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."
Meanwhile, AI is becoming a new battlefield for customer loyalty, offering firms an opportunity to escape a "race to the bottom" in price competition by introducing new ways to distinguish themselves to customers.
In other ways, AI will facilitate closer collaboration with solutions built on shared datasets which 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.
However, the rise of AI will bring tensions and risks. First, financial institutions will be drawn closer to big tech since cloud computing is central to most AI strategies. But there is a chance that most of the benefits will escape them.
Second, the report warns that AI will raise new challenges for the financial ecosystem, particularly around regulation. The divergent path being taken by regulators around the world towards customer data could create a new form a regulatory arbitrage.
Finally, the report points to systemic and security risks from creating a more networked finance system, where a few AI databases contain most clients’ information.
This means that new risk management and mitigation strategies will be required and that new methods of protecting consumers will have to be put in place.
Read the full report