A financial services industry perspective on digital transformation with AI.
If you were to look for me on 21st January 2019, you would have found me on a train to Davos, sipping away a drink, and enjoying a fairytale like Swiss Alps scenery which would have made the perfect Christmas postcard.
Davos is a lovely Swiss ski resort. For the past 48 years, it has been the home of The World Economic Forum (WEF) Annual meeting which brings together 2,500 leaders of global society, including leaders of financial services. The WEF was founded in 1971 by Klaus Schawab, a business professor at the University of Geneva. Each year the WEF meeting has a different agenda.
The 2019 agenda was Globalization 4.0: Shaping a Global Architecture in the Age of the Fourth Industrial Revolution. Sandra Navidi calls Davos “the stratosphere of power” in her book, “Superhubs - how the financial elite and their networks rule our world”. So, on this account alone, I think our industry should pay attention to what it was said during Davos.
I followed closely the technology and financial services leaders' stance during their public discussions in Davos. I consider myself lucky to have spent time in private meetings with some truly brilliant economists, business leaders, financiers, technology investors and AI pioneers exchanging ideas and discussing how our industry will evolve.
The future of financial services industry is the product of a multilayered vision of technology applied in our industry’s specific environment. During Davos, I was interested to ascertain to what extent and how the AI / automation revolution is influencing our industry leaders’ thinking and business vision. I have distilled a number of discussions in a few main points below which I believe will set the narrative for 2019 and beyond:
With the IMF marginally cutting global growth forecast, the political effects of the global economic slowdown at the forefront of the majority of business and political leaders minds. The lack of liquidity was discussed in the “Shaping the Future of Finance“ session. The panel highlighted that USD 11 trillion is estimated to be sitting on central banks balance sheets, and cross border capital flows have fallen by 65% since the 2008 financial crisis while finance technologies are reshaping growth and investment. In a well-articulated intervention, Mary Callahan Erdoes, CEO of JP Morgan Asset & Wealth Management, discussed the issues of high volatility, pockets of illiquidity and where asset allocators can find investment opportunities.
The meaning of finance
Michail Sabia, who runs USD 270 Billion Canadian pension fund, warned the audience that finance has forgotten its purpose as the long-term backer of corporate investments. Instead it has become an investment tourist who cares less about companies and more about short term gains. The short-termism mindset makes the headlines again.
Automating capital markets
With the help of technology, the retail investors have benefited from reduced trading costs and management fees which have, according to Adena Friedman, President and CEO of NASDAQ, been reduced by 70% and, in some cases, by even 100%. The issue of liquidity from the passive and active investments point of view was extensively discussed with Andy Serwer, Editor-in-Chiefof Yahoo Finance, citing the Vanguard’s founder saying that if everyone were invested in passive, then "it would be chaos". The speakers estimated that 44% is currently devoted to passive investments. Lack of liquidity in private markets, primarily in Private Equity, has also arisen and was discussed in respect of how blockchain technology could be deployed to help address this issue and opening this particular asset class to retail investors. There is a concern around the black box algorithms in portfolio management and trading. The asset managers have a governance and fiduciary responsibility towards their investors, and so they need understand how the algorithms arrive at their conclusions; as such explainable AI is a theme which returns as a necessity.
Data ownership. AIG’s President and CEO, Brian Duperreault explained in no uncertain terms that it must be a priority to establish the ownership of data and how it can be transferred. Individuals own their data, he said during his talk on 24th Jan 2019. IBM’s CEO Ginni Rometty, echoed this view.
Data architecture. You cannot have AI (artificial intelligence) without IA (Information architecture) which is one of the core principles guiding the strategic deployment of AI.
Privacy = human right. As the world becomes digitised and as the physical space becomes embedded with computing, we have to deal with privacy as a human right, said Microsoft’s Satya Nadella.
Data governance. In his keynote, Japan’s Prime Minister Abe announced that at the upcoming G20 meeting in Osaka later this year, Japan will launch a new initiative under the auspices of the World Trade Organisation aimed at looking at data governance. This is yet another essential initiative pioneered by Japan in addition to being the first country to design the first AI Principles in 2016. I think there is not enough credit given to Japan for their contribution to this field.
Future of Work
Job redefinition and displacement. As with all technological change, the nature of jobs will change with AI. This change will be radical and occur faster than during any other technological revolution in history. It is clearly accepted that job displacement will happen together with the redefinition of jobs and the redistribution of the workforce.
Re-skilling of staff with the suitable skills related to new jobs. There are generations of people which are affected by the current technological revolution. As technological changes accelerates, some people will inevitably be left behind. History shows that when big technological events happen, the physical infrastructure and societal infrastructure are forced to change. These changes have far reaching impacts across public education to transport infrastructure.
Culture change happens when there is a sense of purpose and mission within the enterprise. This brings and bonds people together. Satya Nadella, CEO of Microsoft, questioned how do we encourage people to become “learn-it-all” and to have a growth mindset?
Recruiting more women into technical roles. “We rely more and more on machine learning to help us make good choices. Women need to be there to help machines make good choices” commented Allen Blue, LinkedIn co-founder and Vice President. This is a theme heard time and time again, as it is the insurance policy against building in and reinforcing bias in how AI tools operate.
Irrespective of the type of attacks, whether state driven or not, it is widely accepted that attacks affect the most vulnerable. Some suggests the need of new constructs like Geneva convention for cybersecurity. Businesses regard cyber attacks as an existential risk.
It will become the differentiator which will foster new innovations with its ability to deliver unprecedented productivity gains, while pioneering new distribution and consumption models. 5G is poised to be the transformational tipping point that will accelerate the global market reach and reshape the competitive landscape. It will give an opportunity to re-examine business processes with a 5G lens and invest intelligently in next generation technologies.
C-Suite and CEOs new set of responsibilities
Bill Thomas, Global Chairman of KPMG articulates three main points, which I believe are relevant to leadership teams in financial services:
CEOs know that the core skills they developed through their career won’t be enough to make them successful CEOs;
CEOs need to be prepared to evolve as quickly as the market and their business. The winners will spend more time learning new skills and accept that they won’t be the master of every discipline and topic;
The public scrutiny has never been more intense on the leaderships of any institution.
Rethink your business processes. The research and work done at Cognitive Finance Group (CFG) have indicated that far too many decision makers and innovation teams hurry to deploy AI on current business process without understanding: (1) what does automating one process mean to the rest of the business? and (2) taking the time to examine how they are doing their work before they deploy AI. In quoting Michael Blablock of Intel (during a panel which I shared with him and others back in May 2018 in London) adopting AI is an opportunity to “reimagine your business”. The same idea was echoed by the IBM’s CEO when referring to using the adoption of AI as an opportunity to interrogate how we do our work, how business processes can be redesigned.
Ethics. Any technology can bring benefits and challenges to this world. It is “important to bring AI safely into the world” the CEO of IBM concludes on a fire side chat with WSJ Editor in Chief Matt Murray. Consequently, for instance, checking AI tools for bias before they are deployed is an essential step to safeguarding processes and ultimately the business's integrity. Moreover, I would add that it is more expensive to correct errors post deploying flawed AI tools. “As creators of AI, we need to have a set of principles that govern fairness, robustness, privacy, security, accountability in how we build whether is facial recognition, language understanding or speech recognition and without those check we will have a dystopian world” concluded Microsoft’s CEO.
Investments in AI. Mary Callahan Erdoes, CEO of JP Morgan Asset and Wealth management said “the issue it is really hard to imagine not being a bank at scale. I cannot imagine having to figure out how to protect yourself from cyber perspective. We spend USD 750 million on cyber protection alone." JPM have employed 50,000 technologists alone and spend USD 10 billion on technology. "With all the AI we have and big data, we aim to help consumers make better decisions - that’s the goal that we are seeking, and if you don’t have scale, it will be a hard slog. This is a clarion call for all legacy institutions and their AI strategy which would enable their business to scale.
Explainable AI will become good business standards and gradually regulators will expect to see it in the AI tools used by financial institutions.
Distribution of wealth created through automation needs to be equitably shared within the society was a theme discussed on a few panels. I would ask what kind of systems, thinking and structure do we need to have in place for this to happen? Some speakers indicated that higher taxes for super wealthy around 70% or more has proven as a successful mechanism to redistribute wealth and build growth as history demonstrates in the United States during the 1930s through to 1960s with the top marginal tax rate of 91% during the Eisenhower administration.
I've discussed these topics and their interplay within business strategy in my upcoming book Edge of Progress© how financial services can prepare for a data driven business model and what corporate boards need to know about AI.
Clara Durodié is a technology strategist specialising in applied artificial intelligence (AI) in financial services, with a focus on AI & Ethics and the tactical adoption of AI for business profitability.
She is internationally recognised for her expertise, advising Boards of leading financial institutions, think-tanks, governments, and academia. She also mentors AI startups on funding and growth strategy. Prior to founding Cognitive Finance group, Clara started scoping the research for her PhD which sits at the intersection of neuroscience, artificial intelligence and asset management. Her focus is on how episodic memory informs how people save and invest. In her corporate life, Clara served in leadership roles in European asset and wealth management in the UK, Switzerland and Luxembourg. Clara is a member of the Chartered Institute for Securities and Investment (UK), has a Certificate in Investment Management (UK) and holds a Master’s degree from the University of Oxford.