This book discusses also how this would cause key processes in the bank to change, and how organization and governance should evolve as a consequence. Also discussed is how human resources could rise to the challenge of the change brought by AI and the robotization of the banking business.
This book discusses also how this would cause key processes in the bank to change, and how organization and governance should evolve as a consequence. Also discussed is how human resources could rise to the challenge of the change brought by AI and the robotization of the banking business.
Singularity Bank: AI and Runaway Transformation in Financial Services
282
Singularity Bank: AI and Runaway Transformation in Financial Services
282eBook
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Overview
This book discusses also how this would cause key processes in the bank to change, and how organization and governance should evolve as a consequence. Also discussed is how human resources could rise to the challenge of the change brought by AI and the robotization of the banking business.
Product Details
| ISBN-13: | 9788885486799 |
|---|---|
| Publisher: | EGEA Spa - Bocconi University Press |
| Publication date: | 03/01/2019 |
| Sold by: | INDEPENDENT PUB GROUP - EPUB - EBKS |
| Format: | eBook |
| Pages: | 282 |
| File size: | 6 MB |
About the Author
Read an Excerpt
CHAPTER 1
Asset-Less, in the Digital Age
1. Like a hedge fund
Banks have traditionally been long on real estate, almost like hedge funds, and closely intertwined with the real estate cycle – driving its fortunes and potential asset bubbles as for no other sector. Banks have gone long ever since they started to use real estate collateral to strengthen their recovery ratios and "cure rates" in cases of default on a corporate or retail loan, and have lent to real estate developers and to the construction industry, as these sectors drove most of the growth in the developed countries after the Second World War. Banks have often underwritten loans purely on the strength of their real estate collateral, feeling that they were "buying a call" (option), whilst often ending up having "sold a put" to the counterpart – ready to dump cracking collaterals at the trough of the cycle, whilst retaining most of the upside when their lending options are "in the money".
Real estate assets have also become the object of the banks' leveraged finance business, of their trading strategies (either as principal investors or as arrangers and financiers) and life insurance and wealth/asset management and pension businesses (as a key component of their investment strategies for end customers). Finally, banks have traditionally been notorious for their sprawling real estate "core" assets, which in the past they used to grow their origination and distribution might (via their corporate and retail branches), to host their product and service factories and, more mundanely, their global and regional headquarters.
Real estate, and trophy assets specifically, with their image of tangibility, concreteness and opulence, have also been working well to reinforce the reputation of banks as "fortresses", full of money and with almost no risk of failing – the new kingdoms of unimaginable wealth to whom people could entrust their savings and sleep well. If you like historic buildings and architectural works of art, you may be interested to find many of these used as headquarters by international and local banks in Europe. If you are keen on new, technological and imposing glass and steel skyscrapers, you may be drawn to those banks that inhabit entire buildings of up to 30, 40 or 50 floors, as in Canary Wharf in London, or at La Defense in Paris – and in the new financial districts of Frankfurt, Madrid and Milan (think here of the Gae Aulenti, City Life and Expo new areas).
If you happen to visit such banks, whether historic buildings or new skyscrapers, a simple thought might come to mind almost immediately: These are big and imposing, trophy and technological, and full of people working in their cubicle-shaped offices all day long, with limited or no client interaction and no "physical" activity that would point to the creation of something – as in a manufacturing plant, for example. A banking magnate could have something like 30,000, 50,000 or even 100,000 white-collar people working in just such a way, not to mention the further twice as many doing front-office work in the bank's individual branches.
The advent of phone and then online and mobile banking is already a well-known phenomenon, with hundreds of thousands of front-office jobs fast disappearing, along with the closure of banks' local branches. Yet even assuming that the digitalization journey of most customers keeps accelerating and that most of the real estate used for origination and distribution gets shut down, banks will still command many of the most iconic historic buildings and the highest skyscrapers, with a growing number of people doing compliance, risk management and other regulatory, administrative and control work, on top of the product factory (asset management, financial trading etc.) and related service companies (e.g. IT), not to mention the general management of the bank.
2. The empty bank
What about if, in a five- to ten-year timeframe, we could walk into the imposing headquarters of one of these banks and find nothing except a few stacks of super-powerful and super-fast computers, probably kept cool by the proximity of a river or lake and also probably stored somewhere safer, more remote and cheaper than downtown?
What about if we should find, behind the shiny doors of these imposing headquarters, almost no people at all, save for a bunch of computer scientists going around in jeans and t-shirts, and a few remaining top managers (also data scientists?) pretending to check up on the day-to-day business and set the bank's future strategy? All of this could well happen, as most of the back-office people could have been, by that time, automated away. And middle-office employees may also get crowded out by robots working 24/7 and with no paid holidays or sick leave – let alone ever going on strike. Even front-office resources could be arbitraged away by human-like voice recognition-interaction activated devices, by autonomous applications doing advisory work online and, potentially, even by "alive and kicking" robots (very human looking ones, if we should wish) that can move across the city in driverless cars or by flying in drones, to deliver the "wine and dine" aspect of the business direct to our doors.
Eventually, even their reprogramming and coding, as well as strategy and "command and control" activities could be done by machines better able to define the "best possible strategy" among the many millions potentially available, killing off the last remaining and well-paid striped suit-wearing top managers. Such a scenario is hardly impossible, as the advances in artificial intelligence (AI) are progressing on multiple fronts – as we shall discuss in this book – and at an unprecedented pace. Furthermore, most of the relevant technology, hardware and software are becoming easily available as a service and "over the cloud".
In the (by definition) immaterial world of finance, banks, born (almost by design) in a state of unbearable "lightness", could also fully dematerialize and become "empty", in the full sense of the word. They could basically evolve into an ethereal set of contractual obligations and rights, granting them the ownership and use of a mesmerizingly large quantity of data and, more importantly, of a more selective but extremely powerful set of AI super-applications. With the help of robots (and cyborgs, if needs be), these would progressively take care of most of the strategic and operational functions of current and future business models, thus becoming progressively not just "asset-less" (as discussed in our previous book on digital transformation in financial services) but also (and maybe more worryingly) "human-less".
Empty banks in empty buildings, with a limited balance sheet and an even more limited human workforce. But let us take one step at a time. The "unbearable lightness" that we mentioned (the extremely high leverage driven by banks' money multiplier model, the time lapses and duration mismatches driven by their intermediation model, the excessive velocity of equity usage driven by securitization and derivatives, etc.) have led, we have argued, to the many structural weaknesses of the global banking system that were already quite evident during the 2008 financial crisis. Furthermore, digital innovation and the challenges introduced by FinTech and "big digital" players are progressively killing the banks' traditional business model – with old savings institutions and lenders ignoring technological innovation and related disruptions at their peril.
The "synapsis bank", as we discussed, was then the potential end state of this accelerating evolutionary process – driven by the so-called fourth industrial revolution and leading to a new wave of banks' failures in the name and spirit of a Schumpeterian "creative destruction" to come. By synapsis bank we mean a bank business model where the bank is capturing and capitalizing all kind of structured and unstructured data and then, using applied analytics and AI, is able to create new intelligence in the system, making things happen in the economy in the best way, activating multiple stakeholders in the ecosystem and designing and executing new, value adding solutions. In a way this is similar to what the synapsis are doing, getting data as input to create intelligence in our brain and then activating muscles, joints, arts etc to drive our bodies toward a certain actions that are always informed by our thoughts that keep changing and been re-elaborated whilst we act.
A synapsis bank would be built on a different and more sustainable version of lightness and basically working on the basis of five main building blocks.
3. Asset-less, brain heavy
Synapsization is, in fact, in our strategic framework of analysis, driven, by five key elements, or building blocks. The first one is data – the structured and unstructured information making up the "big data" that is the "new oil" of the digital intelligence economy. The second is applied analytics, able to mine data and get intelligence out of them. The third refers to the management of enlarged ecosystems, composed of multiple stakeholders that can enjoy their greater interconnectivity (or junction playing, following the brain metaphor) as favoured by the "synapsis bank". The fourth points to the economic solutions or ultimate use cases that, either by design or by chance, are created and acted upon by the "synapsis bank".
Finally, the fifth element refers to the cyber-trust embedded in the new economic system, as the synapsization created is fully developed and consolidated on the basis of the "cyber-trust" (and put at risk by its antithesis, the cyber-risk, that defines a "cyber-trust capital at risk"), which is the new scarce resource at play.
Synapsis banks are the answer to the unbearable lightness of the traditional bank business model and the solution to the digital transformation challenge, where banks create synapsis and become financial assets light, as everything is progressively driven by information, intelligence, networking, solutions and cyber-trust. These are the key elements of the business transformation that could happen to banks and to their economic system, allowing them to remain competitive, overcoming the threats of new challengers.
Global leading companies that are worth tens of billions of dollars and are asset light or asset-less are nothing new, by the way. Uber, the world's largest taxi company, and one of the largest in transport overall, owns no taxis. Facebook, the world's most popular media owner, creates no content. Airbnb, the world's largest accommodation provider also owns no real estate. So, what about a bank becoming the most valuable one globally and holding no financial assets at all? It would not be inconceivable and maybe it is already happening, as balance sheets are reduced and substituted by big data and intelligence assets.
Whether a traditional bank, with a full license and all, could do this may still be debatable. Certainly, the move into banking of big digital players' (the FAANGs of the western economy – Facebook, Amazon, Apple, Netflix and Google) could aim at creating billions in financial value out of "thin air" (meaning, with almost no financial assets, sitting on their balance sheets with no regulatory capital at risk).
They could certainly pose a serious competitive threat to banks and even change the structure of the overall financial system and the paradigms (and related risks) of its stability (it is worth noting here that big digital is also, at the moment, only lightly regulated, often escaping the supervision of banking authorities). Should they set up financial services divisions or business units (let us call it a "proxy bank"), these would already be worth a few billions. Even tens of billions – if we think of Alibaba, Tencent or Baidu, the FAANGS equivalent of the Chinese economy – as these big digital giants are apparently making faster inroads in the Asian continent.
3. Big, digital and dangerous
Regulations (or lack thereof) are also lending a hand to big digitals. This not only allows them to dodge the heavy burdens forced onto traditional banks after the global financial crisis, but also imposes new competition rules on banks, compelling the latter to open their informational door – somewhat cracking the code of banking – in a faster and potentially more devastating way. Let us consider, for example, the consequences of "open banking" and of the PSD2 (Payments Service Directive 2) in Europe, which is forcing banks to provide access to the accounts of the customers who authorize it, providing interfaces that can be used to source data.
Francisco González, Chairman of BBVA, one of the most "pro-digital" bankers in Europe and a vocal advocate of the necessity for banks to embrace digital transformation and AI, has warned how players such as Facebook, Amazon and Google in the USA, and Baidu, Tencent and Alibaba in China, could soon replace banks. Amazon is providing payment services and loans to merchants that offer their goods on its website. It can monitor, in real time, the health of their sales and cash flows, and the "likes" of current and prospective clients. It can even get hold of their products as a collateral, as they are already physically hosted in Amazon warehouses – which bank could match, as of today, such a powerful lending proposition?
Big digitals are not just offering financial complements starting from the e-commerce world. Take, for instance, the growing "cloud services" business they offer, which allow the likes of Microsoft and Amazon to manage the information and the applications used by each client company. They cannot access the information and applications but have access to a view on the flows of the market. This can help in the prediction of trends and patterns, as investment banks have been doing for years, leveraging their brokerage "flow" businesses to get insights and hints for their principal trading business.
The potential ways in for big digitals are increasing by the day, as they spot the opportunity for disruption in the global financial system and start tapping the profit pools that have been the preserve of banks and other financial intermediaries for centuries. Apple and Google are, for example, already in payments and electronic money and Facebook is now entering too and it wants to grow big.
Was it not money, after all, that started as a way to allow people to socialize and exchange, well before the advent of communication across space and international commerce? Moreover, once you are in payments, it is easier to manage money and savings – and then consumer or commercial lending or personal and property and casualty insurance – if you know what people like or dislike and suggest to friends and people of similar cohorts.
What about Alibaba then, which is already by far the largest insurance distributor in China and also big in payments with AliPay? The situation is similar with Tencent and Baidu. They are now becoming active in "instant lending", providing underwriting decisions in a few seconds, based on the online behaviour of customers. All these players have huge amounts of social and behavioural data and are (so far) completely financial assets free.
They still lack huge stocks of transactional and other financial data (hence their focus on payments or the potential urge of customers to buy some financial intermediary just to get that missing piece), but they are rapidly making up for that gap. More importantly, and often on the back of their offer of cloud computing – a storage solution increasingly used by banks too – they are investing heavily in AI applications, as they try to convert information into intelligence in an efficient and effective way. This is happening in an accelerated manner, "over the cloud", asset-less and almost without any people being involved.
4. The age of digital intelligence
As these big digital players turn into big cloud service outfits, they also become the leading masters of AI capabilities and related services – they can potentially offer some slimmed-down version to banks and to all kinds of other financial intermediaries, who are then enticed to move their hardware and software over the cloud. Almost by default, as the cloud managed by the big digitals expands, banks' real estate core assets empty out, and a greater concern arises over this massive concentration of power on just a few global platforms. Furthermore, considerations of the systemic risk potentially linked to the default – or cybersecurity crisis – of any of these big cloud platforms become a high priority for regulators and policymakers to address.
This is, however, just the very start of a new age of digital intelligence to come. In fact, the digital transformation that is underway in financial services will not be ending with a change in the business and operating model of the main players and markets. The overall structure of the global financial system is also transforming, driven by profound changes that will eventually introduce new equilibria and steady states – towards a target end state marked (potentially) by the dominance of digital intelligence: one that is super-human in nature, artificial by design and potentially better than the human.
(Continues…)
Excerpted from "Singularity Bank"
by .
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