With digital banking and social payments already making waves in the financial community there is one more piece of technology that is revolutionising the banking world; AI advisors. While human advisors can offer that personal touch, AI bankers are becoming increasingly astute, and more market savvy than human traders and advisors. The advantage of 24 hour service, massive processing power, and the ability to see and assess every conceivable option is rather hard to compete with, so we could soon see robo-advisors become more prominent in the industry than humans.
In 2015 robo-advisors managed less than $20 billion in the US, a small drop in the ocean of the financial world, but some projections from the consulting firm A.T. Kearny indicate that this number may be about to explode. Assets under management by AI advisors are estimated to increase 68 percent annually to around $2.2 trillion by 2020, with half of the investment coming from new investments and half coming from money that has already been invested. Fintech firms are racing to disrupt banks and traditional wealth management through the use of AI advisors, although banks have not been too slow to realise that this could well be the future; the Bank of Montreal is just one of many financial institutions who have taken a foray into robo-advisors with their “BMO Smartfolio”.
In the past Financial Investment Advisors (FIAs) were expensive (in fact good ones still are) and thus beyond the reach of younger people, especially in today’s stretched economy. However, AI wealth management significantly lowers the financial barriers to investing and has drastically altered the market to allow for small and easy investments. Millennials generally prefer branchless banking, 24/7 communication and access, and technologically aided systems. So this combined with the lower barriers to entry, is likely to mean a boom in both robo-advisors and Millennial investing. That said, Millennials have not been the prime market for these investments that they were expected to be, with the average age for clients in a Globe and Mail report was 43 – so perhaps the robo-advisors could be adopted even faster across the board by all age groups than we imagine!
The CFA Institute surveyed investment experts on the possibility of AI asset management, and 70% expressed the feeling that these tools would be useful to a range of investors, with some even suggesting that the 24-hour service and automatic tax loss harvesting could entice those with a substantial net worth who would normally use an investment manager to deal with their assets.
However, AI advisors are not the only area that AI and automation are set to revolutionise the banking industry. Richard Lumb, the head of financial services at Accenture has suggested that AI automation may soon take over “thousands of roles” in internal policing and regulation. Roles that have been created to check customer data and transactions will soon be decimated in favour of automation and AI, “Companies have really thrown bodies at this to deal with the demands of the regulators. They have had no option,” he said speaking to The Financial Times. “But now we are shifting from a revolution of labour arbitrage and offshore to a revolution of automation around this.”
According to Citigroup estimates, international banking institutions like JPMorgan and HSBC are employing twice as many people as they previously were to deal with compliance and regulations that have been put in place. These costs now amount to roughly $270bn a year and accounts for 10 per cent of operating costs across the banking industry.
Similarly, Citigroup have themselves claimed that of the $3.4 billion in costs that they had saved in 2015 through greater efficiency, 59 percent was spent on new compliance and regulatory staff and resources. The spending on regulation is speeding up banks investment in AI and automation, as regulatory costs since the 2008 crash continue to rise, in order to fill these requirements at a lower cost.
There is no doubt that both artificial intelligence and automation are going to revolutionise the banking world, in ways that we can barely imagine at this point. Banking is taking a leap towards digitization, and no-one can be quite sure as to where it is going to end up.
By Josh Hamilton