Finance
Exploring Three Scenarios For How Gen AI Will Change Consumer Finance
Could consumer-facing tech behemoths (such as Alphabet, Apple or Meta) disintermediate financial … [+]
The rise of generative AI has led to much hand-wringing and discussion about the potential for the technology to disrupt industries and eliminate broad swathes of human jobs. But the impact of the technology will vary from industry to industry, so it’s important to look beyond the high-level talk around disruption and to think through exactly how it will change the financial services sector.
In the case of financial services, the impact of generative AI can be simplified into three possible future scenarios: 1) non-financial tech firms develop a dominant generative AI-based personal assistant and disintermediate financial firms, 2) no disintermediation, but the technology further entrenches the dominance of the largest global banks, and 3) no firms manage to establish dominant generative AI assistants, and the technology becomes commonplace without drastically altering market share.
While we can’t predict the future, it’s essential that financial services organizations think through the three possible outcomes to develop long-term plans for how their business would react to each of these scenarios.
Before diving into this topic, a caveat. The goal of this article is to to make the subject approachable for someone who is not familiar with the nuances of generative AI. This article will not discuss the technical developments that would drive these outcomes – e.g., whether it becomes cheaper and easier to build a proprietary large language model (LLM). This article will guide non-technical individuals through how generative AI will impact the financial services industry.
Scenario one: non-financial tech player(s) take a dominant position
One possible outcome for generative AI technology is that the consumer-facing tech behemoths (such as Alphabet, Apple or Meta) and/or a breakthrough tech startup develop consumers’ go-to personal assistant for a very wide range of life tasks, including personal finance. Consumer behavior changes, and the average person looks to the leading generative AI-based virtual assistant(s) with dominant market share to help them with questions and concerns.
This outcome sees generative AI technology evolve in such a way that tech firms are able to develop a superior personal assistant that is so advanced it incentivizes consumers to almost exclusively use their personal assistant. This assistant would monitor consumers’ affairs (via linked outside accounts) and would provide advice when asked questions like “how can I improve my financial situation?” or “could my savings be earning more?” This development would disintermediate financial services firms and the assistant would be able to influence consumers’ financial decisions and behaviors.
An advanced AI-based general personal assistant with dominant market share would disintermediate … [+]
If this scenario becomes reality, the response of financial services firms to this disintermediation partly depends on how regulation shakes out and whether AI assistants can earn referral fees. Beyond the referral question, in the long-term this outcome would likely make the financial services industry much more cutthroat.
In this scenario, financial services firms would need to become far more innovative and would need to develop compelling and unique products and services. Financial services firms would need to incentivize clients to actually log into their website and app and not just rely on their personal assistant. A generic product lineup and a generic client experience would gradually lose market share in a world driven by tech firms’ high-performing virtual assistants.
According to Remco Janssen, Founder and CEO of European tech news media company Silicon Canals, “in past tech hype cycles, the established tech giants were often slow to react. When it comes to generative AI technology, however, the largest firms have acted quickly. Tech behemoths like Apple, Google and Amazon
Amazon
Scenario two: the largest financial firms use gen AI to further entrench their dominance
In this scenario, generative AI technology develops in such a way that tech companies do not disintermediate financial services firms, but the costs and complexity of advanced AI technology allows the largest global banks to gain a competitive edge over relatively smaller rivals in the industry. For an example of the gulf between the top financial services firms and the next tier of financial institutions, as of May 10th, the market capitalization of JPMorgan Chase ($570.80 billion) and Bank of America ($300.69 billion) both exceed the combined market capitalization of US Bancorp, PNC, Capital One and Truist. The combined market capitalization of those four institutions is “only” approximately $235 billion.
The largest banks can dedicate far more resources generative AI. The CEOs of Wells Fargo, Bank of … [+]
It may turn out that the largest financial firms–those which can afford expensive engineering talent and cloud computing resources–can develop meaningfully more powerful generative AI-based financial assistants than the average financial services firm and the industry’s third-party vendors. If the largest global banks can offer a superior generative AI-based financial assistant, they will use this offering to further entrench their dominance of the industry and to win market share from relatively smaller firms.
Scenario three: no dominant gen AI assistants emerge
The final scenario sees generative AI technology become somewhat of a commodity and no firm develops a meaningfully superior generative AI assistant. Generative AI-based assistants become a standard feature of financial services websites and apps without fundamentally disrupting the industry and changing market share dynamics. Financial services firms may even end up relying on multiple third-party generative models simultaneously, calling upon different models depending on the user’s needs.
In this scenario, financial services firms would need to be thoughtful about how they optimize their generative AI assistant to minimize costs and maximize revenue. Financial services firms would work to continually improve their generative AI’s ability to handle customer service questions (preventing more expensive queries to the customer service call center) and to drive desirable actions (e.g., establishing direct deposit, opening a new account, etc.). While this third scenario presents less of a threat to the average financial services firm, developing a high-quality generative AI assistant still represents a large and complex undertaking.
If no dominant generative AI assistants emerge, firms would look outperform peers via superior user … [+]
According to Dr Andreas Rung, CEO and Founder of Ergomania, “banks and financial institutions have a tendency to keep big tech initiatives in the experimental/ideation phase for too long. Time is of the essence when it comes to generative AI. Your organization needs to move quickly to deploy a generative AI assistant to your customer base. In order to keep pace with the competition, your generative AI assistant must also become a seamless part of the UX and customer experience.”
Gen AI has the potential to upend financial services, and firms must start planning for future scenarios now
Only time will tell how generative AI technology develops and which of these three scenarios becomes reality. But your organization should start to think through these outcomes and how to react in each situation. Could your organization restructure and make a massive investment in developing a cutting-edge generative AI assistant if that becomes necessary? If your firm uses a third-party AI vendor, what are the “switching costs” if your firm “backs the wrong horse” and must make a change in order to keep pace with the leading firms? In each of these scenarios, how would your firm adjust the human workforce? It is better to start planning now than to be reactive and scrambling to catch up to changing market dynamics.
According to Milan De Reede, Founder and CEO of Nano GPT, “I see our customers’ preferences shift in real time as new generative AI models and updates are released. There’s no clear “winner” as of May 2024. Our customers seem to prefer different generative AI models for different tasks. At some point in the future, your firm may need to change your generative AI infrastructure and approach relatively quickly depending on which of these three scenarios becomes reality.”
Finance
Stress in private credit could spark ‘psychological contagion,’ Fed’s Barr tells Bloomberg News
May 3 (Reuters) – U.S. Federal Reserve Governor Michael Barr said stress in private credit could spark “psychological contagion” leading to a broader credit crunch, Bloomberg News reported on Sunday.
While direct links between banks and private credit do not yet appear “super worrisome,” there were other areas of concern such as the insurance sector’s overlaps with private lenders, Barr said in an interview with Bloomberg News.
“People might look at private credit, and instead of saying, ‘This is an idiosyncratic problem, these were high-risk loans, the rest of the corporate sector is different,’ they might say, ‘Wow, there seem to be cracks in our corporate sector. Maybe over here in the corporate bond market, there are also cracks,’” Barr said.
Barr also added that “then you could have a credit pullback, and that could lead to more financial strain.”
Private credit firms have been under stress because of the market’s recent downturn with some investors retreating from these investments due to worries about valuations and lending standards following a handful of high-profile bankruptcies.
Fed Chair Jerome Powell said in March central bank officials are watching developments in the private credit sector for signs of trouble, but do not currently see issues there bringing down the financial system as a whole.
(Reporting by Angela Christy in Bengaluru; Editing by Will Dunham)
A repeat of the Reserve Bank board’s split decision to raise interest rates in March could be on the cards as the central bank frets over the dual threats of high inflation and a stalling economy.
Financial markets and most economists are tipping a third straight rate hike on Tuesday.
ANZ Bank head of Australian economics Adam Boyton is part of the chorus predicting the Reserve Bank will lift the official cash rate to 4.35 per cent – the same level as its post-COVID-19 pandemic peak.
But he thinks it won’t be a lay down misere, with several members likely to vote in favour of keeping rates on hold.
The combination of a tight labour market, above-target underlying inflation and concerns inflation expectations could become unanchored all point in favour of a hike.
At the same time, the US-Israeli war with Iran’s effects on the economy could convince some board members more time is needed to weigh the impact on economic growth.
In March, four of the board’s nine members voted unsuccessfully to keep rates on hold, arguing there was too much uncertainty around the domestic growth outlook and how the conflict in the Middle East would evolve.
Uncertainty around the path forward would be reflected in the bank’s post-meeting communications, Mr Boyton said, with no forward guidance expected.
“We expect, however, a tilt in the language in the post-meeting statement that will open the door to an extended pause,” he said.
Financial markets put the chance of a hike on Tuesday at about three-quarters and have fully priced in at least one more rate rise by November.
Westpac forecasts another two hikes after May, in June and August.
But economists at ANZ, NAB, Commonwealth Bank, Deutsche Bank and HSBC think the Reserve Bank will stand pat after Tuesday.
“Whether the RBA delivers further tightening beyond May will depend on how quickly the economy weakens,” HSBC’s local chief economist Paul Bloxham said.
“We see a recent sharp weakening in sentiment as a clear signal that a downturn is already under way.
“Our central case is that, beyond the May hike, the RBA remains on hold.”
Updated economic forecasts by Reserve Bank staff, released simultaneously to the monetary policy decision, will be closely scrutinised for hints about the path forward for rates.
Earlier on Tuesday, the Australian Bureau of Statistics will release household spending figures for March.
Economists predict a rise of 1.5 per cent, driven by higher fuel spending.
Building approvals figures for March will be published on Monday.
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