Few would dispute the idea that artificial intelligence will be a transformative technology for financial services. Yet the view of how that transformation will shake out may be evolving significantly.
A report from Deloitte and the World Economic Forum contends that in the near future, technology expertise will grow so commonly available that raw AI and multiple technologies built around that hub will not be what separates the winners from the other players.
Instead, as envisioned by the report, the transformative technologies that excite so many today will become as basic to the industry as the longstanding payments rails they all share today. What institutions do with that transformative technology will mean much more and that will hinge on some surprisingly basic ideas.
Since the first tremors that heralded the beginnings of disruption in financial services, the banking industry has been cast as the reactionary, the conservative slow-poke that won’t change in the face of better ideas and processes. Even as more individual institutions “got it,” the industry continues to be portrayed as a laggard.
Is that really still the case? Or is that a dated and mistaken impression? Rob Galaski, Vice-Chair and Managing Partner, Financial Services, at Deloitte Canada, thinks banking has made more progress than most think.
“The industry has been going through so much transformation, yet it is always being criticized and questioned,” says Galaski. “Is there enough innovation? Is there enough disruption? Are we going fast enough? Or has all of this bluster we’ve been talking about for so long actually been coming true?”
Galaski’s contrarian conclusion: “Over the last five years, and certainly going into the future, what’s happening is the big institutions have entirely transformed their organizations, just not in the ‘big bang’ way that people were expecting.”
Host of Technologies Revolving AI and Cloud Computing
Behind this iterative transformation have been a variety of technologies that Galaski and other members of the Deloitte team have been exploring in a series of reports produced in cooperation with the World Economic Forum. The technologies include augmented and virtual reality, the internet of things, distributed ledger technology, quantum computing and artificial intelligence. Galaski says the combination of these sciences is proving to be “multiplicative” as they all come to maturity in concurrent time frames. The impact of COVID-19 is simply another influence on this evolution that brings the industry closer to major change.
“When you look at Google, Amazon, Microsoft, Facebook and the three big Asian tech companies, Alibaba, Tencent and Baidu, together they control nearly 70% of the world’s AI investment.” — Rob Galaski, Deloitte Canada
The study maintains that the technologies listed will be used in “technology clusters” appropriate to various purposes, such as lending, embedded financial services, and funds transfer. But AI and cloud computing will be at the center of every cluster. AI, the report observes, “helps to analyze, interpret and make decisions upon the data that many of the other technologies generate, store or process.” AI may increasingly be made available to many organizations as a cloud-based service, potentially even learning from its “experience” among multiple financial institutions.
In an interview with Galaski The Financial Brand concentrated on the strong part that artificial intelligence will play in the future.
Amid all the enthusiasm for artificial intelligence overall, and in financial services specifically, is an inconvenient fact: The big difference between AI hopes and AI realities.
“We’ve found in our work that if you view the landscape of all the different business problems that exist in our industry and see where AI can have the greatest effect, then you can see that the impact could be transformative,” says Galaski. “But then when you compare it to the actual realized application of AI in financial services, you find that something on the order of 90% of AI test cases never actually go into full commercialization.”
Galaski says that up until now “explainability” has been an issue.
“There is a divide between the folks who are employing AI on the front lines of the banking business and the senior management and governance contingent to whom they report, in terms of being able to actually explain why AI is effective,” he says.
However, another factor outside of the industry plays a significant role, according to Galaski.
“When you look at Google, Amazon, Microsoft, Facebook and the three big Asian tech companies, Alibaba, Tencent and Baidu, together they control nearly 70% of the world’s AI investment,” says Galaski. “So if you’re a traditional financial institution, you’re trying to compete for those same resources. It can be very difficult.”
As a result, Galaski says the tech firms are “emerging as really significant parts of the financial services ecosystem, and that participation will increase over time. When they are in a partnership model with financial institutions they will collaborate and bring the best of the world’s talent and apply it to financial institution problems.”
In effect, these firms act as AI suppliers —”intelligence for hire” — or, as the joint report says, “AI as a Service.”
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“Ultimately financial institutions are very adept at running safe and secure businesses that provide for their customers and their shareholders. They are safe, secure and sound managers or fiduciaries,” explains Galaski. “Financial institutions acting as large-scale technology companies is a new phenomenon. The level of fluency in these new technologies is not uniform across the management ranks.”
“You don’t want to apply good technology to bad processes. If you take good technology and apply it to an inherently bad process, you’re not going to get the outcome you want.” — Rob Galaski, Deloitte Canada
While this fluency takes time to develop, Galaski says that larger banks and insurance companies have been evolving.
“They have done a very good job of learning to fight pound-for-pound with some of the larger tech firms over the last five years or so,” Galaski explains.
Something the strongest pioneers have been realizing is that these new technologies open up fresh approaches.
“You don’t want to apply good technology to bad processes,” says Galaski. “If you take good technology and apply it to an inherently bad process, you’re not going to get the outcome you want.”
In areas like consumer lending, for example, you need to implement end-to-end business process transformation as well, according to Galaski. Hand in hand with this is the need to adopt agile development techniques.
One thing that is helping the larger institutions is that they offer younger experts in AI and other leading edge tech a chance to really move the needle. If they go to a big tech, they will be another cog in a high-performance tech organization.
By contrast, those who join a banking institution have a special opportunity to make their mark.
“The graduates from top-tier programs are beginning to choose the financial industry,” says Galaski, “because they see they’ll have the ability to make wholesale changes to something that impacts hundreds of thousands — if not millions — of people.”
“This has become a story about real-world application of techniques and of seeing one’s work manifest on Main Street,” says Galaski. “I think that’s a noble effort.”
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Increasing Tech Ubiquity Brings Transformation Challenge Back to Basics
The impact on Main Street — both for consumers and small businesses — will not only come from the giants. As AI and all the other technologies mentioned earlier become available as a service in various combinations, all banks and credit unions will have some level of opportunity to bring that functionality to those they serve.
“The barriers to entry for small and midsized institutions are coming down,” Galaski says. Their offerings may not be laden with all the features the big players can serve up, but they’ll be in there slugging away.
Which brings Galaski to a key point of the research: Financial markets will becoming increasingly saturated in leading edge technology, so that it won’t be a key differentiator anymore.
What will set one institution apart from another will be their abilities to assemble packages of functions desired by their customers and prospects; their ability to use the technologies to execute on those service packages; and, finally, to build and maintain trusted relationships so consumers and businesses will want to obtain those services from that particular institution.
“What will become primary is for banks to have to learn to act like marketing companies,” says Galaski. “The barriers to actually being in the market will be so low that the name of the game will be how many customers you can attract to your platform.” Traditional divisions between parts of the financial services business and big tech and fintech will become less and less sharp
For many in the business, he says, this will mean going back to “the core principles of business that we all grew up learning.”