial revolution on the development trend of banks, we can see the following notable points:
Firstly, the management model and method in banks have become more complete thanks to the strong development of artificial intelligence (AI) . Banks can apply AI in risk portfolio management, customer management and database management. With the ability to self-learn and adapt, the potential of AI is unlimited in applications.
Second, the strong development of the digital banking model: Creating many new financial service products such as M-POS, internet banking, mobile banking, chip card technology, e-wallet... are increasingly developing strongly, creating convenience for people in using modern banking services and saving transaction costs.
Third, the expansion of modern banking distribution channels : Internet sales channels, mobile-banking, tablet-banking, social networks, digital banking development and paperless transactions will be strong development trends.
It is forecasted that in the next 10 years, the majority of retail banking revenue will come from web, mobile phones or tablet applications. Therefore, domestic banks need to grasp and change according to the trend, improve the mobile application capabilities of service utilities, and strongly develop service support via the internet to maintain and enhance connection and customer care. Pay special attention to the change in customer consumption trends towards the preference for experience (trial).
Fourth, the scope of banking transactions and transaction methods have changed significantly . Accordingly, computer networks have connected financial markets around the world into a unified and continuously operating market, overcoming the barriers of space and time, reducing costs, creating conditions for international banking transactions to be conducted smoothly and quickly, and taking care of customers at banks remotely via video-call has become easy and convenient. Virtual reality technology and 3D images will be able to completely replace human communication.
Fifth, the banking data system is improved and expanded many times . Thanks to Big Data technology and data analysis of the 4th Industrial Revolution, banks can collect, analyze and process big data, creating new knowledge, supporting faster and more appropriate decision making, reducing costs and creating competitive advantages.
Challenges for banks
The biggest challenge that the Vietnamese banking system in particular and the world banking system in general must face and solve is ensuring network security, safety and confidentiality of financial transactions .
With the increasingly sophisticated development of digital technology and the trend of gradually shifting to cloud computing, security vulnerabilities have also increased, leading to increasingly serious concerns about the risk of hacker attacks. Accordingly, risk control mechanisms based on traditional methods and banking supervision mechanisms in each country may no longer be suitable.
Second, there is a major change in the labor market in the banking sector . Due to the application of the achievements of this revolution, banks will reduce the number of employees. However, the demand for high-quality human resources will increase (good at both banking and information technology). Moreover, competition through expanding the network of bank branches will gradually end, due to high operating costs, replaced by modern banking technology.
Third, the increasing trend of using cryptocurrencies has a significant impact on the effectiveness of monetary policy management by central banks. The development of cryptocurrencies not issued by central banks (with the 3 most famous ones being Bitcoin, Onecoin, Lifecoin) will affect the management of monetary policy (CSTT). The appearance of this currency can have a negative impact on monetary indicators in the goal of price stability.
Fourth, financial technology (FinTech) companies have become fierce competitors of banks in providing financial services.
According to a research report released in February 2016 by PwC, one of the four leading auditing firms in the world today, by 2020-2025, traditional banks (whose business mainly relies on capital mobilization and lending activities) may gradually disappear and the size of the banking sector will shrink significantly.
The 4.0 industrial revolution has created conditions for the penetration trend between technology companies (Fintech) into the banking sector, leading to the development and invasion of underground banking activities, especially for non-traditional payment activities (electronic payment gateways, e-wallets, payments provided by telecommunications companies, etc.).
Solutions and recommendations
Firstly, the banking system needs to build an information infrastructure system and national financial information and network security, and to combat high-tech crimes, as well as improve the qualifications, capacity, quantity and quality of the IT staff.
To do so, banks need to increase their financial resources to invest in technology, especially the cost of building and developing backup data centers. This has a significant impact on information technology security issues in the context of increasingly advanced and sophisticated technology development, which can easily lead to the risk of losing control of the banking system. The State can support banks by building a public service center to provide backup database infrastructure.
Second, banks must embrace technology in changing their business models and governance models: Domestic banks must review their business operations and make adjustments to suit the trend of smart governance, mobile banking, paperless banking, and digital banking.
Third , banks need to focus on and develop core strategies in developing new distribution channels and modern, highly integrated banking products and services.
Because in a hyper-connected world with instant messaging, social media, multi-touch tablets and a host of other digital and biotechnologies, customer needs change dramatically and frequently. On the other hand, consumer engagement and new consumer behaviors force banks to adapt the way they design, market and distribute their products and services.
Banks need to quickly re-evaluate the issue of branch expansion (traditional distribution channel). Because the development of the 4.0 industrial revolution will reduce the role of bank branches and make branches no longer the most profitable distribution channel in the future.
Regarding this issue, the State Bank needs to perfect relevant documents and accelerate the completion of the cashless payment project to ensure the foundation for modern banking services and digital banking.
CONCLUDE
The 4.0 industrial revolution has strongly impacted all aspects of economic and social life in general and brought about great changes to the banking industry in particular. This is the initial stage and also the time that is determined to be the hinge for Vietnamese banks to move forward to keep up with the development trend of modern banking in the world. Clearly identifying the impacts and development trends of banking activities in the process of the 4.0 industrial revolution helps banks to carefully prepare the necessary resources and have the right direction, timely innovation, and appropriate policies to seize opportunities and overcome challenges, helping the banking system ensure safe and sustainable development in its business activities.
References :
1. State Bank of Vietnam, 2016: Report on assessing the impact of the fourth industrial revolution and some operational orientations of the Vietnamese banking sector , Proceedings of the OECD workshop (2016);
2. To Huy Vu and Vu Xuan Thanh, “Banking industry under the impact of the fourth industrial revolution” , Banking Magazine No. 15/2016, page 12.
3. Nghiem Xuan Thanh, “The 4th Industrial Revolution and the Preparation of the Vietnamese Banking Industry” , Finance Magazine, Issue 2, February 2017.
4. Some websites:
http://www.cesti.gov.vn
http://dantri.com.vn
http://phienbancu.vnba.org.vn
http://khoahocnganhang.org.vn/
http://tapchitaichinh.vn
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