Artificial intelligence is changing the finance industry, with some early big movers already monetising their investments in back-office AI applications. But as this trend widens, new systemic and security risks may be introduced in the financial system, warns a new report from the World Economic Forum and Deloitte.
The report, based on more than 200 interviews with industry players as well as a host of workshops, concludes that AI is „fundamentally changing the physics of financial services”.
This is largely because big FS firms are taking a page from the AI book of big tech firms. Rather than a proprietary mindset, they are developing applications and making them available as a service through the cloud.
For example, in China, Ping An’s One Connect sells AI-powered services ranging from credit adjudication to instantaneous insurance claims settlement to hundreds of small and mid-sized Chinese banks and is expected to fetch up to $3 billion at public sale.
Meanwhile, in the US, BlackRock’s Aladdin, which provides risk analytics and portfolio management tools that leverage machine learning to asset managers and insurers, is expected to provide 30% of the firm’s revenues by 2022.
Jesse McWaters, AI in Financial Services project lead at the WEF, says AI „is turning what were historically cost centres into new source of profitability, and creating a virtuous cycle of self-learning that accelerates their lead.”
„A clear vision of the future financial landscape will be critical to good strategic and governance decisions as financial institutions around the world face growing competitive pressure to make major strategic investments in AI and policy makers seek to navigate the challenging regulatory and social uncertainties emerging globally.”, the authors says.
Building on the World Economic Forum’s past work on disruptive innovation in financial services, this report provides a comprehensive exploration of the impact of AI on financial services.
Key findings include:
• From cost centre to profit centre: Institutions will turn AI-enabled back-office operations into external services, both accelerating the rate at which these capabilities improve and necessitating others to become consumers of those capabilities to avoid falling behind.
• A new battlefield for customer loyalty: As past methods of differentiation erode, AI presents an opportunity for institutions to escape a „race to the bottom” in price competition by introducing new ways to distinguish themselves to customers.
• Self-driving finance: Future customer experiences will be centred around AI, which automates much of customers’ financial lives and improves their financial outcomes.
• Collective solutions for shared problems: Collaborative solutions built on shared datasets will radically increase the accuracy, timeliness, and performance of non-competitive functions, creating mutual efficiencies in operations and improving the safety of the financial system.
• Bifurcation of market structure: As AI reduces search and comparison costs for customers, firm structures will be pushed to market extremes, amplifying the returns for large-scale players and creating new opportunities for niche and agile innovators.
• Uneasy data alliances: In an ecosystem where every institution is vying for diversity of data, managing partnerships with competitors and potential competitors will be critical but fraught with strategic and operational risks.
• The power of data regulators: Regulations governing the privacy and portability of data will shape the relative ability of financial and non-financial institutions to deploy AI, thus becoming as important as traditional regulations to the competitive positioning of firms.
• Finding a balanced approach to talent: Talent transformation will be the most challenging speed limit on institutions’ implementations of AI, putting at risk the competitive positioning of firms and geographies that fail to effectively transition talent alongside technology.
• New ethical dilemmas: AI will necessitate a collaborative re-examination of principles and supervisory techniques to address the ethical grey areas and regulatory uncertainties that reduce institutions’ willingness to adopt more transformative AI capabilities.
This report is the culmination of one year’s worth of research, including over 200 interviews with subject matter experts and seven global workshops, prepared by the World Economic Forum in collaboration with Deloitte.
Download the full report here: The New Physics of Financial Services – Understanding how artificial intelligence is transforming the financial ecosystem
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