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.”
Inflation has been dominating the headlines. But what most people are actually feeling in their daily lives is something different: affordability pressure.
There’s an important distinction. Inflation measures the rate at which prices are rising. Affordability, on the other hand, reflects whether your income can keep up with the level of those prices. And even as inflation has cooled from its recent peaks, the reality is that many costs have reset higher and stayed there.
That’s why things may still feel tight. Over the past five years, consumer prices have risen more than 20%, according to the Bureau of Labor Statistics. Even in the past year, prices rose about 3.3%, while real wages increased just 0.2%. For many households, incomes are still playing catch-up.
This gap is where affordability pressure lives and it shows up in everyday life.
Affordability and your pocketbook
Housing is often the biggest factor. Roughly one-third of U.S. households are considered “cost-burdened,” meaning they spend more than 30% of their income on housing, according to the U.S. Department of Housing and Urban Development. Add in higher mortgage rates that have more than doubled since their pandemic lows, and the pressure becomes even more pronounced.
It doesn’t stop there. Insurance premiums have climbed. Grocery bills remain elevated. Interest rates on credit cards and auto loans are significantly higher. And many people are still anchoring to what things used to cost, which makes today’s environment feel even more uncomfortable.
In short, affordability stress shows up in your monthly cash flow, not just on paper.
Inflation and your portfolio
Inflation doesn’t impact all investments equally. Cash, while stable in nominal terms, tends to lose purchasing power over time. Longer-term bonds can be sensitive to rising interest rates. Stocks, especially companies with pricing power, may be better positioned to adapt. Real assets like real estate or infrastructure can also provide a degree of inflation resilience.
The takeaway isn’t to overhaul your portfolio every time an economic indicator changes. It’s to build a resilient, all-weather strategy that potentially can outlast it. Maintaining appropriate equity exposure, diversifying across asset types, and managing interest rate sensitivity are all part of that process.
Planning considerations in the current environment
A strong financial plan anticipates how higher costs affect your life. That means shifting the focus from net worth to cash flow. Can your plan absorb higher recurring expenses? Do you have enough flexibility to adjust spending if needed? Are you managing taxes in a way that preserves after-tax income?
Thinking about moving? Keep these realities in mind
For some households, the most powerful affordability lever is changing the cost structure entirely. That’s why many Americans are now considering moves from higher-cost to lower-cost states. Lower housing costs, reduced taxes, and a generally lower cost of living can improve cash flow and reduce the pressure on a financial plan, especially in retirement.
But a move isn’t a guaranteed win.
Transaction costs alone, related to selling a home, buying another and relocating, can take years to recover. Tax differences aren’t always straightforward; lower income taxes may be offset by higher property taxes or insurance costs. Healthcare access and quality vary by region. And lifestyle factors, like proximity to family or community ties, can be just as important as financial ones.
A move that may look good on paper still has to work in real life.
Practical steps you can take now
You don’t need to make dramatic changes to respond to this environment. But making thoughtful, small adjustments can make a difference.
Consider locking in fixed costs where possible, especially when it comes to debt. Review variable expenses, including insurance and subscriptions. Maintain a healthy emergency reserve to absorb unexpected increases. And focus on after-tax income, not just what you earn on paper.
If your plan is solid, you shouldn’t need to overhaul it; you just need to make smart adjustments.
Inflation tells you what is happening in the economy. Affordability tells you what’s happening in your life. And while prices may not be rising as quickly as they were, they’re still higher than they used to be. A well-constructed financial plan accounts for that reality, builds in flexibility, and helps you stay ahead of your cost of living over time.
You may not be able to control inflation, but you can control how prepared your plan is for it.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO 830 AM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com. Advisory services offered through Wealth Enhancement Advisory Services LLC, a registered investment adviser and affiliate of Wealth Enhancement Group.
When Anthony Nappa started selling hair products out of the corner of his parents’ warehouse as a teen, he never could have imagined what the side hustle would become. The business has grown from a small eBay store to a multi-million dollar beauty empire that is rapidly expanding its physical presence across Australia.
Founded as a side project in 2012 when Nappa was 19 years old, Oz Hair & Beauty posted $100 million in revenue in the past financial year and now employs more than 500 staff across the country. It has opened 30 new stores in the past three years, with the aim of expanding to 50 stores by the end of the next financial year.
Nappa, now 33, told Yahoo Finance it was a far cry from his original plan when he was a teenager. Back then, he was working part-time as a labourer while studying Commerce at university.
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“My plan was to live at home, study at uni, while I’m studying, save as much money as possible and by the time I graduate, put a down payment on a house and have a graduate job,” he said.
But when his labouring boss suddenly left the country, Nappa found himself out of a job. His parents, Elio and Venessa Nappa, owned a number of Oz Hair hairdressing salons in Sydney, so he decided to start selling the salon’s hair products on eBay.
Nappa invested $10,000 of his savings into the business and saw sales start picking up when he migrated from an eBay store to a proper website and later Shopify.
“Long story short, it really took off. I was working at the back of the warehouse, and then I had to lease the whole warehouse,” he said.
Do you have a story to share? Contact tamika.seeto@yahooinc.com
Growing bricks and mortar presence
It was during the pandemic that business really “boomed”, Nappa said. In 2019, annual revenue sat at about $24 million, but by 2021, turnover had reached $40 million.
In 2021, Oz Hair & Beauty received backing from billionaire Brett Blundy’s BBRC and Daniel Agostinelli, CEO of Accent Group, which runs shoe retail chains like Platypus and Hype.
Nappa said part of the deal included buying his parents’ store in the QVB, which was then rejigged in 2022 into a fully fledged retail store.
“That increased sales by nearly double. So we thought we’ve got something here now,” Nappa said.
At a time when many discretionary retailers are reducing their physical footprints, Oz Hair & Beauty has taken the opposite approach.
The Catalytic Climate Finance Facility (CC Facility), a program jointly managed by Climate Policy Initiative and Convergence, along with the Government of Canada, is hosting an event during London Climate Action Week focused on Scaling Climate Investments in Emerging Markets Using Blended Finance.
The event will explore opportunities and challenges in mobilizing private capital for climate action in emerging markets, including the role of catalytic capital instruments such as grants and technical assistance in scaling innovative blended climate finance solutions. Discussions will draw on practical insights from actual blended climate finance transactions and also highlight key lessons emerging from programs such as the CC Facility, which leverages these instruments to accelerate and scale such solutions. The event will bring together investors, government funders, DFIs and MDBs, philanthropies, climate finance practitioners, and ecosystem partners, and will provide an opportunity to network with key stakeholders across the blended and climate finance ecosystem over drinks.
Due to limited capacity, this is an invite-only event. If you are interested in attending, please register your interest here.
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