The comprehensive guide to the future of financial services firms

TECHNOLOGY: It’s changing the world around us.

And although financial services have been slow to change, customers and startups are finally forcing traditional institutions to embrace change — or be disrupted.

Even regulators are helping usher in the new age of digital-first products and services, providing and facilitating them through new incentives, sandboxes, and consultation papers resulting in new bills and laws.

Soon, the face of the financial services industry will change beyond recognition. According to a new study by the World Economic Forum (WEF), AI will be the biggest disruptor of the industry and will transform the financial ecosystem:

• Making front and back office operations look radically different
• Creating major shifts in how financial markets are structured and regulated
• Raising critical challenges for society to resolve

However, from the looks of it, the impact of AI on front and back offices seems most transformative.

In fact, the WEF argues that some financial institutions will optimize their AI-enabled back-office processes and offer them ‘as a service’ to competitors in order to accelerate development of the algorithms by gaining access to a collective pool of user and transaction data.

Creating such an externalized service also creates a defensible advantage in efficiency and a sustained revenue source for the financial services institution operating it.

The value in externalized services

“The proliferation of externalized services across back-office processes is a result of both the rise in modularized operations and the data dynamics of AI,” explained the WEF.

In the future, AI is expected to turbocharge several back-office processes that will drive the further externalization of services. Here’s why it’s something financial services institutions should look forward to:

Operations are modularizing as institutions look to commoditize their costs

Cost commoditization is pushing institutions to modernize their operations and make them more interoperable within the industry.

Investments in modernized operations can immediately make them more efficient, and lay the foundations to turn those processes into service offerings.

These operations, particularly AI-based processes, are increasingly built on modular and cloud-based architecture, meaning they are easy to scale to new users — meaning externalization is easier from the get-go.

Turning operations into service offerings provide a defensible economic advantage

Beyond creating revenue streams, externalized service offerings bring in more data, which ensures AI models continuously learn from all owned data as well as client data pools.

As more competitors become users of a service and integrate it into their data flows, the underlying algorithm learns from it – continuously increasing the efficiency of the overall process.

As a result, institutions that move quickly to modernize operations will have gain a sustained operational advantage.

As external services continue to improve, other institutions are pushed to become consumers

Beyond creating revenue streams, externalized services bring in more data, which ensures that AI models continuously improve.

Institutions become increasingly locked into mutualized services built on collective data. Individual institutions would need significant innovation to develop algorithms that overcome their comparative data deficit.

Data advantages are more sustainable than algorithmic advantages, as AI research is open source and new innovations can be duplicated by competitors.

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