The term economic model has been conceptualized as a theoretical construct that assists economists to logically isolate and carry out an analytical hypothesis on the cause and effects of interacting elements in an economy (Schotter, 2009). This paper thus seeks to provide an economic model that clearly describes and elucidate how technology advancement has a tremendous effect on the demand and supply curves in banking industry such as City Bank. This paper also seeks to describe how technology change can influence the consumers’ behavior thus having an effect on an entire economic model.
Introduction to the industry and firm
The Banking Industry has been a central part and aspect of a vast majority of peoples lives ever since its establishment some decades ago. The banking industry had been established with the main intent of performing all financial duties such as providing loans to individuals while also managing people’s money deposits. Traditional banking industry was able to achieve equilibrium and stability through the customer’s deposits with a constant expectation of returns through the interest rates gained from the offered loans. Besides this, most traditional banks enjoyed monopoly and thus were able to maximize their profits by operating in a way that its marginal revenue equaled its marginal cost (Perloff, 2009). However, today’s banking industry has undergone dramatic changes as deregulation, financial innovation and technological advancement have led to the loss of equilibrium in the traditional banks.
City Bank is an example of an ancient commercial bank that had been founded in the year 1963 in the State of Dallas. Ever since the heydays, City Bank has been widely known to perform its role of providing its customers with the much needed financial services and performing all existing financial operations. As a monopoly entity, City Bank has in the past decade enjoyed remarkable and immeasurable levels of market revenues and products. This was because of the fact that there were no other financial institutions that would have seemingly performed the different financial operations to the customers who had only been left with the only option of going to City Bank. City Bank thus enjoyed the monopolistic advantages by performing all the bank functions such as providing loans and making deposits for both individuals and different business entities. The bank performed the major role of circulating money within and outside the Dallas State thereby its financial operations being a major factor that determined or contributed to the financial and economy stability of both the State and the Country at large. However, in today’s current business world, competition has become a major threat to the closure of many banks inclusive of City Bank. This has been mainly attributed to the fast paced technology development and advancement which has acted as a catalyst to change within the different banking institutions (Bouwman et al, 2008). The rapidly improving and changing technology has had an effect on a vast majority of individual’s lives most of whom have already adapted to the new technologies (Sheng et al, 2015). As anyone would put it, advancement in technology has come along with a myriad of benefits that have seemingly improved the lives of most human beings. It is with this profound reason that the customer’s behavior has also evolved in accordance with the existing technology. Since the customers remain to be described as the primary asset for any existing business, their behavior, tastes and preferences are likely to determine the direction in which any business would take with an aim of providing satisfaction and value to its customers. Thus, City Bank’s inability to embrace and incorporate new technology into its financial service delivery operations has had a large impact both its revenue and customers’ loyalty . In addition, City Bank has failed to cut an edge over its competitors as it continues to be outcompeted by new and emerging financial institutions that offer the customers digital ways of performing financial services.
Present way of service delivery and outcomes with regards to economy model
Due to the fact that City Bank had been established back in the heydays, its current financial operations still majorly resemble the traditional methods. City Bank thus serves as an example of traditional banking whose business model in service delivery mainly required the physical presence of the customer within the bank or on one of its branches. Therefore, in order for any customer to get his or her financial services done, the he or she need to be physically present within the bank institution so as to physically convey his or her needs to the bank operator. This meant that in order for any person to withdraw money from or deposit into his or her account, then he needed to convey these instructions to the banker in a face to face communication. Besides this, the person had to carry all the legal documents that would clearly provide his or her identity to the banker before any financial transaction could be performed by the bank. This was mainly performed with an objective of preventing any fraud or mistaken identity cases.
However, the outcome of the bank’s economic model was drastic in the recent decade as more and more customers flee to other financial institutions that have embraced the digital way of providing financial services to its customers. City Bank has in many cases faced bankruptcy and was on the verge of throwing in the towel for dissolution. This was because of the customers’ constant withdrawal of money from their own accounts in a bid to seek greener pastures where all of their preferences would be met. This outcome had been mainly attributed by the previous monopolistic nature of City Bank where the bank faced no competition. In addition, City Bank’s mode of service delivery had been a great inconvenience to many customers who were mostly from distant areas. This method of banking thus limited accessibility in which both the customers and the potential customers could conduct their financial needs at their brick-and- motor locations (Schotter, 2009). It is with this profound reason that City Bank had in most cases avoided the idea of investing in technology. It is thus true to say that any bank is doomed to not being successful if it fails to pursue and make the customer’s preferences and wants a reality. The new competition from other emerging modern banks led City bank’s significant fall in revenue right from 80% revenue in 1991 to its present 30% revenue. This has been largely attributed to most of the bank’s customer’s closing their accounts in they sought other banks that offered modern digital banking service delivery. Besides this, City Bank has lost its monopoly status due to new entry of other financial institutions that resulted to the bank losing its customer’s at an alarming rate of 25% per annum. Due to competition, the bank has lost its powers to charge its service costs above the marginal cost thus not being able to maximize its price so as to earn maximum profits as it was able to do during its monopoly period.
An economic model showing the decline in demand due to traditional banking methods
Key: D – Former demand, D1 – Present demand
Q – Former number of bank accounts, Q1 – Present number of bank accounts
The diagrams above showcase how City Bank’s avoidance to incorporate technology as part of its banking services affected the consumer’s behavior. Since City Bank enjoyed monopoly existence in the past, most of the customers had to seek their banking services as there were no other options with regards to the financial institutions. However, amid many emerging financial institutions, people have sought services to City Bank’s competitors due to the key fact that they have digitalized their way of service delivery. This has thus affected customers’ loyalty as they move to other financial institutions who give them the self-service digital option of banking. Thus the reason for reduced demand, decrease in the number of customers and bankruptcy at City Bank. In addition, the net effect of new technology is that there would be a reduction in the total deposits at City Bank where as there would be an increase in the number of rival banks that would operate at a reduced deposit scales. This results to zero-profit equilibrium due to the reduced deposit levels at City Bank.
New business model describing technological change and first round effects on the economic model
Amid the current competitive market, changing customer’s preferences and rapid technological advancements, City Bank may only surpass the pressure by revising its business model. The customers are regarded to be the major catalyst to City Bank’s economic model change (Perloff, 2009). Besides this, the explosion of technology is currently a major factor that is driving change in the banking industry. This is due to the fact that technology advancements remain to be a paramount determinant in the way we live, think and work (Rajagopal, 2015). The unprecedented wave of technology development has led to a change in the consumer’s behavior which has an ultimate direct effect on the banking industry. The current technology has come with a plethora of changes that need to be effected in almost every aspect of our lives (Perloff, 2009). The banking industry is faced with the choice of adapting to the technological development in accordance to the customer’s choices. This is because of the fact that any financial institution is doomed to failure if it fails to deliver its services through the platform that is mostly preferred by its customers. In this new economic model, technology has been regarded as the primary catalyst of the City bank’s economic model change. While City bank had the luxury of enjoying the monopolistic market decades ago, the bank is currently facing a lot of competition from new emerging markets. It is with this profound reason that the bank had to incur more cost with an aim of introducing digital technology for its financial service delivery to its customer. The new economic model was as a result of the bank having incorporated digital technology by providing mobile banking option of financial service delivery to its customers. For this model to have become a reality, the Bank had to partner and collaborates with a Telecommunication Industry which had to be the main provider of the telecommunication service between the bank’s customers and the bank itself. In the current Century, communication between and among persons and institutions can be easily effected with the use of technological devices such as telephones, emails, websites, social media among many other ways. Thus, incorporating a technological way of communication would alleviate the customers’ need of availing him or herself to the bank in order to perform a simple financial operation. It is thus eminently important for City Bank to design an effective and efficient business banking model that would ultimately impact the financial market positively upon being effected.
What the company should do after incorporating digital banking services
First and foremost, the digital way of performing financial services should be optional so as to accommodate those customers who would still prefer the traditional way of performing and obtaining banking services. This would help in providing an optional channel which would indicate the bank’s acknowledgement and acceptance of those customers who have embraced and prefer the face to face option of obtaining the different financial services from the bank. The second most vital aspect entails the necessity of the customers being trained and educated on how to utilize the digital banking services. The customers should also be educated on both the advantages and limitations of using the digital method of obtaining financial services from the bank. Besides this, the customers should be taught on how to get help and instructions in case they are stuck on performing a given financial operation. This would be eminently helpful in providing awareness to the customers on the digital way of performing any bank financial transaction. In addition, a vast number of potential customers would be attracted into joining City Bank as they would feel a sense of being provided with the best knowledge on how to perform digital banking operations. The third aspect involves getting the support and acceptance of the digital banking idea from the banks’ stakeholders. This would actually act as a boost in fastening the process of transforming City Bank’s traditional was of banking into an elaborate and easy modern way of banking. Last but not least, City Bank’s employees should be taught on other cross duties that would assist in enabling the bank attain its success potential. This would help in ensuring that each and every employee learns and specializes on different banking duties that would lead to a massive increase in productivity and thus add to the total success of the bank. The employees should also be taught on providing efficient customer service to both the existing customers and the potential customers. This would further help in maintaining the customer’s loyalty while administering new customers to City Bank as they anticipate receiving stellar services whether in the digital way or traditional way.
Ultimate effects of the new digital form of banking to the economic model
The new technology adopted by the City Bank will facilitate the success of self-service to the bank’s customers. This is because it would provide the much needed flexibility both for the Bank’s employees and its customers. Technological innovation is known to change the production process as the firm will be able to produce more output with the same amount of factors of production or resources. The new technology shock will also enable more customers to open their account through an online channel. Thus, the shock effect of this innovation will result to a significant increase of demand for City Bank’s services. Nevertheless, this would be neutral technical change as the new technology will not at all affect the cost of production since the number of employees remained the same so as to offer services to those customers who still preferred traditional banking methods. This technology shock will also affect the equilibrium price to change thereby causing a slight increase in the bank’s revenue. This is due to the fact that the bank will have to incur a large amount of extra cost so as to introduce technology as part of its service delivery. This extra cost will be incurred by the bank as it will be obliged to pay Telekom Company for telecommunication services. This increase in production cost will thereby have to be passed to the customers who will have to pay more for each and every bank services. Thus an increase in production cost would lead to a change in the equilibrium price and quantity. The increase in price for the bank services due to digital technology shock will thereafter cause the supply curve to shift to the left from S to S2, whereby the equilibrium quantity would fall from e1 to e2.
An economic model showing the effects of technology shock on the price, demand and supply curves
Key: D – Demand in City Bank, D1 – Demand for new modern banks
Q –Number of bank accounts
Effects that the digital form of service delivery would have on the bank
Digital banking will enable City Bank to create an all assessable banking method where any customer would be able to perform his or her banking transactions anywhere and everywhere (Sheng et al, 2015). This will help in limiting the transport expenses as well as ensuring that the customer does not get inconvenienced by having to travel to long distances for a simple financial transaction. It is with this primary reason that a vast majority of potential customers will apply to get City Bank’s accounts as they will be assured of the ability of just utilizing a good internet connection so as to perform their specific banking services at their own comfort (Bouwmanet al, 2008). Besides this, the use of digital banking will alleviate the need of the customer to spend countless hours in the bank in wait of being served by the bankers. This service will enable many of the bank’s customers to get quick banking services which would be regarded to being more efficient and convenient (Sheng et al, 2015). This is due to the fact of a customer will be able to perform mobile banking transactions within seconds after which he or she would also be able to keep the record of transaction by either saving or printing the receipt of transaction. Digital banking will also provide the customers with the option of being able to pay their bills or purchasing products from a shopping mall just by performing an online transaction that would allow the customer to transfer a specific amount of money to the designated bank account (Bouwmanet al, 2008). Digital banking is also eminently vital in performing international transactions that would enable a person from another country to easily effect payment transactions from one country to another. This is mainly done through specialized international online banking sites such as PayPal and Skirl (Bouwmanet al, 2008). City Bank would thus facilitate the transaction carried out between an individual from a far country with a person within the country simply by the customer’s request of transferring money from his or her paid PayPal account to his or her City Bank’s account.
This new technology will put City Bank to be at par with other financial institutions and thus being able to lure and attract as much customers as the other financial institutions can. Since deposits from the customers are a necessity for any existing financial institution, City bank will thus remain in the limelight as its many customers will save it from plunging into bankruptcy.
An economic model diagram showing the demand and supply patterns at City Bank
Key; DI- Previous demand rates, D2-Present demand
QI- Previous number of opened bank accounts, Q2- Present number of bank accounts
The diagram above shows how introduction of technology will affect the demand and supply curve. D1 signifies the demand curve that was there before the new digital technology banking was introduced. The number of customers having City Bank’s bank account was relatively few as compared to the number of customers who will open an account with City Bank after the introduction of digital banking. Thus, both the demand and supply will increase significantly in the short run after the new digital banking technology introduction. The bank will thus be able to increase its revenues and profits remarkably after introducing the new technology as part of its operations. This is due to the fact that more potential customers will be attracted and convinced to be part of City Bank after the bank decided to incorporate technology as part of its service delivery to the customers.
Key data for future quantitative report
According to my survey, the average estimate of the short run elasticity was approximately 5% whereas the long run elasticity will be expected to be double or thrice that of the short run. This is because, as a result of the technical shock effects, the price of City bank’s service delivery to the customers will have to be increased by approximately $2 so that the bank does to go at a loss. This action would lead to a decline in demand as more customers will seek another bank that would offer a cheaper option. This is due to the existence of other competitor banking firms that offer the same services at a lower cost in comparison to that of City bank’s. Unlike in the past where City bank monopoly status constrained the customers’ choices, the current emerging bank industries means that City Bank will have to seek oligopolistic status so as not to shut down. In the long run, the bank will have to work under zero profit rates due to the presence of other competitor firms.
In a future quantitative report, other key data that I would collect entail the aspect that over 50% of the bank’s customers will embrace the online digital banking method. However, there will still be a number of customers who would still largely prefer the traditional banking method as opposed to online banking. This is mainly due to some of the imperfections that would be posed by using online digital banking methods. Some of these limitations would probably include online fraud which remains to be a persistent problem with carrying out online transactions (Sheng et al, 2015). This is because, aside from online digital banking attracting customers to perform different online businesses, the development will also introduce and accelerate the growth of computer internet hawkers who will be preying for other peoples’ money. Unlike digital online banking that lacks security; traditional banking methods have higher levels of security that is provided with the availability of different security surveillance cameras that have been strategically placed within banks (Sheng et al, 2015). Due to risks posed by digital banking, some City bank’a customers will still opt for traditional banking services. In addition, the presence of security officers in banking institutions provide the customers with the necessary assurance and confidence of obtaining banking services effectively with no hiccups. Thus, unless the rate of online fraud reduces drastically, then a vast majority of customers will still utilize the brick-and-motor method of obtaining their desired financial banking services (Sheng et al, 2015). Therefore, for a better economic model, City Bank should provide the necessary safety trainings to its customers so that they can keep their money safe from the computer hackers who are always ready to commit fraud (Sheng et al, 2015). In addition, the bank should offer additional safety measures such as providing each customer with a specific PIN or Password where without it, the online bank account would remain inaccessible (Bouwmanet al, 2008). Besides this, City Bank should also collaborate with different online security agencies that would work in handy in curbing internet frauds and also capturing the computer hackers for injustices committed.
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