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The digital economy: Why it matters for your business

digital economy

The internet has changed how consumers and businesses connect, creating a digital economy existing almost entirely online. From social media, online marketing, real-time access to data, and websites, many industries have evolved from advances in online technology.1

As manual processes are replaced with digital processes or upgraded, many industries have been transformed through the digital economy, creating new products or transforming existing ones. Some examples of this are digital banking, e-commerce, and virtual education platforms.

Canadian finance expert Don Tapscott first coined the term digital economy in his 1995 book, "The Digital Economy." 2 In his book, Tapscott warned that the internet would completely change how business was conducted.

And he ended up being right.

Characteristics of the digital economy

At its core, the digital economy is about using the latest technology to advance your business, whether social media, cryptocurrencies, NFTs, or other digital assets. This global environment is accessed by millions of people with an internet connection through their phones, computers, smart watches, or tablets.

In general, the digital economy has three core characteristics—infrastructure, electronic business, and electronic commerce.3

Infrastructure is the support that companies use to conduct their business online. That can include hardware, software, support services, or even human support (i.e., programmers). Essentially, anything that supports the digital economy, specifically information technology goods and services.

Electronic business (or e-business) refers to any process a company uses over the internet. This can include online purchasing, selling, logistics, and internal communication and support services.4

Electronic commerce (or e-commerce) is probably the most familiar aspect of the digital economy, as it deals with goods and services sold online. A marketplace like Etsy, retail sites like Amazon, and manufacturing companies selling parts to other plants through the web, are all examples of e-commerce.

Advantages of the digital economy

The digitalization of the traditional economy has many advantages. For one, it has led to the increased productivity of businesses as they automate their operations and processes.5 It has also led to greater competition, as companies can reach new customers they may not have been able to reach before.

One good example of this is PayPal. This was one of the first companies to use the internet to make it easier for customers to securely share their bank information and get fast, low-cost payments. Today the fintech company has a market cap of over $118 billion.6

Both customers and businesses have more access to data and information, helping them choose different services and products. The digital economy has also increased security, making it more secure for clients to purchase items online thanks to advances in digital payments and authentication.

Disadvantages of the digital economy

While there are a number of advantages to the digital economy, there are also some drawbacks. Businesses now need to think more about cyber security, especially if they deal with sensitive data. There is a risk of data leaks, and companies need to take steps to protect their customer's information.7

For example, in 2017 Equifax had a data security breach that affected 143 million Americans, or about 40% of the population. Hackers were able to access the personal records of millions of Americans, and it took a few years for the company to clean up the aftermath.8

There are also privacy concerns with businesses having more access to customer data. In the European Union, for example, businesses must comply with a comprehensive data privacy law known as General Data Protection Regulation (GDPR).9 Furthermore, the digital economy requires more investments in technology, which could be a challenge for small businesses that don't have the resources to invest.

Why businesses should care about the digital economy

The digital economy is continuing to evolve. Besides the internet, more technological advances in artificial intelligence, the virtual economy, Blockchain, and more are likely to change how companies and clients interact— and the digital economy as we know it today. For example, chat boxes on websites have made it easier for customers to get answers to their questions.10 Businesses that want to grow should be aware of these digital economy changes and utilize these new technologies to their advantage.

This does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell, or otherwise transact in any investment, including any of the product(s) mentioned herein, or an invitation, offer or solicitation to engage in any investment activity. This information is provided solely on the basis that you will make your own investment decisions, and Bakkt does not take account of any investor's investment objectives, particular needs, or financial situation. It is strongly recommended that you seek professional investment advice before making any investment decision.

1 GlobalX. "A Decade of Change: How Tech Evolved in the 2010s and What's In Store for the 2020s." Published February, 2020.

2Don Tapscott. "The Digital Economy." Accessed August, 2022.

3Thomas Mesenbourg. "Measuring the Digital Economy." Accessed August, 2022.

4U.S. Bureau of Economic Analysis. "Digital Economy." Accessed August, 2022.

5National Bureau of Economic Research. "Technology and Productivity Growth." Published October, 2001.

6Yahoo Finance. "PayPal Holdings Inc." Accessed August, 2022.

7IBM. "IBM Report: Consumers Pay the Price as Data Breach Costs Reach All-Time High" Published July, 2022.

8CSO. "Equifax data breach FAQ: What happened, who was affected, what was the impact?" Published February, 2020.

9GDPR.EU. "What is GDPR, the EU's new data protection law?" Accessed August, 2022.

10Entrepreneur. "3 Ways AI Can Help Businesses Improve Customer Relations." Published July, 2019.