Financial Service Industry
The conventional economy is often modeled as a circular flow between households, companies, and the government. In the aftermath of the Great Financial Crisis, economists realized that the financial sector exerted a significant influence on the economy and must be added to their models. It led to the development of models that included the financial sector as an integral part of the economy. It was further necessitated by the introduction of unconventional monetary policy by central banks.
The financial sector is a section of the economy made up of firms and institutions that provide financial services to commercial and retail customers. A strong financial sector is a sign of a healthy economy.
The modern financial sector is not a monolith but is composed of many different players, each playing an important role. Money is often called the blood of an economy, and the financial sector is the system that circulates money throughout the economy, enabling transactions at all levels. From buying a chocolate bar to acquiring a company, nothing escapes the touch of the financial sector.
The Milestone
Financial product started to develop in the Middle Ages, when Medici in Italy established banking institutions and conducted financial transactions, including money lending, investments, and letter of credit services. In 16 centuries, the Renaissance period witnessed the emergence of modern banking practices when Bank of Amsterdam was established in 1609 as well as the Bank of England in 1694. At that time, the concept of central banking, reserve banking, and the issuance of banknotes emerged.
Geographical diversification started in the 19th century when banks began establishing branch networks, which communicated indirectly using telegraph. They can also coordinate their operation directly enabled by the growing railways. In the current 21st century, the geographical diversification is even larger with the revolutionary advancement in information and telecommunication industry. In ASEAN, the structure and stage of development of telecommunication industry greatly varies across countries in terms of different forms of deregulation, liberalization of markets and privatization of the telecommunications authorities. The leader country in banking industry on this region, Singapore, exercise rapid adoption of mobile payment solutions and digital wallets (Rahmi, 2022). Related to the bank product and services, the projected revenue in the smart finance market for ASEAN is expected to reach US$6.13bn by 2023, with a projected market volume of US$11.05bn by 2028. Since the banking industry is highly competitive and globally connected, we can compare this ASEAN with United States for example, which is projected to generate the highest revenue, amounting to US$10.28bn in 2023 (Statista, 2023)
Electronic banking and computerization also helped the bank diversification in the way they operate. Automated Teller Machines for example, enabled customers to conduct basic transactions independently and remotely. Many banks offered more product variation in payment, money transfer, billing, and investment.
While the growing transport, internet, telecommunication, computation, and financial technology provide more room for the banks to diversify, it also increased the competition with the rise of non-traditional banking models. Fintech startups for example, emerge and leverage technology to offer innovative financial services, ranging from payment solutions to lending platforms. This neo-banking or digital banking or challenger banking, refers to a new wave of financial institutions that operate primarily online and deliver banking services through digital channels.
Open banking is the continuation of this process. In open banking system, the use of application programming interface (APIs) enabled third-party financial service providers with open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions. It is said that this revolutionary payment system greatly affects how the bank exercise diversification in the way they operate. With the widespread application of APIs, the situation is hugely different from earlier ages for example when primitive money in the form of shells made from metal and copper in China back in 1200 BC, or the first use of paper money in 1661 in Sweden following the first paper factory in Spain in 1150.
This evolution will continue and become more complex. All the pushes in competition, innovation, transparency, efficiency, processing time, accuracy, and safety will be larger issue in the financial sector; but now involves the non-banking entities. This keeps the research on bank or the financial sector diversification relevant and important and motivates our paper.
Industry Regulation
Licensing and supervision
This is to charters national banks and supervises the operations of both national banks and foreign bank branches
Control and Audit
To sets standards for federal auditing and reporting
Capital Adequacy & Risk Management
Regulating the production and distribution of money and credit. This is also useful to protect consumers’ deposited money at financial institutions in case those institutions fail
Consumer Privacy & Protection
To educate consumers and enforces laws to avoid financial practices unfair to consumers. In US, this is regulated by Consumer Financial Protection Bureau (CFPB)
Outsourcing and Vendor Management
To standardize the criteria and processes by which banks and other financial institutions are allowed to acquire or merge with others (common in Europe)
Sharing information and inter agency cooperation
AML & CFT
To investigate financial dealings to fight money laundering, terrorism financing, and other financial crimes. Also related to this, AML and CFT regulation may implements and enforces economic and trade sanctions against countries, governments, groups, and individuals that pose a significant threat to national security, foreign policy, or economic policy
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Jaime Ruiz-Cabrero
Managing Director & Senior Partner
Jaime Ruiz-Cabrero
Managing Director & Senior Partner
Jaime Ruiz-Cabrero
Managing Director & Senior Partner
Jaime Ruiz-Cabrero
Managing Director & Senior Partner