Digital Transformation and the Economics of Banking (Routledge International Studies in Money and Banking) by Piotr Lasak

1  Introduction
Piotr Łasak and Jonathan Williams

1.1 Introduction
While the digital revolution is unprecedented in many ways, such as its 
velocity and scope, arguably most important is the power of digitalization to 
facilitate wholesale transformations of systems of production, management, 
and governance. Despite the potential benefits, it is fair to acknowledge that, 
for many firms, the process of digitalization is a disruptor and constitutes a 
significant challenge to incumbents. Digitalization is impacting banks, bank-

ing sectors, and the financial system at large as newly unleashed competi-

tive forces necessitate incumbents to reassess opportunities and threats, and 
strengths and weaknesses, all leading to a transformation of business models. 
The challenges facing finance per se underscore the pivotal role that a digi-

tally enhanced financial services sector is expected to perform in the Fourth 
Industrial Revolution.
A brief synopsis of salient developments in finance following the 2008 
Global Financial Crisis (GFC) serves to illustrate the transformative nature 
of the digitalization process. The emergence of and rapid growth in the 
application of new technologies to financial services was deemed to be game 
changing, a disruptor to facilitate the decentralization of market structures 
by unbundling traditional banking services. While uncertainty precludes 
a definitive assessment of likely competitive conditions in the financial ser-

vices industry, various scenarios have been suggested (BCBS, 2018). In the 
market for financial services, the main protagonists are incumbents like 
banks and technology firms. The latter cohort comprises small, agile financial 
technology (FinTech) firms and very large, big technology (BigTech) firms. 
What is certain is the nature of competition in financial services will evolve. 
While one scenario sees the end of banks amid complete phantomization of 
financial services, other scenarios envisage a robust competitive response by 
banks the bedrock of which is the digitalization of banking.
Initially, banks perceived FinTech as a disruptor. Reasons for this view 
included the small size of FinTech startups that explained their attention to 
payments and settlements and some segments of retail banking. In compari-

son with FinTech’s customer-friendly apps, the legacy IT infrastructure and 

poor records of customer service of banks became a deep-seated comparative 
disadvantage. In the face of the competitive challenge from new entrants, 
incumbents could develop in-house their own Fintech-style services or col-

laborate with FinTech firms to gain access to applications of the new financial 
technologies through strategic partnerships. For FinTech firms, partnerships 
with banks constitute an opportunity to secure new and often substantial 
investment while also providing access to banks’ customers. Carbó-Valverde 
et al. (2021) explain how banks and FinTech might partner: through inno-

vation facilitators, such as regulatory sandboxes; alliances to co-develop 
products; equity investments; and mergers and acquisitions. Therefore, col-

laboration is a mutually beneficial solution.
BigTech poses a significant competitive challenge to banks. Measured by 
market capitalization, the major BigTech companies are larger than the larg-

est banks; BigTech has plentiful financial resources, access to low-cost funds, 
and brands which are recognized by very large customer bases (FSB, 2019). 
Furthermore, phantomization and regulatory initiatives, such as open bank-

ing (OB) and decentralized finance, will impact the competitive landscape. 
Arguably, developments concerning the regulatory perimeter will influence 
the nature of competition and how banks and BigTech firms might interact. 
FSB (2019) suggests that BigTech could compete directly with incumbents 
through the establishment of their own online financial services firms. On 
the other hand, BigTech could partner with banks, for instance, by providing 
technical services like cloud computing; using their partner, licensed banks 
to provide funding for loans to customers that BigTech originates or bor-

rowing directly from financial institutions or financial markets; or through 
interfacing whereby BigTech distributes the financial services of incumbents. 
The nature of competition between banks and technology firms is evolving 
and we are now observing co-opetition whereby technology firms and finan-

cial firms compete in some market segments while collaborating in other 
segments.
In addition to the market developments discussed above, the spread of 
COVID-19 was classified as a pandemic by the World Health Organization 
in March 2020 with many countries implementing lockdowns or other poli-

cies that adversely affected economic activity. The pandemic significantly 
boosted digitalization. It caused fundamental changes in consumer behavior 
that typically take many years to manifest under normal conditions as con-

sumers had no alternative other than using digital channels to conduct finan-

cial transactions and interact with financial services providers. Therefore, 
and in a remarkably short space of time, the post-pandemic world is charac-

terized by an increasing use of digital channels and adoption of new digital 
payments. Carbó-Valverde et al. (2021) report that customers perceive choice 
to be beneficial and are demanding new, so-called “intelligent relationships” 
with financial services providers that are based on trust. One can expect 
a further transformation of banking channels because social distancing has 
increased the use and popularity of online channels.

Digital Transformation and the Economics of Banking (Routledge International Studies in Money and Banking) by Piotr Lasak