New technologies are set to radically transform financial services and this report by the World Economic Forum (WEF), The New Physics of Financial Services, outlines key changes that will be driven by the use of artificial intelligence (AI) in finance.

The hype around AI is often sensational, with rapid investment and growth of AI-based financial services in the next few years. Cross-industry investment in global AI of about $58 billion is predicted by 2021, with financial institutions expected to invest $10 billion by 2020. But amid the excitement, there is also fear that robots will 'steal jobs', while also introducing potential risks and uncertainty into the financial system.

What is AI?

The WEF's report notes that there is no one meaning or definition for the term and people often use it to describe different processes. However, it defines AI as the following set of capabilities (and combinations thereof):

A suite of technologies, enabled by adaptive predictive power and exhibiting some degree of autonomous learning, that have made dramatic advances in our ability to use machines to automate and enhance:

• pattern detection (recognize (ir)regularities in data);
• foresight (determine the probability of future events);
• customization (generate rules from specific profiles and apply general data to optimize outcomes);
• decision-making (generate rules from general data and apply specific profiles against those rules); and
• interaction (communicate with humans through digital or analogue mediums).

Shifting centres of gravity

The report notes that AI is “weakening the bonds that have historically held together financial institutions, while creating new centres of gravity where new and old capabilities are being combined in unexpected ways”. This will put pressure on legacy business, as the global financial services of the future will be built upon a new set of priorities and capabilities, often defined and driven by AI technology. These include the use of big data to drive operational advantage, tailored experiences and highly customised products, seeking to keep clients engaged through improving product performance and benefits, as well as performance augmented by talent and technology.

These changes are set to transform financial services, making front- and back-office look radically different, while creating “major shifts in the structure and regulation of financial markets”, and raising new ethical dilemmas for society – as this overview from the WEF's report shows:

Questions for the future

These key transformations identified in the WEF report also raise the following questions:

• As financial institutions build datasets that stretch to new industries, what are the boundaries and principles that should be obeyed regarding customer privacy?
• How do we ensure that algorithm- driven decision-making can be trusted and held accountable?
• How will liability for errors and compliance failures be shared between utilities, collectives and individual institutions?
• How will emerging markets react to aggressive expansion of international firms into their domestic systems?
• How will regulator-mandated data- sharing (e.g. open banking) affect the relative negotiating power of institutions in forming partnerships?
• Who will retain control of the customer experience in partnerships between technology companies and financial services firms?
• How can financial institutions accelerate transformations when training, learning and adapting takes place at human speed?

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CTMfile take: These are just some of the questions raised by the key technology transformations identified in the WEF report. It also considers the ethical dilemmas, from the safety of the financial system to employment and human capital issues. Well worth a read.