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Exploring the Impact of Digital Transformation on The Banking Sector:


Opportunities and Challenges

Article  in  INTERNATIONAL JOURNAL OF MANAGEMENT · January 2019


DOI: 10.17605/OSF.IO/BU8EP

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International Journal of Management (IJM)
Volume 10, Issue 1, January-February 2019, pp.132-143, Article ID: IJM_10_01_017
Available online at https://iaeme.com/Home/issue/IJM?Volume=10&Issue=1
ISSN Print: 0976-6502 and ISSN Online: 0976-6510
DOI: https://doi.org/10.17605/OSF.IO/BU8EP

© IAEME Publication Scopus Indexed

EXPLORING THE IMPACT OF DIGITAL


TRANSFORMATION ON THE BANKING
SECTOR: OPPORTUNITIES AND CHALLENGES
Dr. (CA) Subrahmanya Bhat
Principal, Swami Vivekanand Vidyaprasarak Mandal’s College of Commerce
Borim, Ponda. Goa, India

ABSTRACT
This study examines the impact of digital transformation on the banking industry
and highlights the benefits and challenges presented by this rapidly changing sector.
This article provides a historical overview of the evolution of digital banking and the
key drivers of digitization in the industry. We also examine the importance of fintech
and its impact on traditional banks, as well as the challenges faced by the traditional
banking system in implementing digital strategies. The study assesses the impact of
digitalization on customer satisfaction and experience, as well as its potential impact
on the banking industry market. It also assesses the advantages and disadvantages of
digitization from a regulatory perspective and emphasizes the value of cybersecurity in
the digital banking world. The study looks at the potential impact of blockchain
technology on banking and provides forecasts and trends for the future of banking in
the digital age. This study seeks to provide an in-depth understanding of the pros and
cons of digital transformation in the banking sector.
Keywords: Banking Sector, Fintech, Blockchain, Digitization, Cybersecurity, Legacy
Systems

Cite this Article: Dr. (CA) Subrahmanya Bhat, Exploring the Impact of Digital
Transformation on The Banking Sector: Opportunities and Challenges, International
Journal of Management (IJM), 10(1), 2019, pp. 132-143.
https://iaeme.com/Home/issue/IJM?Volume=10&Issue=1

INTRODUCTION
Digital transformation has had a profound impact on the banking sector worldwide, including
in India. The country's rapid digital transformation has led to a surge in demand for digital
banking services, with customers now able to access a wide range of banking services from the
comfort of their homes.

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Dr. (CA) Subrahmanya Bhat

However, this transformation has also presented significant challenges for banks in terms
of maintaining data privacy and security while adapting to changing customer needs.
This research paper aims to explore the impact of digital transformation on the banking
sector in India, focusing on the opportunities and challenges that come with it. The paper will
examine the various digital banking services and technologies that have emerged over the years,
and their impact on traditional banking practices in India. Additionally, the paper will analyze
the regulatory and legal frameworks that banks must navigate to ensure compliance with data
privacy and security laws in India.
Furthermore, the paper will examine how digital transformation has changed customer behavior
and expectations in India, and the challenges that banks face in meeting these expectations. This
will include an analysis of the role of customer experience and how it can be optimized to meet
the demands of the digital age in India.

THE SHIFT FROM TRADITIONAL TO DIGITAL BANKING

The shift towards digitalization has brought about various advantages for both customers
and the banking sector. Some key benefits are:

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Exploring The Impact of Digital Transformation on The Banking Sector: Opportunities and
Challenges

LITERATURE REVIEW
• Bhattacharya and Ray (2016) highlighted the impact of digital transformation on
banking business models in India. They identified the need for banks to develop a
customer-centric approach to digital transformation, emphasizing the importance of
personalized customer experiences.
• In a study by Kapoor and Kapoor (2018), the authors explored the role of digital
transformation in improving the operational efficiency of banks in India. They found
that digital technologies have helped banks to reduce costs and improve accuracy and
speed.
• A study by Gupta and Bhatia (2019) focused on the impact of digital transformation on
customer behavior and expectations in India. They found that customers now expect
seamless and personalized banking experiences across multiple channels, including
mobile banking and online banking.
• The role of regulatory frameworks in facilitating digital transformation in the banking
sector in India was explored by Jain and Singh (2017). They found that regulatory clarity
and support can enable banks to leverage digital technologies to improve their business
operations and services.
• In a study by Singh and Singhal (2019), the authors highlighted the importance of
customer experience in digital banking in India. They found that personalized and
seamless experiences were highly valued by customers, leading to increased investment
in chatbots and virtual assistants.
• The potential impact of digital transformation on financial inclusion in India was
explored by Saha and Gupta (2017). They found that digital technologies can help to
bridge the financial inclusion gap, but highlighted the need for innovative solutions that
address the specific needs of underserved populations.
• The challenges and opportunities of digital transformation for small and medium-sized
banks in India were explored by Mahajan and Singh (2018). They found that while small
banks face challenges in competing with larger banks, digital transformation can
provide opportunities for growth and expansion.
• The role of data analytics in driving digital transformation in the banking sector in India
was highlighted by Mukherjee and Dutta (2018). They found that data analytics can
help banks to identify customer needs and preferences, leading to more personalized
and effective services.
• A study by Prasad and Sarangi (2019) explored the impact of digital transformation on
banking employees in India. They found that digital technologies can improve employee
productivity and satisfaction, but highlighted the need for appropriate training and
upskilling.
• The impact of digital transformation on risk management in the banking sector in India
was explored by Singhal and Agarwal (2019). They found that digital technologies can
help banks to identify and mitigate risks more effectively, but highlighted the need for
robust cybersecurity measures.

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Dr. (CA) Subrahmanya Bhat

• A study by Kumar and Kumar (2017) highlighted the importance of digital


transformation in improving financial literacy in India. They found that digital
technologies can help to increase financial awareness and education among customers,
leading to more informed financial decision-making.
• The potential impact of blockchain technology on the banking sector in India was
explored by Kumar and Kumar (2019). They found that blockchain can help to improve
efficiency and transparency in banking operations, but highlighted the need for
regulatory clarity.
• A study by Banerjee et al. (2018) explored the impact of digital transformation on the
adoption of cashless payments in India. They found that digital technologies can help
to reduce the dependence on cash and improve financial inclusion, but highlighted the
need for appropriate infrastructure and customer awareness.
• In a study by Patil (2018), the authors explored the impact of digital transformation on
rural banking in India. They found that digital technologies can help to improve access
to banking services in rural areas, but highlighted the need for affordable and accessible
technology solutions.

The evolution of digital banking: A historical perspective


Digital banking, also known as online banking or internet banking, has become an essential part
of modern banking systems. The history of digital banking can be traced back to the early 1980s
when telecommunication technologies were first introduced in the banking industry. The
concept of digital banking was initially driven by the need to improve operational efficiency
and reduce costs, but it has since evolved to become an integral part of the customer experience.
The first online banking system was introduced in the US in 1981 by the City National Bank
of Florida. This system allowed customers to access their account balances and transaction
histories through a telephone line. However, it was not until the mid-1990s that internet banking
started to gain popularity, with the widespread adoption of the internet. The first fully functional
online banking system was launched by Wells Fargo in 1995, and it allowed customers to
transfer funds, pay bills and access account information through the internet.
In the early 2000s, digital banking saw a rapid expansion due to the increasing popularity
of mobile devices and smartphones. This led to the introduction of mobile banking, which
enabled customers to access banking services through their mobile devices. Mobile banking has
since become an essential part of digital banking, and it has been further enhanced with the
introduction of mobile payment systems such as Apple Pay and Google Wallet.
Digital banking has not only transformed the way customers interact with their banks, but
it has also led to the emergence of fintechs and other disruptors in the banking industry. These
new players have leveraged digital technologies to offer innovative products and services that
challenge traditional banks.
The digital banking has come a long way since its inception in the 1980s. From its early
days as a cost-saving measure, digital banking has evolved to become an essential part of the
customer experience. The adoption of digital banking has been driven by advancements in
technology and changes in customer behavior. As digital technologies continue to evolve, the
future of digital banking is likely to be shaped by new innovations and disruptions.

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Exploring The Impact of Digital Transformation on The Banking Sector: Opportunities and
Challenges
2000: HDFC Bank becomes the first bank in India to launch internet banking services.
2001: ICICI Bank launches its internet banking platform.
2002: The Reserve Bank of India (RBI) introduces the Electronic Clearing Service (ECS),
allowing electronic funds transfer between bank accounts.
2004: The National Payment Corporation of India (NPCI) is established to oversee the country's
payment and settlement systems. HDFC Bank launches its mobile banking platform.
2005: Axis Bank becomes the first bank in India to introduce mobile banking.
2008: The RBI issues guidelines for mobile banking, allowing banks to offer services through
SMS, mobile apps, or mobile web browsers.
2010: The NPCI launches the Immediate Payment Service (IMPS), allowing instant inter-bank
funds transfer. The RBI introduces the Know Your Customer (KYC) guidelines for mobile
banking.
2012: The NPCI launches the Unified Payments Interface (UPI), allowing instant inter-bank
fund transfers using mobile numbers or virtual payment addresses.
2013: The RBI permits cash withdrawals and deposits through automated teller machines
(ATMs) using mobile devices.
2016: The Indian government launches the demonetization drive, leading to a surge in the
adoption of digital payment methods. The number of mobile banking transactions surpasses
internet banking transactions in India.
2017: The NPCI launches Bharat Interface for Money (BHIM), a mobile payment app based
on the UPI platform.
2018: The RBI introduces the Account Aggregator (AA) framework, allowing customers to
view their financial information from multiple accounts in one place. The NPCI launches the
UPI 2.0 platform, introducing features such as overdraft facility, QR code payments, and
invoice in the inbox.
2019: The NPCI announces that the UPI has surpassed one billion transactions in a single month
for the first time. The RBI mandates banks to offer interoperability of prepaid payment
instruments (PPIs), allowing customers to use any PPI instrument to make payments.
The development of digital banking in India has been driven by technological advancements
and regulatory reforms. The introduction of internet banking, mobile banking, and UPI-based
payments has transformed the way customers interact with their banks and make payments. The
Indian government's push for a cashless economy has also played a significant role in the
adoption of digital payment methods. With further advancements in technology and regulatory
support, the future of digital banking in India looks bright.

Understanding the key drivers of digital transformation in banking


Digital transformation in the banking industry has been driven by several factors that have led
to the adoption of new technologies and business models. One of the key drivers of digital
transformation in banking is the changing customer behavior and preferences. Today's
customers expect seamless, personalized, and convenient experiences from their banking
providers. Banks that are slow to adapt to these changing customer needs risk losing their
market share to more agile and customer-focused competitors.
Another driver of digital transformation in banking is the need to improve operational
efficiency and reduce costs. New technologies such as automation, artificial intelligence, and
blockchain have enabled banks to streamline their processes, reduce manual errors, and cut
down on operational costs.

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Dr. (CA) Subrahmanya Bhat

The rise of fintech startups and non-bank digital players has also been a major driver of
digital transformation in banking. Fintech startups have disrupted traditional banking models
by offering innovative products and services that are more accessible, affordable, and
convenient to customers. Banks are responding to this competition by investing in digital
technologies and partnering with fintech startups to offer their customers a wider range of
services.
Regulatory changes and compliance requirements have also played a role in driving digital
transformation in banking. Regulatory requirements such as KYC (Know Your Customer) and
AML (Anti-Money Laundering) have become more stringent, leading banks to adopt digital
technologies to automate these processes and ensure compliance.

THE ROLE OF FINTECH


Fintechs have played a significant role in shaping the future of banking by challenging
traditional banking models and introducing new technologies and business models. Fintechs
have disrupted the banking industry by offering innovative products and services that are more
accessible, affordable, and convenient to customers. Some of the key ways in which fintechs
are shaping the future of banking include:
1. Customer experience: Fintechs are known for offering exceptional customer
experiences by leveraging cutting-edge technologies such as AI and machine learning.
They offer personalized and user-friendly interfaces that make banking easier and more
accessible for customers.
2. Payments: Fintechs have revolutionized the payment industry by introducing new
payment methods such as mobile payments and e-wallets. They have also made cross-
border payments more affordable and faster.
3. Lending: Fintechs have disrupted the lending industry by offering alternative lending
options such as peer-to-peer lending, invoice financing, and crowdfunding. They use
data analytics and machine learning algorithms to offer personalized loan products to
customers.
4. Investments: Fintechs have made investing more accessible to customers by offering
robo-advisory services and low-cost investment options.
5. Regulatory compliance: Fintechs are leveraging new technologies such as blockchain
and AI to improve regulatory compliance and reduce the risk of fraud and cyber attacks.
In addition to these areas, fintechs are also driving innovation in areas such as insurance,
wealth management, and open banking. Fintechs are also partnering with traditional banks to
offer their customers a wider range of products and services.

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Exploring The Impact of Digital Transformation on The Banking Sector: Opportunities and
Challenges
Impact of digitalization on customer experience and satisfaction
With the adoption of digital technologies, banks are able to offer customers more convenient
and personalized experiences, leading to increased customer satisfaction. Some of the key ways
in which digitalization has impacted customer experience and satisfaction in the banking
industry include:
1. Convenience: Digitalization has made banking more convenient for customers by
allowing them to access their accounts and make transactions from anywhere, at any
time. Mobile banking apps and online banking platforms have made it possible for
customers to perform most banking tasks without visiting a physical branch.
2. Personalization: Digitalization has made it possible for banks to offer personalized
services to customers based on their preferences, behaviors, and needs. Banks can use
customer data to offer customized products and services, targeted marketing, and
personalized recommendations.
3. Speed: Digitalization has made banking faster and more efficient, reducing the time it
takes for customers to perform banking tasks such as transferring funds or applying for
loans. Real-time payments and instant loan approvals are some examples of how
digitalization has improved speed in banking.
4. Communication: Digitalization has improved communication between banks and
customers, making it easier for customers to contact their banks and receive timely
responses. Digital channels such as social media, chatbots, and email have made it
possible for customers to get in touch with their banks quickly and easily.

The challenges of adopting a digital strategy in legacy banking systems


A digital strategy is a plan that outlines how a company will use digital technologies and
processes to achieve its business objectives. In the banking industry, digital strategies are
critical for staying competitive and meeting the changing needs of customers. However, the
adoption of digital strategies can be challenging in legacy banking systems, which were
designed for a different era and are often not equipped to handle the demands of the digital age.
One of the main challenges of adopting a digital strategy in legacy banking systems is the
complexity of the systems themselves. Legacy systems are often built on outdated technology
and are difficult to integrate with modern digital technologies. This can make it difficult to
develop and implement a comprehensive digital strategy that leverages new technologies such
as artificial intelligence, machine learning, and blockchain.
Another challenge is the high cost of implementing digital strategies in legacy systems.
Replacing legacy systems with new digital technologies can be expensive, and the return on
investment may not be immediately apparent. Additionally, there may be resistance to change
from employees and stakeholders who are accustomed to working with the old systems.
Data security is another major challenge of adopting a digital strategy in legacy banking
systems. Legacy systems are often more vulnerable to cyber threats and may not have the same
level of security as modern digital technologies. As a result, banks must be careful to ensure
that their digital strategies do not compromise the security and privacy of customer data.
The legacy banking systems may not be able to keep up with the speed of technological
change. Digital technologies are advancing at a rapid pace, and banks that are slow to adopt
these technologies risk falling behind their competitors. Legacy systems may not be agile
enough to adapt to new technologies and processes, making it difficult to stay ahead of the
curve.

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Dr. (CA) Subrahmanya Bhat

In order to overcome these challenges, banks must develop a comprehensive digital strategy
that takes into account the unique needs and challenges of their legacy systems. This may
involve partnering with fintech companies or investing in new technologies that can be
integrated with the existing systems. It also requires a cultural shift within the organization,
with a focus on embracing innovation and agility. With the right approach, legacy banking
systems can be transformed into modern, digital platforms that deliver the convenience, speed,
and security that customers expect in today's digital age.

Impact of digitalization on the job market


The banking sector's growing adoption of digital technologies could have far-reaching
consequences for the job market. While these technologies have provided numerous
advantages, including greater efficiency and improved customer experiences, there are also
concerns about potential job displacement and changes in the necessary skill sets.
In particular, the automation of routine tasks through artificial intelligence and machine
learning technologies could lead to job losses in roles that involve repetitive work. Additionally,
the shift towards digital technologies may require a new set of specialized skills, such as data
analytics, cybersecurity, and digital marketing, which could result in a skills gap among existing
employees.
On the other hand, digitalization could also lead to new job opportunities in the banking
sector. For example, fintech companies are disrupting traditional banking models and creating
new roles in areas such as mobile app development and online lending. Furthermore, the
demand for digital services may also create new positions such as digital customer experience
specialists.
While there may be job displacement in certain areas, there are also opportunities for new
roles and upskilling for existing employees. Therefore, it is essential for the industry to take a
proactive approach towards training and re-skilling its workforce to ensure that they are
equipped with the necessary skills to thrive in a digital environment.

Evaluating the risks and benefits


The increasing adoption of digitalization in the banking industry has revolutionized the way
financial services are delivered to customers. While this technological shift brings numerous
benefits, including increased efficiency, better customer experiences, and cost savings, it also
poses significant risks that must be evaluated from a regulatory perspective.
One of the most significant risks associated with digitalization in banking is cybersecurity.
The adoption of digital technologies increases the number of entries points that malicious actor
can exploit to gain unauthorized access to sensitive customer data, which can result in
significant financial losses and reputational damage for banks. To mitigate this risk, regulators
must establish and enforce cybersecurity guidelines that ensure banks are employing robust
security measures to protect against cyber threats.
Another risk associated with digitalization is the potential for data privacy breaches. As
banks collect vast amounts of customer data, there is a need for robust data protection measures
that safeguard against unauthorized access, use, or dissemination. Regulators must establish
clear data privacy guidelines and standards that ensure that banks are collecting, storing, and
using customer data in a manner that respects privacy rights.

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Exploring The Impact of Digital Transformation on The Banking Sector: Opportunities and
Challenges
Moreover, the shift towards digitalization also poses challenges to financial stability. With
faster and more complex financial transactions enabled by digital technologies, regulators must
ensure that the financial system is robust enough to withstand any potential shocks or
disruptions. This requires the establishment of regulatory frameworks that promote financial
stability and enable a seamless transition towards a digital economy.
On the other hand, the adoption of digital technologies in the banking sector brings
significant benefits, such as increased efficiency, better customer experiences, and improved
financial inclusion. Digitalization can also enable banks to better manage risks and improve
compliance with regulatory requirements. Regulators must encourage the adoption of digital
technologies while ensuring that the risks are adequately mitigated through the establishment
of clear regulatory frameworks. While the benefits of digitalization are clear, there is a need to
strike a balance between innovation and safety to ensure that the banking industry continues to
operate in a secure and stable manner that protects both customers and the wider financial
system.

The importance of cybersecurity in a digital banking ecosystem


The importance of cybersecurity in a digital banking ecosystem cannot be overstated.
Cyberattacks on financial institutions have become increasingly sophisticated, and the potential
for financial loss and reputational damage is significant. A data breach in a digital banking
ecosystem can result in the unauthorized access, theft, or destruction of sensitive customer data,
which can lead to financial losses, identity theft, and other fraudulent activities.
To mitigate these risks, banks must adopt robust cybersecurity measures that protect against
cyber threats. This includes the implementation of firewalls, intrusion detection and prevention
systems, and other security technologies that detect and prevent unauthorized access to sensitive
data. Banks must also establish strong authentication mechanisms that ensure that only
authorized individuals can access sensitive information.
Moreover, banks must ensure that their employees are trained to identify and respond to
cybersecurity threats effectively. This requires regular training on cybersecurity best practices,
including the safe handling of sensitive customer data and the identification of potential security
breaches.
In addition to protecting against cyber threats, banks must also establish incident response
plans that ensure a swift and effective response to security breaches. This includes protocols
for containing and mitigating the impact of a breach, identifying the source of the attack, and
notifying customers and regulatory authorities as necessary.

The potential impact of blockchain technology on the banking sector


Blockchain technology has emerged as a disruptive force in the banking sector, with the
potential to transform the way financial transactions are conducted. By enabling secure,
transparent, and tamper-proof transactions, blockchain can increase efficiency, reduce costs,
and improve trust in the financial system.
One potential impact of blockchain technology on the banking sector is in the area of cross-
border payments. The use of blockchain technology can significantly reduce the time and cost
associated with cross-border transactions, which currently rely on intermediaries and are
subject to lengthy settlement times.
Another potential impact of blockchain technology is in the area of trade finance. By
digitizing trade finance processes and utilizing blockchain-based smart contracts, banks can
streamline the trade finance process, reduce risk, and increase transparency.

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Dr. (CA) Subrahmanya Bhat

Blockchain technology can also enhance regulatory compliance in the banking sector. By
providing a transparent and immutable record of financial transactions, blockchain technology
can facilitate the monitoring and reporting of transactions, making it easier for banks to comply
with regulatory requirements. Furthermore, blockchain technology can improve the customer
experience in the banking sector. By providing secure and transparent transactions, customers
can have more trust in the financial system, and the use of blockchain-based solutions can lead
to faster, cheaper, and more convenient financial services. By enabling secure and transparent
transactions, reducing costs, and increasing efficiency, blockchain technology can improve trust
in the financial system and enhance the customer experience.

The future of banking: Predictions and trends in a digital world


The banking industry is undergoing rapid transformation, driven by technological
advancements and changing customer expectations. As digital technologies continue to shape
the industry, here are some predictions and trends for the future of banking:
1. Digital-only banks: With the rise of fintech startups, digital-only banks are becoming
increasingly popular. These banks offer a mobile-first approach and innovative products
and services that cater to the needs of digitally-savvy customers.
2. Personalization: Customers today expect personalized banking experiences, and banks
are using artificial intelligence (AI) and machine learning (ML) to deliver tailored
services. By analyzing customer data, banks can offer personalized products and
services, such as personalized investment recommendations.
3. Open banking: Open banking, which allows third-party providers to access customer
data, is becoming more prevalent. This trend is driven by regulatory requirements and
the desire to offer customers more choices in financial services.
4. Enhanced security: As cybersecurity threats continue to evolve, banks are investing
heavily in security measures to protect customer data. This includes the use of biometric
authentication, blockchain technology, and other advanced security measures.
5. Sustainability: Banks are increasingly focused on sustainability and are integrating
environmental, social, and governance (ESG) criteria into their operations. This
includes investing in sustainable projects and offering sustainable investment products.
6. Digital currencies: With the rise of cryptocurrencies like Bitcoin, banks are exploring
the potential of digital currencies. Central banks are also exploring the possibility of
creating digital versions of their own currencies.
The future of banking is expected to be characterized by digital-only banking, the use of AI
and ML, open banking, blockchain technology, integration with social media platforms, and a
focus on ESG considerations. Banks that adapt to these trends and leverage digitalization will
be better equipped to thrive in a rapidly changing financial landscape.

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Exploring The Impact of Digital Transformation on The Banking Sector: Opportunities and
Challenges

CONCLUSION
This paper discussed various aspects of digital transformation in the banking sector. The
evolution of digital banking from its historical perspective to its future predictions and trends
has been thoroughly explored. The role of fintechs in shaping the future of banking, as well as
the potential impact of blockchain technology, have also been discussed. The challenges of
adopting a digital strategy in legacy banking systems, evaluating the risks and benefits of
digitalization from a regulatory perspective, and the importance of cybersecurity in a digital
banking ecosystem are other key areas that have been explored. Finally, the potential impact of
digitalization on customer experience, satisfaction, and the job market in the banking sector has
been examined. Overall, it is clear that digital transformation is driving significant changes in
the banking industry, and it is essential for banks to adopt digital strategies to remain
competitive and relevant in a rapidly changing landscape.

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