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Summary CPA Program Australia - Digital Finance
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A comprehensive summary of notes from module 1 to module 5 for Digital Finance, CPA Australia.
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Module 1: The Digital Finance EcosystemPart A: Digital Finance Landscape
1.1 Technological Evolution
The Network Age
- Is characterised by interconnectivity, enabled by the internet, smart devices, mobile communications and the rapidly
diminishing cost of technology.
- Connectivity generate a network effect.
- Network effects are positive returns to scale; as participant numbers grow, the value of participating also grows.
- The use of Network Age technologies in industry — especially the combination of analytics, artificial intelligence and
automation — is often referred to as Industry 4.0.
Big Data
- The datasets that arise from the pervasive creation and capture of data in the Network Age.
- Volume — the large size of the datasets created by collecting and storing the data generated by devices, transactions and
interactions
- Variety — the breadth and depth of datasets that arise from diverse sources
- Velocity — the speed at which new data is generated and accumulated within datasets
- Veracity — the variable quality of datasets given the diverse source of data collected.
- Value is described as the fifth V, to recognise that the effective use of data is often the key to value creation.
The Transformation of Accounting and Finance
- Automation — the use of technology to replace or complement human labour
- Analytics — the application of data analysis technologies to big data to generate and visualise actionable insights
- Artificial intelligence (AI) — the use of technology to intelligently analyse data and respond to the outcomes.
Digital Mindset
- involves rethinking entire business and operating models in addition to the adoption of new technology.
- Digital literacy requires knowing enough about the applications, benefits, costs and limitations of technologies to be able to
assess their value to the organisation and support their effective implementation.
- A digital mindset, data literacy and effective evaluation and use of technology should be embedded in the business and drive
decision making.
Enabling Skills
- Behavioural skills — communication, relationship management and strategic thinking
- Data analysis skills — data modelling and visualisation, design thinking and programming
- Finance skills — business modelling, process design and financial analysis.
Creating a Future-Ready Finance Function
- Focus on value creation for the business entity. Value is created through strategic choices and involves leveraging
technology and data to integrate strategic, operational and risk information to ensure performance is aligned to value creation
in a changing external environment.
- Use agile funding models that balance ongoing core investments with riskier options. Agile funding enables riskier
investments to be tested and scaled up if successful or discontinued if unsuccessful. Success should be measured by
qualitative data (e.g. customer satisfaction) in addition to quantitative data (e.g. ROI).
- Seek talent with broad enabling skills and a digital mindset. Focus on seeking talent and developing staff with high-level
enabling skills who are adaptable to the changing landscape and possess a firm foundation in digital literacy.
- Early adopt advanced analytics and automation technologies. Lead the way in adopting automation and advanced
analytics to deliver meaningful insights enabling the most pressing business questions to be answered.
- Establish a digital ecosystem service delivery model. Use digital technologies to streamline processes to improve
customer services, lower costs and increase productivity in order to achieve the entity’s vision.
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,1.2 Impact of Technology on the Digital Finance Landscape
- A competitive advantage exists when a business is able to achieve better performance than its competitors and defend that
advantage over the long term.
- A transient advantage is temporary, recognising that some advantages cannot be sustained, as competitors quickly copy or
improve on an innovation.
Analysing the Digital Finance Landscape using the Digital Finance Cube
1. digital finance business functions
2. digital finance technologies and technological concepts
3. digital finance institutions
Digital Finance Business Function
1. Digital financing
The term ‘digital financing’ should not be confused with the term ‘digital finance’. While the former explicitly focuses on financing
aspects, the latter embraces all business functions — including financing (Gomber, Koch & Siering 2017)
- Invoice financing and invoice factoring. A business borrows against or sells its accounts receivable to a third party.
- Electronic invoicing. Technology provides better coordination, faster transmission and automated processing of invoices
- Lease-financing. An individual or business contracts for the use of an asset, such as a vehicle or equipment, that is owned by
the finance provider.
- Crowdfunding. Money is raised through small contributions from a large number of people (the ‘crowd’).
2. Digital investments pg.7
support individuals or institutions in making investment decisions and in arranging the required investment transactions. Digital
investments include:
- online brokerage, and mobile and social trading, in the B2C area
- high-frequency and algorithmic B2B trading (Gomber, Koch & Siering 2017).
3. Digital money pg.7
The Digital Finance Cube can be used to examine any digital innovation in how money and currency are created, stored, valued,
regulated or exchanged.
4. Digital payments pg.8
Also known as electronic payments or e-payments that refer to any payments that are initiated, processed or received electronically.
5. Digital insurance pg.9
In the B2B space, digital insurance platforms provide a range of value-adding services, including in particular data analytics to enable
insurers and their clients to service and monetise their customers more optimally, including through improved relationship management
and customer experience, and better identification of cross-selling opportunities.
6. Digital financial advice
- Review sites and comparison portals evaluate, score and compare products and services.
- These usually focus on financial product reviews or financial product comparisons.
Digital Finance Technologies and Technological Concepts
• Blockchain
- A blockchain is a type of distributed ledger — a platform that provides an ordered, timestamped and highly secure record of
transactions. The entire history of verified and valid transactions between network users is contained in the blockchain ledger.
• Social networks
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, - The connectivity that characterises the Network Age enables interaction and the development of networks via social media
platforms.
• Near-field communication (NFC)
- NFC is a standardised protocol that enables two devices to communicate when brought close to each other. It is wireless
(using radio frequency) and operates point-to-point over a distance of up to about 4cm.
• Peer-to-peer technology
- A P2P system is intended to share resources and data in such a way that avoids reliance on a central intermediary. P2P
systems are built on a technology architecture in which participants (peers) enable other participants to access and interact
with their technology infrastructure and data processing power. Resources are thus shared.
• Big data analytics
- As described in section 1.1, the Network Age is characterised by big data — the enormous volume and variety of data
generated by pervasive interconnectivity. The insights that can be generated from big data have great potential value for
business, but to unlock these insights, the business requires advanced analytics abilities.
• Enablers such as mobile devices, cloud technologies, information security technologies, automation and AI.
- Important enablers include fast and mobile internet connections, AI, worldwide connectivity, intuitive user interfaces, security
technologies (such as biometrics) and automation technologies
Digital Finance Institutions
They include FinTech companies (both start-ups and established technology companies entering the financial domain), and the
incumbent traditional service providers.
FinTech companies
- Emerged either as FinTech start-ups or technology companies without a history in financial services that have developed
FinTech offerings.
- Integrate technology and financial services.
- Initially, the FinTech sector targeted niche finance functions that were not well served by traditional providers.
Traditional Service Providers
- Include asset management companies, banks, insurance companies and brokerage companies.
- Encompass a broad range of services including: cash accounts, savings, money management, investment management,
money transfer and payments (e.g. credit cards), portfolio management, financial advice, money loaning and lending (e.g.
mortgages, consumer loans, credits), foreign currency exchange, equity trading, brokerage, insurances, and pension planning
(Gomber, Koch & Siering 2017).
ANALYSING DRIVERS OF INNOVATION USING THE TEN TYPES FRAMEWORK
The Ten Types of Innovation framework (Keeley, Pikkel, Quinn & Walters 2013) is a useful tool to:
• evaluate and enrich a potential or developing innovation
• analyse an existing approach.
When using the Ten Types framework:
• focus on a particular platform within the business rather than the entire organisation
• carefully analyse initiatives
• do not mistake activity for innovation • remember that true differentiation does not come easily.
Profit Model: How the Company Makes Money
- Innovative profit models represent new ways to convert a company’s offerings and other sources of value into cash.
- Example include premium pricing, where companies figure out how to charge more for their offering than competitors do, or
auctions, where the market sets the price for goods.
Network: How the Company Connects with Others to Create Value
- Provide a way for companies to take advantage of other companies’ processes, technologies, offerings, channels and brands.
Structure: How the Company’s Resources are Organised
- Focused on organising company resources in unique ways that create value.
- An enterprise’s fixed costs and corporate functions can also be improved through structure innovations.
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, - Examples include building incentive systems to encourage employees to work towards a particular goal, standardising assets
to reduce operating costs and complexity, and creating a corporate university to provide sophisticated, continuous training.
- Eg. Whole Foods (James 2020b)
Process: How the Company Uses Signature or Superior Methods to Do its Work
Product Performance: How the Company Develops Distinguishing Features and Functionality
Product System: How the Company Creates Complementary Products and Services
Service: How the Company Supports and Amplifies the Value of its Offerings
Channel: How the Company Delivers its Offerings to Customers and Users
Brand: How the Company Represents its Offerings and Business
Customer Engagement: How the Company Fosters Compelling Interactions
1.3 IMPACT OF TECHNOLOGY ON BANKING/ FINANCIAL MARKETS
The structure of the financial system is provided by financial markets and financial institutions:
• financial markets facilitate the creation and exchange of financial assets
• financial institutions provide financial services and invest their funds in financial assets.
An efficient financial system gathers money and allocates it to the best investment opportunities — financing those with the highest
rates of return and best credit ratings and rejecting those with low rates of return and poor credit ratings.
HOW FUNDS FLOW THROUGH THE TRADITIONAL FINANCIAL SYSTEM
A CHANGING LANDSCAPE
Network Age innovations will not replace banking, but they will diminish and change it.
Financial inclusion — mobile smart phones and mobile wallets to bring financial services to billions of people who were previously
unserved by financial institutions
Social networks — the increasing power of consumers to communicate with each other, moving control of communications from
business to consumer
Emerging digital currency platforms — the use of technologies to create new mediums and pathways of exchange that diminish the
role of traditional intermediaries
Interconnectedness — the proliferation of internet-connected smart devices known as the Internet of Things (IoT), which is
transforming the world into one big, connected, smart structure. IHS Markit estimate that 78 billion ‘things’ will be communicating by
2025. Exchanges between these ‘things’ will generate trillions of transactions in just minutes.
A NEW MODEL OF INNOVATION — WORKING TOGETHER pg.16
The first wave of the FinTech industry (from 2010 to 2014) targeted areas that banks underserved or overlooked, including SME
funding, student finance, frictionless mobile payments and checkout.
These FinTech start-ups (FinTech 1.0) fell into three categories:
1. those that focused on payment processing
2. those that generated new lending models using peer-to-peer structures
3. those that helped banks through personal financial management and risk modelling tools.
From 2014, FinTech 2.0 began to emerge. FinTech 2.0 is characterised by:
increasing collaboration and cooperation between banks and the FinTech companies
a trend towards open financial structures.
OPEN BANKING AND OPEN MARKETPLACES
Open banking is based on an open marketplace created through apps, APIs and analytics.
Everything can be connected from the bank to business to consumer.
It can incorporate any FinTech and can connect to any FinTech.
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, PART B: DIGITAL FINANCE ECOSYSTEM
1.4 DIGITAL ECOSYSTEM
A dynamic integration of organisational departments, suppliers, tools, systems, customers and external partners, brought together to
increase data flow throughout an organisation and drive business performance.
Cooperative Networks - participants share information and expertise while remaining independent and only interact when necessary to
harmonise efforts.
Collaborative Networks - participants are interdependent, thus requiring a mutual commitment to working with other members of the
network.
DIGITAL ECOSYSTEM COMPONENTS
The creation of value involves three interrelated and interdependent digital ecosystem components:
software
data
information and communications technology (ICT) infrastructure.
Created by the interaction of businesses via a common technological platform to
produce software and services
Software Ecosystems Independent developers extend and enrich the platform while sharing costs, risks
and benefits with the platform owner
provide organisations with data that is relied on to understand customers
Data-Oriented Ecosystems
and to make better decisions.
the foundation of any digital ecosystem.
ICT infrastructure refers to the hardware and software services that capture, store
and organise data.
The infrastructure includes servers for storage, search languages and hosting
ICT Infrastructure Ecosystems platforms.
This infrastructure is interconnected and consists of thousands of individual
networks.
THE CHARACTERISTICS OF A DIGITAL ECOSYSTEM Pg.22
Successful digital ecosystems are:
Customer Centred A customer-centric approach involves making the customer the focus of decisions across all
aspects of the business.
Dynamic A digital ecosystem is a collaborative and dynamic environment, replacing linear
value chains and the segmented and siloed departments of traditional business
structures.
A digital ecosystem provides ways to scale and leverage innovation and new
technologies.
Data-Driven The more information a company has about its potential target customers, the better
it can attract them with uniquely appealing offerings, create customer loyalty and
maintain customer engagement with products and services.
Big data can reveal insights into what consumers are thinking about a brand, what
they need and what they want.
Automated AI and automation technologies make this kind of data analytics possible,
creating consistent valuable insights into consumer preferences, trends and behaviours, and
enabling both automated and human decision-based responses.
HOW DIGITAL ECOSYSTEMS CREATE AND DELIVER VALUE
Increasing sales Data-driven insights into customer preferences and habits
Increasing ROI Big data analytics enable greater understanding of each aspect of the business, its
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