“The times they are a-changin’”, and with the growth of artificial intelligence (AI) in all industrial sectors, including financial services, the words of singer-songwriter Bob Dylan are certainly coming true. Attracta Mooney, an asset management reporter for the Financial Times, points out in her article of 20th January 2017 that over the past 3 decades the Baby Boomer generation (born between 1946 and 1964) has “fuelled growth in the asset management industry…helping to create a $71tn business.”
Baby Boomers remain the industry’s most important clients as they are often touted as the richest generation in history. Yet there comes a point when the financial services sector must look ahead, to see what the next generation can offer. Therefore the asset management industry, and the financial services sector as a whole, now wants to catch potential investors who were born between 1980 and 2000. Who could blame the companies involved for wanting to target this segment of the market? After all, the technology-savvy Millennial Generation now forms the largest demographic in both the UK and the US. So, they represent the biggest opportunity to create future profitability for their firms.
Data provider Pitchbook claims that the Millennials have less money than the Baby Boomers, holding $1tn of wealth, and with just $250bn invested. Yet the firm’s figures show that venture capitalists and other investors “have poured $11.4bn into businesses into the field of asset management” – firms that VCs and investors believes are of interest to the Millennials.
The Fintech companies they invest in are using such technologies as Robo-advisors to offer low-cost, automated online investment services, and to support in other businesses to make it easier and cheaper to invest and trade. In doing so they are often cutting out any human interaction that would traditionally be required by employing technologies such as artificial intelligence in these Robo-advisors.
Alternative Investment Analyst for Emerging Technology at PitchBook, Evan Morris, ponders on whether it is wise for Millennial investors to rely on systems that use AI rather than human interaction: “I think the more important aspect to consider is that younger people are able to adopt saving and investing habits earlier on before they are able to meet the account minimums required by professional advisors.”
He adds: “At least in the U.S., professional advisors primarily come into play once an individual’s income reaches a level where the tax code affects this. Given that Millennials have innate tendencies into technology infiltrating much of their lives, it seems as if using robo-advisory services adds on to this.”
Focus on benefits
James Duez, Co-Founder and Chairman of award winning cognitive reasoning platform firm Rainbird, replies to the same question by saying: “People should focus less on AI taking over from human intelligence, and apply more focus to the benefits of augmenting human workers with AI. If you think about it, people have been using machines (and later technology) to augment their work and make them more efficient for many years. AI is just the next generation of that automation. If you combine human and machines, you can get the best of both.”
That’s all well and good, but how accurate is robo-advisor technology for offering automated online investment services? “It depends on the approach taken”, says Duez before adding, “AI is not a single technology but a combination of different methods. Machine learning technologies start by analysing a large corpus of historic data, applying algorithms to determine insights that may benefit customers, for example, ‘what investment product may be appropriate’. The problem is that machine learning cannot provide a rationale for each judgement, at least not one that humans can understand. In short, you cannot know ‘why’ a decision is made.”
He finds that this causes problems for the regulators, and claims that other technologies like Rainbird work on a human down rather than a data up model by applying human models of knowledge: “These models are based on well-understood human or expertise (or documented rules), such methods can provide solutions to complex questions and an audit trail for automated judgements ensuring that regulators are also satisfied.”
“To date, most success in this space comes from using such technology to support human workers by automating complex, repetitive decision-making”, he claims and then comments: “This leaves humans to deal with the ‘exceptions;’ and other tasks that humans are best at – like building rapport with customers.” He says the simplest form of AI comes in the form of a conversational chat, and this is the preferred method of communication for most Millennials in Duez’s opinion. “Messaging is asynchronous, so it’s perfect for a busy Millennial [to use it]”, he claims.
It is also suggested that Fintech will have far reaching changes for the industry, but what are they? Morris explains that the primary structural changes will amount to “lower fees across financial services, faster payment processing times and settlement.” He believes that the use of AI – perhaps in the form of Robo-advisors – will also offer “a strong online user experience, which will be essential for all types of service providers moving forward.”
He says that most of the changes are occurring in the back offices of well-established financial institutions: “Visa, for example, has partnered with a start-up called Chain to do all of their internal transfers on Blockchain.” Duez adds that the most interesting application of AI is “the tailoring of financial services products… Imagine having a credit card or mortgage designed just for you”. Apparently, this is now possible to achieve as it has become more economically viable to offer such as financial services product to financial services clients.
Adapt to succeed
So, what are the consequences of failing to adapt to meet the needs of today’s Millennials? Duez comments: “Banks, insurers, brokers and others need to provide financial services solutions that deliver value to each new generation, meeting their needs both in the way they engage and consume financial services. The new challenger banks, unshackled from the legacy of the established players, are able to innovate faster and find new models of customer engagement and product design.”
He concludes, “Those who do not innovate quickly will fall behind.” This is because to succeed organisations need to deliver more value, for less cost. “When people think of AI, they think of the analysis of Big Data, but the success of the financial services industry will rely on more than data analytics”, he claims. What it will need in his opinion is cognitive reasoning to deliver “unprecedented levels of efficiency, [while] powering entirely new products and services that couldn’t have existed without cognitive solutions.” This kind of solution will support and not entirely replace humans.
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