How AI is reshaping the financial services industry
New report from World Economic Forum and Deloitte explores how AI is challenging traditional operating models and upending competitive dynamics in financial services.
AUCKLAND, 4th September 2018 – Artificial intelligence (AI) is rapidly changing the way financial services institutions attract and retain their customers, and it will necessitate new models of collaboration amongst competitors, according to a new report by the World Economic Forum and Deloitte. The report, “The New Physics of Financial Services" explores how AI will transform the realities of financial institutions by radically changing front- and back-office operations, creating major shifts in the structure and regulation of financial markets, and raising critical challenges for society to resolve.
Deloitte New Zealand Partner and Banking Sector Lead Marco Ciobo says that by now many have seen the impressive demos of AI assistants calling a restaurant or hair salon to make an appointment. And in New Zealand we are seeing a number of banks launching, or planning to launch, AI customer service offerings. But this is just the tip of the iceberg.
“AI in the back office will dramatically impact banking and insurance operations, from credit decisions to investment advice. However, focusing exclusively on the capabilities that AI offers risks missing the fundamental shift that is occurring. AI is rapidly reshaping what’s necessary to build a successful business in financial services. In the future, financial institutions will be built on scale of data and the ability to leverage that data,” says Mr Ciobo.
“What’s more, fulfilling the promise of AI will require an honest and collaborative relationship between an institution’s workforce and leaders, and the transformative impacts of AI will necessitate more public-private commitment. While emerging questions about consumer protections and systemic risks remain the role of regulators, effectively responding to these challenges will require collaboration between public and private stakeholders to resolve regulatory uncertainties and manage the risks and opportunities of AI in financial services,” he adds.
The report identifies four core findings that explore how AI is radically transforming the front- and back-office operations of financial institutions:
Cost centres to profit centres – AI enabled back-office functions will allow financial institutions to turn their centres of excellence into services, while pushing them to outsource most other capabilities. As financial institutions move towards a back-office as-a-service model, these processes will continuously learn and improve using data from its collective users. This both accelerates the rate at which capabilities improve while necessitating competitors to become consumers of that capability to avoid falling behind.
A new battlefield for customer loyalty – Past methods of differentiation for financial institutions—such as cost, speed and access—are eroding. AI is giving rise to a new set of competitive factors on which financial institutions can distinguish themselves to customers. For example, the ability of institutions to optimise financial outcomes by tailoring, recommending and advising customers will allow them to compete on value offered. The ability to engage users and access data through ongoing and integrated interactions beyond financial services will allow them to better retain customers. And curating ecosystems by bringing together data from multi-dimensional networks that include consumers, corporate clients and third parties will allow financial institutions to offer differentiated advice and improve performance.
Self-driving finance – Financial advice, part of every product, is often generic and impersonal. It also tends to be overly reliant on subjective advice from different customer service agents. A self-driving vision of finance could transform the delivery of financial advice, centreing customer experiences around AI. In this vision, individuals will increasingly interact primarily with a single platform or agent who will provide recommendations about the types of products they should engage with and advisory services around those products. AI enables this vision in three key ways: empowered platforms which can compare and switch between products and providers; increasingly personalised advice based on data; and continuous optimisation through algorithms which will automate most routine customer decisions.
Collective solutions for shared problems – While AI presents increased opportunities for competition, it also presents a strong mechanism to collaborate as the value of shared datasets is tremendous. There is great potential for cross-institutional collaboration on issues such as fraud prevention and anti-money laundering controls, which are often run inefficiently and ineffectively today. Collaborative solutions built on shared datasets will radically increase the accuracy, timelines, and performance of non-competitive functions, creating mutual efficiencies in operations and improving the safety of the financial system.
Additional findings from the report explore major shifts in the structure and regulation of financial markets and critical challenges for society to resolve:
- 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.
- Adapting talent strategies: Talent transformation will be the most challenging road block on institutions’ implementation of AI, putting at risk the competitive positioning of firms and regions that fail to effectively transition talent alongside technology.
- New ethical dilemmas: Global communities have a joint interest in mitigating the risks and harms of rapid technological development. AI will necessitate a collaborative reexamination of principles and supervisory techniques to address the ethical concerns and regulatory uncertainty that are hindering institutions’ willingness to adopt more transformative AI capabilities.
The full report can be found at www.deloitte.com/nz/artificial-intelligence-transformation