©2018 rsm us llp. all rights reserved. spring/rsm_breakoutslide… · ©2018 rsm us llp. all...

©2018 RSM US LLP. All Rights Reserved.

ARTIFICIAL INTELLIGENCE IN FINANCIAL SERVICES2019 BHCA Spring Seminar

May 7, 2019


Who am I?

Caleb Schultz, MBA

3

Technology Management Consulting

• 18 years of experience managing technology for Banks

• CIO & Advisory Services

• Digital Transformation

• Technology Risk and Compliance

• Operational and IT Efficiencies (I outsourced my job)


What are we talking about today?

• What is Artificial Intelligence (AI) • AI and Financial Institutions • Embracing and Managing Innovation

“Fearing the rise of KILLER robots is like worrying about over population on Mars.”

-Life 3.0:Being Human in the Age of Artificial Intelligent Max Tegmark


AI – WHAT AND WHY


What is AI?

• Coined in 1956 by John McCarthy – “thinking

machines” – theory that every aspect of human

learning and intelligence can be simulated by a

machine.

• Fast forward 63 years, it’s 2019, why are we just now

having this conversation?

− Advances in hardware, software platforms and connectivity

− Cost effective global interconnected distributed cloud

computing

− 7.6 billion people with 25.2 billion smart computing

devices


The Rise of IoT – it’s in the BILLIONS!

13.1

16.3

19.2

22.2

25.2

28.1

7.3 7.4 7.5 7.5 7.6 7.7

0

5

10

15

20

25

30

2015 2016 2017 2018 2019 2020

IoT Devices Humans


Machine Learning in AI

• Machine Learning is the most successful approach to current AI.

• Mathematical algorithms and techniques that enable software to undergo a learning process that leads to a desired outcome.

• The recent AI explosion is due to:− Massive data sets generated by humans using the web

− The use of “deep neural networks” that can utilize massive computer networks for processing.


AI is very similar to humans

Source: Autonomous NEXT

“The likelihood of a self-driving car to have an accident is less than you falling asleep at the wheel” –Elon Musk


AI, Big Data and IoT are closely connected

Theme Human View Machine ViewGeneral IntelligenceRespond to StimuliLimited events observed

Specific IntelligenceReact to EventsAll events observed

IoT Natural SensesNervous System NetworkBrain Processing

Machine SensorsRendered in digital and virtual worlds (digital nervous system)

Big Data Different Systems to measure and react to stimuli, activate emotions or thought

Structured data collection and analysis.Processing massive amounts of information.

AI A sensory experience impacts a system to determine a reaction.

Data receivedModel updatedAction caused

A person will withdraw a hand from the flame

after processing a pain signal

A self-driving car may change course on

perceiving an obstacle


Process Automation Leads to AI


Humans Providing Data for Machines to Make Predictions


Humans Teaching Machine Learning to Improve AI


AI AND FINANCIAL SERVICES


Opportunity $1,000,000,000,000 (1 Trillion!) in FS

• Analysts predict $1T savings by 2030 due to AI− $490B in Front Office savings (reduction of scale in branches,

security, staff, chatbots, voice assistants, authentication)− $350B in Middle Office savings (compliance, knowing your

customer (KYC), form processing, anti-fraud, risk)− $200B in Back Office (underwriting, approval, collections, asset

management)

• Banking alone will see $450B (25% reduction)− 1.2M staff working in banking will be exposed− Roughly 30% productivity gains (do we grow 30% or is there a

reduction in force?)


Why is AI Growing in Financial Services Industry?

• Customers are demanding individualized banking experience

− Driven by social media and online shopping experiences

− Capability to deliver personalized banking experience to each customer

• Risk management - Increase positive outcomes and minimize

negative outcomes

− Increase savings, avoid overdrafts

− Accuracy of data

− Fraud detection – analyze patterns, trends, language, geographic movement

• Streamline processes

− Better working experience for employees

− Focus on more value driven activities

− Job functions become less difficult

• Increase revenue growth - Creating opportunities for selling more

services to your customers

− Customer profiling - Determined by Banking trends of customers

− Analyzing word choices and syntax


Obstacles to AI in the Financial Services Industry

• Adoption− Unsure of benefit

– marginal improvements?− Where to start?

• Managing large amounts of high-quality data to train algorithms

• Replacing people with AI creates anxiety for workforce – augmenting vs replacing humans

We have a deep emotional connection to our money!


Gap in AI Investment-Megabank vs Community Bank

A 2017 PWC study:

− “About half (52%) of those in the financial services industry said they’re currently making “substantial investments” in AI, and 66% said they expect to be making substantial investments in three years.”

− 61% of bank executives within large institutions believe a customer centric model is ‘very important’!

Wait a minute… doesn’t this sound like your relationship focused

Community Bank?


Gap in AI Investment-Megabank vs Community Bank

• A 2019 Cornerstone report indicated a stark difference for organizations between 250M and 50B:

− 3% Have deployed chatbots with only 1% deploying process automation.

− Less than 20% were planning to invest in AI, process automation while almost a third of the institutions surveyed didn’t even have these technologies and concepts on their radar

Community Banks don’t have access to the same data!


Closing the Gap

• Better data!− Collaborate: Peer Groups, Core, 3rd Party Subscription− More and Better Datastreams− Capture it…NOW! Access to historical trending data in the future

• Creating Hyper-Personalization Strategies− An Ascend survey asked which marketing techniques

were most effective. AI-driven Chatbots were last due to insufficient quality and quantity of data.

− Predictive Analytics and User Experience, was top.

The Community Bank already owns the Personal ExperienceCombine it with data quality/quantity

The market doesn’t have to shift!


What is a Digital Financial Institution?

A Celent report from December 2014 Defining a Digital Financial Institution: • Delivering a customized but consistent FI brand

experience • To customers across all channels and points of interaction • Underpinned by analytics and automation • Requiring a change in the operating model, products and

services, culture, and skills and IT• In order to deliver demonstrable and sustainable

economic value.

It’s been 5 years, are we even halfway there?


How does this benefit you?

• Improved cost-savings and efficiencies− Self-servicing− Work-flow

• Increased productivity• Increased customer

engagement• Better customer service (if

managed correctly)• Attract new customers


UNDERSTANDING AND MANAGING INNOVATION


Innovation Continuum – Where are you?

Determine your maturity level on the innovation continuum to evaluate customer engagement

Crawl

Walk

Run Fly

Innovative Player

Strategic Player§ Expanded capabilities§ Leading AI and digital innovation in some

categories§ Business planning focus§ Strategic vision communication

Process Driven§ Basic capabilities as required § Lagging AI and digital innovation§ Limited strategic vision

Transactional§ Minimal AI and digital capabilities§ No strategic vision§ Lagging digital innovation

01

02

03

04§ Leading AI and digital innovation§ Strategic level decision support§ Strong thought leadership§ Opportunity identification§ Forward looking strategic analytical focus


It feels like we are behind with AI

• It feels risky and bleeding-edge right now….

• Up-front investment required and still working on return on investment

• Not enough time and staff to keep up

• “That won’t work for our customers”

• It takes away from our “community” approach

• Lower on the priority list


Strategic Digital Focus Today!

• You don’t need to offer the same services to compete

• It is important to understand and have a strategy that works for your organization− Start small, you don’t need to tackle the elephant all at once

• Leverage existing vendor relationships− Core, EFT, Cybersecurity, Internet and Mobile Banking

• Build efficiencies in your current operational and IT environment− Outsource or automate repetitive processes− Utilize employees as a core competency


What are the Risks with AI?

• Customer paranoia− Concern of invasion of privacy− Collecting data on customer habits

• Employee paranoia− AI replacing humans− What is my value to the organization

• Cutting edge technology− Risk vs. reward for early adopters− Cost vs. value− Will it work as expected?

• Increase in Cyber crime?


Knight Capital – Validation Issues

• On August 1, 2012, Knight Capital caused a major stock market disruption leading to a large trading loss for the company.

• The incident happened after a technician forgot to copy new code to a server, which was Knight's automated system for equity orders.

• Knight's trading activities caused a major disruption in the prices of 148 companies listed at the New York Stock Exchange.

• Knight Capital sent millions of child orders, resulting in 4 million executions in 154 stocks for more than 397 million shares in approximately 45 minutes.

• Knight Capital took a pre-tax loss of $440 million. This caused Knight Capital's stock price to collapse, sending shares lower by over 70% before the event.

• The nature of the Knight Capital's unusual trading activity was described as a "technology breakdown".


EMBRACING INNOVATION


Who owns one of these devices?Automated Text Recognition and Speech Generation

• Conversational Interfaces

• Natural Language Processing

• Take sound and turn it into machine readable data

• Extracting meaning and emotion to frame appropriate responses

• Virtual assistants in the form of chatbots will dominate self-driving cars

• This technology exists today!


Impact of Cashless Society / Cardless Society

37%

14%19% 18%

12%

43%

13%17% 15%

11%

0%5%

10%15%20%25%

30%35%40%45%50%

Never In morethan 10years

In 5 to 10years

In 3 to 5years

In lessthan 3years

Will Smartphones replace Cash & Credit

Cards?

Card payments Cash payments

• Amazon Payments: − Users increased to 33M from 23M last

year. − Payment volume doubled.

• ApplePay: − Payment volume grew “500%

annually in the December quarter”, − handled "hundreds of millions of

transactions and billions of dollars in purchases”

• PayPal reported for 2017: − 197 million active accounts − 6.1B payment transactions (2B

Mobile)

% of US adults thinking that smartphone payments will replace cash/card

Source: Harris Poll, 2015 Digital Banking Report

China has already done it!


Developing an Innovation Roadmap

Identify your goals

Assess the competition

Evaluate your

capabilities

Build the roadmap

Communicate with staff Execute


Wrap-Up

• Customer service and relationships have changed

• The “new normal” is omni-channel, providing services

and communication when and how consumers want it

through analytics

• Many AI and digital options available, the key is

selecting what is important to your customers

• Set Goals, Access the Competition, Evaluate

Capabilities, Build Roadmap, Communicate &

Execute

• Be Prepared even if you don’t think AI applies to you


EXAMPLES


Example – Investment Products

• Scenario− Customer has multiple investment product options to

consider− Employees need to know all product details and then

try to select right product for customer− Potential for wrong product to be recommended− Manual processes dominate time with the customer

• Value of utilizing an AI solution− Customer could walk through process of identifying

best product in an automated environment− Client advisors could focus on client relationship and

less on processes


Example – Surveillance

• Scenario− Surveillance cameras are passive and require

someone to be looking a them to detect real-time suspicious activity

− Multiple video feeds

• Value of utilizing an AI solution− Live video is analyzed in real-time and can provide

immediate notification of suspicious activity− Recorded video can be searched by natural language

queries like “green car”


Example – Tax Planning

• Scenario− How do new tax laws impact tax planning?

• Value of utilizing an AI solution− Intelligent, “audit thinking” - able to learn how to

interpret law and apply to specific data− Able to determine optimal tax structure for future

performance of an investment− Tax professionals become more of a business advisor


Example – Underwriting

• Scenario− Insurance company needs to assess risk of a customer

• Value of utilizing an AI solution− Natural language processing is used to analyze public

information in social media platforms− Customer social media presence shows the customer

is a risk taker• Mentions that they are a motorcycle enthusiast• Evidence of smoking in pictures

− Risk rating is aligned with lifestyle


Example – CORE Systems Integration

• Scenario− Customers are demanding banking services to be

integrated into mobile apps

• Value of utilizing an AI solution− Financial Institution could utilize a chatbot that

integrates into legacy CORE systems and conversation apps like Facebook Messenger.

− Chatbot is able to learn how to answer questions as it analyzes questions being asked

− Customers use familiar interface − Customers are able to get immediate feedback and

answers


Technology and Management Consulting


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Mitigating Competitive Threats

16%

17%

20%

20%

21%

0% 5% 10% 15% 20% 25%

Neo-banks and digital-onllybanks

Robo-advisors and similarthird-party automated

services

Payment players (e.g.PayPal, Apple Pay)

Retailers, telecom firms, etc.

Peer-to-peer lenders

The biggest competitive threats banking execs see between

now and 2020

29%

30%

30%

31%

34%

34%

34%

35%

0% 10% 20% 30% 40%

Ring-fencing retail operationsfrom other parts of the business

Cutting costs or improvingmargins on retail business

Migrating customers fromphysical to digital channels

Modernizing technology andupdating legacy systems

Responding to regulatoryrequirements

Integrating frontend, back-officeand other systems

Customer segmentation forproduct design, service and…

Adapting the role of the branchnetwork

Banking execs top priorities for their institution between now and

2020

Source: The Economist, January 2017


Digital Spending

• Digital Spend Continues to Rise

• Second Only to Core Banking• FIs need a plan for Digital

− Align to the FI business strategy

− Prioritize spending− Address resource

requirements• Human• Vendors• Technology

6% 7% 7%

11%13% 14%

22% 23%

6% 6%7%

12%10%

14%

21%23%

0%

5%

10%

15%

20%

25%

Infras

tructu

re vir

tualiza

tion

Service

s

Paymen

ts

Risk/C

ompli

ance

/AML

Custom

er rel

ation

ships

Big Data

/ Ana

lytics

Digital

chan

nels

Core ba

nking

syste

ms

IT spending priorities for financial institutions (2016 vs 2015)

2016 2015

Source: Temenos, January 2017


AI in Banking

• Natural Language Processing – voice authentication− Pay bills− Transfer funds− Other transactions

• Machine Learning – Systems learn patterns and make predications− Predictive banking

• Mobile app• Analyze activity and sends alerts/suggestions

− Analyze unstructured data from customers – email, news articles, legal docs, recorded phone conversations

− Predict potentially unsatisfied customers and escalate cases− Chatbots and personal assistants – answer frequently asked questions

• Automation – gather organize and interpret data better− Employee benefit− Efficiencies with Complex reporting – board or investor relations− Repetitive tasks – opening account requests, simple reconciliations, collecting data for

audits

©2018 rsm us llp. all rights reserved. spring/rsm_breakoutslide… · ©2018 rsm us llp. all...

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