AI can finally break-up the finance industry’s monopolies

by Matthew Lynn, financial columnist for The Telegraph and The Spectator
AI chatbot

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It will make millions of us redundant. It will turn whole industries upside down. It might even lead to the obliteration of humanity, and its replacement with something smarter and more civilised.

Over the last few months, since the emergence of genuinely smart artificial intelligence systems, some ambitious claims have been made for the technology. Most of them will turn out to be empty hyperbole.

But there is one more modest claim that could well turn out to be true, however. It will re-work the way that finance operates – and finally open a series of what are essentially closed to monopolies up to some real competition.

Since the launch of ChatGPT, and rivals such as Google’s Bard, AI chatbots have been taking the business world by storm. Whether they are actually intelligent is a matter for philosophers to debate.

One point is certain, however. They are very, very useful, especially in business. From composing memos, to writing code, to designing presentations and analysing data, AI systems can take over many tasks that were traditionally the sole preserve of white-collar professionals.

Nowhere will the impact of that be greater than in the financial markets. There are three main ways that AI will change the industry permanently.

First, it crunches data on an unprecedented scale. In simple payments processing, vast quantities of information must be shuttled about the place at lightning speed, and it has to be done accurately.

In making lending decisions, credit scoring is dependent on collecting information on people in a matter of minutes and using it to make sensitive decisions. In insurance, risk assessments have to be made based on hundreds of varying factors, and the more accurately that is done, the more competitively a contract can be priced.

The list goes on and on. AI systems will dramatically lower the cost of processing all that data, and that will improve the profitability of all the existing players. But it will also make it a lot easier for start-ups to break into the industry.

Next, AI systems can process customers as well. We have probably all used an AI chatbot when dealing with a bank or an insurance company already, without really realising it (and in fairness probably found it very irritating).

As the software gets better and better, however, the AI assistants may well be virtually indistinguishable from traditional call centre staff, and potentially much better.

In finance, huge amounts of money has to be spent on dealing with customers, usually through call centres that are expensive and hard to run. If AI can replace those, just as with data crunching, it will lower costs significantly, while also making it far easier for new rivals to emerge.

Finally, it will ease the burden of regulatory compliance. The Competitive Enterprise Institute estimates that the American banking industry alone is spending more than $50 billion annually on compliance, and for many financial institutions the cost is running at more than $10,000 per employee.

In the UK, and in most major European countries, the costs will be even higher, given that there are stricter levels of regulation, and the rules are typically more rigorously enforced. It is a lot of money.

Just as significantly, it is often almost impossible for new companies to cope with all the paperwork involved. Indeed, one of the main reasons why the UK retail banking has remained so closed is because many of the challengers can’t get licences. The regulation is too expensive, and too hard to master. And yet much of it is very routine work, involving little creativity. If it can be automated by AI systems, it will change the market dramatically.

In reality, finance has always, at its core been about processing large amounts of data efficiently and effectively, and it has been dominated by a series of giant companies. Whether it has been in payment processing, or retail banking, or insurance or asset management, the scale required to collect all that data has meant that sheer size is a key competitive advantage.

AI has the potential to change that. Smaller companies and start-ups will be able to match the data of the largest companies. It might not happen right away. And in the first instance, intelligent computers will mainly be used by the established giants of the industry to lower their costs.

Over time, however, that will inevitably change. AI software will make the markets for most major financial products far more open, and it will make it a lot easier for new companies to challenge well established players.

For consumers that can only be a good thing, lowering prices, and improving the range of services available – even if we do occasionally have to deal with a cranky chatbot that drives us up the wall by misunderstanding everything we ask it.

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