The World Economic Forum (the folks that bring us the famous Davos conference every winter) is out with a very topical report on artificial intelligence called “The New Physics of Financial Services”. Done in conjunction with Deloitte, it is a hefty +150 pages of Powerpoint slides. We’ve met the lead author, Jesse McWaters, at trade conferences; he is a very thoughtful individual. The work took a year of research, with Jesse and others interviewing +200 subject matter experts. It is a solid piece of research.
Today we’ll distill the report into its key themes, and there is a link at the end of this section if you want to see the complete presentation (good train/plane reading).
Point #1: AI has had several false starts over the years, but all the pieces are finally in place for this technology to have a dramatic impact on Financial Services:
- Computer processing speeds are now cheap/fast enough to leverage the mountains of data available in the industry.
- AI development has shifted from academics to technologists, who are building real world applications.
- The world’s largest technology companies are investing heavily in AI right now with a focus on generating both useful tools and significant profits.
- The shift to cloud computing provides affordable access to both large datasets and processing power, enabling faster training of AI models.
Point #2. Artificial Intelligence is actually a group of computer-enabled capabilities, all of which are relevant to Financial Services:
- Pattern recognition: accurately identifying both “expected” and “irregular” data at scale
- Foresight: determining the probability of future events
- Customization: generating rules from specific profiles and then applying general data to optimize outcomes
- Decision-making: generating rules from general data and applying specific profiles against those rules
- Interaction: communicating with human users through digital or analog mediums
Point #3: AI will fundamentally change the attributes of a successful Financial Services business:
- Scale of client data becomes more important than scale of assets. The more you know (or can learn) about your customers, the better/more efficiently you can service them.
- Customized products and interactions will replace the mass production approach to customer service and one-size-fits-all offerings.
- “Client exclusivity” will finally go extinct; customers will be able to use AI tools to find the best product for their needs. Switching costs go to zero as a result.
- The use of tech-based solutions will deliver operating leverage in the future, rather than simply training and directing large human workforces.
The WEF report also has an entire section on AI as it relates to Investment Management and offers up 5 ideas about how the industry can/will leverage this new technology:
#1. AI would allow financial advisors to provide targeted, personal investment advice to mass-market customers, a new growth opportunity for a traditionally high net worth-focused industry.
#2. The industry will be able to increase both back office and investment process efficiency with AI driven tools.
#3. Asset managers will be able to customize portfolios and investment plans around a deeper understanding of individual client needs with AI powered Big Data analysis of their entire financial lives.
#4. In less-developed economies, existing players and new entrants could use AI to reach new customers and service them efficiently.
#5. Money managers can use Artificial Intelligence directly in the investment process to achieve positive and non-correlated returns across a variety of asset classes.
Our take on all this, in three closing bullet points:
- While we agree that AI is finally ready for prime time, Financial Services is a heavily regulated industry. Regulators are not fond of change; just ask anyone who owns bitcoin waiting on an SEC-approved ETF. And after a decade of high profile run-ins with both government regulators and elected officials, large financial services businesses will proceed with rightful caution when developing new tech-enabled products and services.
- The last thing big US technology companies want at the moment is more regulatory oversight of their business lines. They will therefore be slow to move into Financial Services, where the regulatory structure is dense and unforgiving. Societal concerns over data privacy are another thread here; consumers in developed economies are typically very protective of their financial information. Will they embrace the notion of their financial advisor seeing every transaction they make?
- To end on a less Luddite-ish note, there is plenty of disruption already occurring exactly along the lines of the WEF report. Robo-advisers use rudimentary AI to profile customer risk tolerances. FinTech companies are building business models to leverage customer data, not just gather assets or enable transactions. We have no doubt that data collection and AI-powered algos will eventually define competitive advantage in Financial Services. It will just take longer than the Tech crowd thinks.
Link to report summary (full report available with the “Download PDF” button): https://www.weforum.org/reports/the-new-physics-of-financial-services-how-artificial-intelligence-is-transforming-the-financial-ecosystem