Innovation in Financial Services

Balancing Public and Private Interests

Lech Gąsiorkiewicz, Jan Monkiewicz

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000204155
• Edition: 1
• Topic: Economics
• Subtopic: Macroeconomics
• Index: Economics

This book delves into the many innovative changes that the financial industry has undergone in recent years. The authors investigate these developments in a holistic manner and from a wide range of perspectives: both public and private, business and consumer, regulators and supervisors.

Initially, they set the framework of their analysis by discussing innovation cycles in financial services. Thereafter, they tackle the issue of financial innovations and their consequences for financial stability. They then review the new approaches to financial consumers' protection, which emerged in the aftermath of the global financial crisis. The authors underline the fact that this new approach is heavily influenced by the recent innovative drive in the financial industry. Next, they switch their attention to the public sector, examining the innovative processes in monetary policy and central banks, structural innovations in the supervisory models and systems, and they assess some specific supervisory challenges regarding blockchain and the application of mathematics in the supervisory capacity. Additionally, the book examines a range of issues related to the private sector, such as recent developments regarding risk transferring mechanisms on the financial market, artificial intelligence and natural language processing for regulatory filings, the development of process management in insurance companies and other innovative products on the market. Finally, Innovation in Financial Services discusses how the digital transformation of the financial system impacts the interaction between the public and private sectors.

The book is intended for graduate and postgraduate level students, researchers, public sector officers, as well as financial sector practitioners.

Part I

SYSTEMIC ISSUES

1

DIGITAL TRANSFORMATION OF THE FINANCIAL ECOSYSTEM

Interaction of private and public sector

Marcin Kotarba

1.1 Introduction

The concept of “digital transformation” is no longer new to organizations and their managers. We observe the results and consequences of digitalization in almost all areas of human activity – both in the professional and personal dimensions. The pace of digital changes is however different across societies, industries and economies. Driven not only by direct investments in technology, but also by innovation – “digital” is significantly transforming our behaviors and perception of value. Digitalization is seen as an enabler of an “easier life” for individuals, groups and organizations, allowing them to achieve higher performance and agility in a world of fierce competition.

When we talk about these recent developments, an immediate question can be proffered: Are governments and public services actively participating in the digital journey of the economy and the society? What is and what should be the role of the state or local government in shaping digital services while protecting the citizens and collecting appropriate taxes in the globally dispersed market?

The purpose of this text is to analyze the interactions between the private and public sectors in digital transformation, with a focus on the financial ecosystem as one of the key drivers of the global economy. The public sector is defined as central and local government, state-level international unions and organizations (in particular the European Union), specialized governmental agencies and all other organizations with a controlling stake held by the public. Two research questions are considered for analysis:

1. 1 (RQ1) What are the current interactions of the public and private sector in the digital transformation?
2. 2 (RQ2) How will the interactions of the public and private sector change in the future – what changes are expected and missing from the scientific and commercial discourse?

Being aware of the complexity of the research on interactions between organizations of multiple size and type, the author’s proposed response to the research questions is based on creating an expert view, based on the Delphi panels with experts supported by analysis of the current data and literature. Geographically the research is limited, via specific knowledge of experts, to financial systems in the member countries of the European Union.

A.G. Tansley, already in 1935, wrote an essay on “use and abuse of vegetational concepts and terms” and the dynamic change in the ecosystems (Tansley, 1935). The intention of the author is to maximize the use of similarities between the financial and natural ecosystems in order to better understand the first one and look for inspiration on what changes may and should take place to improve the benefit of public and private relationships for society. Building upon the wisdom from the domain of natural sciences immediately triggers scientific interest in the applicability of the dynamic, change-driven perspective, to financial ecosystems. In our case we are undertaking the study of digitalization in the context of being a powerful force that introduces significant changes to the world of finance, and in particular to the public and private relationships.

1.2 Financial ecosystem – description

The term “financial ecosystem” is used by the financial community, but it is not precisely defined or described by a common taxonomy and ontology. It has joined the prominent class of 21st-century consulting-driven buzzwords that appear in various disciplines, leaving their original homeland, in this case natural sciences. If we follow the classic definition of the financial system we usually talk about a set of mutually interrelated elements (such as markets, instruments, regulations and institutions) that enable the movement of economic power, materialized in products and services, between participants. Looking at the mechanics of the financial system, canonical views propose the following main activity areas (Karkowska, 2012; Górski, 2013; Jajuga, 2007; Dębski, 2012):

1. 1 Capital distribution – moving capital from entities with surplus to the ones with shortages
2. 2 Monetary intermediation – enabling the flow of value in the form of cash and payment instruments between market participants involved in exchange, purchase or sale transactions
3. 3 Supervision – monitoring and regulating monetary and capital balances and transfers, risks and financial results – across the life cycles of entities on the macro and micro levels
4. 4 Public and legal control – organizing the cooperation and coexistence of the private and public sectors via measures that promote or discourage certain behaviors and participants

Private and public sector interactions are present in all of the above areas. However the nature and intensity of these interactions may vary in different geographies and economic systems. The relationships are established among the elements of financial system morphology, which are provided by both sectors (see Table 1.1 for details).

Having in mind the activity areas and elements of the financial system outlined above a question can be asked on what is the applicability of the “eco” prefix and its associated biological and ecological context – in the world of finance. Utilizing previous research (Kotarba, 2019) the author was able to collect key argumentation supporting the benefits of using the understanding of the natural systems to analyze the development and behavior of economic and financial systems:

Table 1.1 Main elements of the financial system morphology

Element	Sector	Sample representation
1 Financial institutions	private, public	banks, exchanges, loan companies, insurance companies, funds, brokerage houses, clearing, rating agencies, intermediaries
2 Financial markets	private, public	platforms enabling the flow of value between their participants, based on contractual agreements on debt, rates, currency, cash, goods, derivatives; linked to economic flows or speculative
3 Financial instruments	private, public	carriers of value: loans, deposits, payments, futures and options, securities, fund units
4 Legal and regulatory institutions	private, public	• public: financial supervision authority, securities and exchange commission, protection of deposits, competition, consumers, personal data • private: associations and guilds of financial institutions
5 Budgetary and fiscal institutions and instruments	public	• institutions: ministry of finance and treasury, central and local governments • instruments: taxation, social security, subsidies
6 A set of rules and practices for participation	private, public	• public: legal acts, general/sector recommendations, regulatory compliance control (e.g. abusive clauses), capital regulations • private: joint recommendations and cooperation agreements (e.g. anti-money-laundering), market protection (e.g. cybercrime prevention), supervisory negotiations, lobbying
7 Technical and logistical infrastructure	private, public	• public and private: information systems, market participant information, order control, durable media, archiving, portals, tokens

Source: Proprietary work, based on Karkowska, 2012; Górski, 2013; Jajuga, 2007; Dębski, 2012.

1. 1 Organizations present in the financial system are similar to organisms – they consist of various organs and they group into populations of species, operating on various levels of the biome (Rothschild, 1990).
   Study of interdependencies between natural organisms can be used to understand the dynamics of relations in the financial system. As in nature, in the business practice we are dealing with mainstream institutions, as well as niche or...

Table of contents

• Cover
• Half Title
• Series
• Title
• Copyright
• Contents
• List of figures
• List of tables
• List of contributors
• Acknowledgements
• Introduction
• Part I Systemic issues
• Part II Public sector
• Part III Private sector
• Index