Will AI Disrupt Our Financial Systems?

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Artificial intelligence (AI) is poised to significantly disrupt the global financial services system—creating both new opportunities and increased vulnerabilities—according to a recent August 2018 report, The New Physics of Financial Services: How artificial intelligence is transforming the financial ecosystem, published by the World Economic Forum (WEF) in collaboration with Deloitte.

AI to Favor Agile Innovators

WEF predicts the eventual fall and elimination of mid-sized financial service companies as AI will benefit scale-based players that can compete on cost, and present agile players with new market opportunities in underserved niche segments. According to DBR Research, only 7 percent of banks with assets between $1 billion and $10 billion dollars have deployed an AI solution, a sharp contrast to 48 percent of banks with greater than $50 billion in assets.

From Cost-Center to New Revenue Streams

WEF predicts that early adopters of AI will transform their back-office operations from a cost center to a revenue-generating external service as a cloud-based “software as a service” (SaaS) provider. For example, U.S.-based Blackrock, one of the world’s largest asset managers, has developed a hosted proprietary risk-analytics and portfolio management platform called Aladdin that utilizes AI machine learning as a differentiator. Blackrock CEO Larry Fink aims to generate nearly 30 percent of the company’s revenues by 2022 through offering Aladdin as an external service provider.

Competing on Value-Add Versus “Race to the Bottom”

AI enables the automation of routine rote-tasks, thereby increasing efficiency and decreasing time-delays that impact the customer experience. As more financial institutions incorporate automate such tasks with AI, increased competitive pressure will eventually bring down the pricing. At the same time, AI may enable new product innovation in the form of value-added services as a differentiator, such as real-time product customization and built-in product advisory services. Establishing an early lead in AI will be a competitive differentiator.

Rush to Data Partnerships and Rise of Financial Services Ecosystems

According to the WEF report, “unlocking the full potential of AI requires an extensive network of partnerships.” Financial institutions will become “ecosystem curators” with “massive scale of data and insight.” China-based Ping An’s One Connect provides hundreds of small and medium-sized banks services developed on AI technology. The company has data from “over 880 million users, 70 million businesses and 300 partners” that fuel its suite of applications for finance, insurance, payments, and even telemedicine.

Partnerships between financial service institutions and technology companies are on the rise. For example, WEF highlights the recently announced joint venture between Amazon, Berkshire Hathaway and JPMorgan Chase to develop a health plan for employees.

The challenges of this new dynamic include protecting proprietary data between institutional partners, selecting the right services that will generate revenue, and regulating third-party services. The customer experience eventually will be self-directed and AI-centric, with the goal of improved financial results. WEF anticipates a talent shift from financial institutions to service providers.

The World Economic Forum anticipates AI to create new opportunities and destroy the traditional financial services models in the future. According to the WEF report editors R. Jesse McWaters and Rob Galaski, “the very fabric of the financial services ecosystem has entered a period of reorganization … in large part by the capabilities and requirements of AI.”

Copyright © 2018 Cami Rosso All rights reserved.