Banks are adopting new technology to get the benefit of speed, efficiency, customized product development and increased volume of activity. New technology has direct impact on the operational cost of banks. It is very difficult to measure the net benefits from the adoption of new technology. Major risks associated with new technology are agency conflict, integration with old system and cost control problems.
Banks are adopting latest technology rapidly to get the benefit of early mover and maintain their competitive edge. The implementation of new technology has many implications on their operating costs, but banks argue that benefits are many like speed, efficiency, innovation in products and volume of activity.
Adoption of innovative technology has many risks too. The banks meticulously do their homework before adopting the new technology, while it is not easy to measure the risk-return tradeoff. Banks face two major risks namely negative net present value and agency cost when they introduce new technology in the existing process and system. We will elaborate a little bit more on these risks.
Negative Net Present Value (NNPV): This risk arises when the discounted value of excess cash flow generated through implementation of new technology are not sufficient to cover the cost to implement the new technology. Ultimate result is reduction in the shareholders value. The objective of any commercial organization to bring innovation in process/system is to enhance shareholders value, not to decrease it. As long as the net present value of increased cash flow is positive, banks can adopt innovative technology. |
