Question

What are the three major objectives of technological investments at FIs? What are the major risks involved with these investments?

Answer 1

Answer to Part 1:

The three major objectives of technological investments at Financial Institutions(FIs) are :

1. Increase Profits: Technological Investments can be used for increasing profits at FIs by lowering the costs associated with the operations of the Financial Institutions.For Example: New Softwares to carry out functions that were previous carried out by a number of people will both help in reducing the labour cost as now fewer people will be required to carry out the function and also there will be more efficiency thus contributing to a higher profit.
2. Capture New Markets/New Customers: Technology Investments can be used for capturing new markets or acquiring new customers.For Example: Making Technology investments in the digital payments space has enabled financial  institutions to enter into a new market (of digital payments) and capture new customers(young people.
3. Lowering the operating costs by taking advantage of economies of scale and economies of scope: By using Technical investments,FIs can leverage the advantage of economies of scale(ie: saving costs in offering more services(or products) at a lower cost) and economies of scope(ie saving costs by offering two or more distinct services at a lower cost as compared to offering theme separately) .For example: The mobile banking app offers all the services at one single place and this allows the bank to save a lot of costs instead of providing each service separately at its different branches.

The major risks involved with these investments are as follows:

• Failures in Technology: If the technology fails then the FIs will be making a large loss.For example:A bank launches a new software to help the corporates in their salary disbursement but it fails due to some reason and as a result the bank will have to reimburse the corporates as well as take a hit in their reputation.
• There may be the risk of an increase in opportunities of frauds by using the technology.For example: An hacking hacking into the technology and gaining confidential information regarding the FI's customers and then misusing them will lead to huge loss for the FIs.
• The failure to obtain additional business that use that technology can also lead to the FIs incurring loss.For Example: A bank launching a new bank-assurance app and the failing .to attract its customers to use it.