The report indicates that the continued AI development will contribute to the transformation of incumbent financial institutions through a radical change in the front- and back-office operations of financial institutions. As a result of the technological revolution, significant changes in the financial market structure may be expected, requiring both regulation adjustments and addressing a number of challenges faced by the entire society as a result of AI expansion.

“AI-enabled operating efficiency and improved customer experience will provide a great competitive advantage to large-scale financial institutions and technology companies. All this at the expense of many small and medium-sized banks. Data and capabilities for their optimal use and sharing will be the critical success factors for providers so that they can offer their customer service or advice of a higher quality than their competitors are. We should be aware that the offers to be made will often go beyond the horizon of traditional financial services”, says Štěpán Húsek, Partner in the Consulting function of Deloitte leading the Technology advisory services team.

The WEF and Deloitte‘s report predicts that disruptive forces may result in the establishment of a market on which only the strongest and most specialised technological players will survive. The report highlights nine key findings describing how AI is transforming the physics of financial sector by weakening the bonds that have held together the parts of incumbent financial institutions and opening the door to entirely new operating models, combining both traditional and new procedures in often unexpected ways. Four of the key findings focus on how AI makes a radical transformation of front- and back-office operations:

From cost centres to profit centres

AI will allow financial institutions to turn advanced back-office operations into external services to be offered to competitors as back-office as-a-service model, in which processes will continuously learn and improve through using data of all shared users. As such, the quality of services will continue to improve, making pressure on competitors to become consumers of the outsourced services to avoid falling behind.

Personalisation as a competitive weapon in the battle for customer loyalty

Past methods of differentiation for financial institutions – such as cost, speed or access, are eroding. AI enabled the establishment of an entirely new set of competitive factors. Financial institutions will be able to optimise their business performance of customer services by customising the services and distinguishing themselves based on value-added rather than just a price. The ability to engage users and collect its data through continuous and integrated interaction going beyond the horizon of traditional financial services will allow institutions to develop better and retain their relationships with customers. The establishment of ecosystems by bringing together data from multi-dimensional networks that include consumers, corporate clients and third parties will allow financial institutions to offer differentiated, personalised advisory services, improve performance and positive customer experience.

Automated selection of financial products and services

The financial advisory included in the products offered is often generic and impersonal. It also tends to be overly reliant on subjective advice from individual advisors. AI as an assistant will transform providing financial advisory services and improve customer experience. A customer would interact primarily with a single platform or an agent who will search, compare and recommend the most suitable products of different providers. All this based on personalised advisory with maximum use of data available and continuous optimisation of product portfolio through algorithms. AI would thus automate a most routine customer decision.

“The question is at the moment whether incumbent financial institutions, technology companies or completely new entrants will become providers of the new service. However, it is clear that the competitive dynamics of the market will change with the highest revenues being generated by the customer relationship owner and with other players being mere providers of a commodity service”, adds Štěpán Húsek from Deloitte.

Collective solutions for shared problems

AI offers many opportunities to advance competitiveness and strong mechanism for cooperation of institutions given the immense potential of data sharing, e.g. in fraud prevention and anti-money laundering controls, which are often run inefficiently and ineffectively today. Collaborative solutions built on shared datasets will radically increase accuracy and accelerate performance of non-competitive functions, supporting mutual operating efficiencies and improving the safety of the financial system.

“Operating models in many financial institutions are obsolete for the digital age and must be transformed. Institutions will have to increase specialisation, get lean and cooperate more with third parties. Major technology companies and Fintechs are usually well ahead in deploying AI and in digital automation in general. Incumbent financial services providers, be it banks or insurers, will have to adjust to the trends if they wish to retain their direct relationship with customers”, adds Jiří Fialka, Partner responsible for insurance advisory services in Deloitte Central Europe.

Additional findings from the WEF and Deloitte’s report:

• We can expect bifurcation of market structure: As AI reduces financial services search and comparison costs for customers the market will become polarised. On the one hand, the returns for large-scale players will amplify and, on the other hand, new opportunities for niche and agile innovators will be created.
• Data alliance will play a key role: In an ecosystem where every institution is vying for a diversity of data, managing partnerships with competitors and potential competitors will be critical, but fraught with strategic and operational risks.
• The power of personal data protection regulation will increase:Regulations governing the privacy and portability of data will significantly shape the ability of financial institutions to deploy AI. As part of the competitive positioning, they will become potentially more important than traditional regulatory standards.
• Transition in the approach to talents will be required: Adjustment to changing requirements for a talent structure will be most challenging in implementations of AI, putting at risk the competitive positioning of institutions that fail to transition their talent strategy alongside the emerging technology effectively.
• New ethical dilemmas will emerge: AI will necessitate the re-examination of principles and supervisory techniques to address the ethical grey areas and regulatory uncertainties that may reduce institutions’ willingness to adopt innovative AI-enabled solutions.

Download The New Physics of Financial Services report here.