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AI Will Transform Financial Services Industry within Two Years

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A new survey released by the World Economic Forum and the Cambridge Centre for Alternative Finance (CCAF) finds nearly two-thirds (64%) of financial services leaders expect to be mass adopters of AI in just two years compared to just 16% doing so today. These firms expect to use AI for purposes beyond cost reduction including revenue generation, process automation, risk management, customer service and client acquisition.

In Transforming Paradigms: Global AI in Financial Services Survey, over 150 senior financial services executives in both fintech and incumbent financial institutions responded to a range of questions on the impact AI will have on the industry, concluding that there will be a significant gap between firms that quickly implement AI and firms that lag behind.

Currently, 60% of firms invest less than 10% of their R&D resources on AI despite evidence of accelerating returns. Pay offs have shown to be especially strong between investment levels of 10% and 30% as well as investment levels of 30% and >40%.

“The comprehensive and global study confirms that AI is affecting the financial system at an accelerating pace,” says Matthew Blake, Head of Financial and Monetary Systems at the World Economic Forum. “With the rising trend of mass adoption of the technologies throughout financial services, those firms that implement AI quickly look set to sprint ahead.”

The study has also revealed executive fears surrounding AI bias and market-wide risks, with over half of executives saying they expect mass AI adoption to worsen bias and discrimination within the sector. Other market-wide risks were also identified.

This is a worry, but 70% of respondents also believe they are at least somewhat prepared to mitigate AI bias risks. Generally, firms using Risk and Compliance teams in AI implementation are most confident about their chances.

The report also identified a difference between how fintechs and incumbent firms are expecting to use AI in their businesses. For example, a higher share of fintechs are creating AI-based products and services, employ autonomous decision-making systems, and rely on cloud-based offerings. Meanwhile, traditional financial services players predominantly focus on harnessing AI to improve existing products.

“This empirical research underscores the growing importance of harnessing AI in financial services,” says Bryan Zhang, Executive Director of the Cambridge Centre for Alternative Finance, “which gives new impetus for firms to develop a holistic and future-proof AI strategy.”

The Global AI in Financial Services Survey, which was produced in collaboration with EY and Invesco, looks into many areas of AI adoption in financial services. The report’s other major findings include:

77% anticipate AI to have high or very high strategic importance within two years

Nearly half of all respondents see a major competitive threat in “Big Tech” firms leveraging AI capabilities to enter financial services.

Selling AI-based solutions as a service is becoming a distinct business model, currently adopted by 45% of fintechs and 21% of incumbents, which allows firms to capitalize on larger and more diverse datasets through digital platforms.

Novel insights are increasingly provided by using AI to analyse new or alternative datasets such as social media and geo-location data, with 60% of respondents making use of such data in their AI applications.

Data quality and access to data and talent are seen as major obstacles to implementing AI by more than 80% of respondents each.

Traditional financial services firms expect AI a 9% net reduction of jobs by 2030 while fintechs expect to increase their workforce by 19%.

While views of regulatory influence on AI implementation diverge, most firms feel impeded by data-sharing regulations between jurisdictions and entities as well as regulatory uncertainty and complexity.

“AI is transforming the financial services industry and we can expect widespread adoption to continue,” says Nigel Duffy, EY Global Artificial Intelligence Leader. “As the technologies start to disrupt business models and transform business functions, it’s increasingly important for organizations to focus on the long-term implications of AI adoption: trust in AI, workforce transformation, and how customer and stakeholder value can be radically reimagined.”

“The report highlights the amazing opportunity ahead of us in financial services for using artificial intelligence and machine learning to the benefits of our customers and our organizations,” says Donie Lochan, Chief Technology Officer, Invesco. “Technological advances such as leveraging intelligence to define investments for customers tied to their personalized goals, improving customer experience through the use of intelligent bots, additional alpha generation via insights from alternative datasets, and operational efficiencies through machine learning automation, will soon become the norm for our industry.”

Overall, this survey highlights the profound shift AI is bringing to the financial services industry. As companies begin to leverage AI to increase profitability and achieve scale, more changes can be expected within the industry and for consumers.

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Economic Activity in Myanmar to Remain at Low Levels, with the Overall Outlook Bleak

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Myanmar’s economy and people continue to be severely tested by the ongoing impacts of the military coup and the surge in COVID-19 cases in 2021. Following an expected 18 percent contraction of the economy in the year ended September 2021, the World Bank’s Myanmar Economic Monitor, released today, projects growth of 1 percent in the year to September 2022. While reflecting recent signs of stabilization in some areas, the projection remains consistent with a critically weak economy, around 30 percent smaller than it might have been in the absence of COVID-19 and the February 2021 coup.

The near-term outlook will depend on the evolution of the pandemic and the effects of conflict, together with the degree to which foreign exchange and financial sector constraints persist, as well as disruptions to other key services including electricity, logistics and digital connectivity.

“The situation and outlook for most people in Myanmar continues to be extremely worrying,” said World Bank Country Director for Myanmar, Cambodia and Lao PDR Mariam Sherman. “Recent trends of escalating conflict are concerning – firstly from a humanitarian perspective but also from the implications for economic activity. Moreover, with a low vaccination rate and inadequate health services, Myanmar is highly vulnerable to the Omicron variant of COVID-19.”

Among recent signs of economic stabilization, mobility has recovered to 2020 levels after falling around 70 percent below pre-COVID-19 baseline levels in July 2021, though it remains about 30 percent below pre-pandemic levels for retail, recreation, and transport venues. This is likely to have supported the services sector, though overall consumer demand continues to be weak due to recent shocks to incomes and employment. In the manufacturing sector, output and employment also appear to be stabilizing, and exports have recovered in recent months.

Nevertheless, economic activity continues to be affected by substantial weaknesses in both supply and demand. Firms continue to report sharp reductions in sales and profits, cashflow shortages, and a lack of adequate access to banking and internet services. Results from the latest World Bank firms’ survey indicate that around half of all companies experienced disruptions in the supply of inputs and raw materials in October, largely because of increases in costs amid logistics constraints and a sharp depreciation of the kyat. Farmers continue to be affected by higher prices for key inputs, restricted access to credit, and ongoing logistics constraints.

Ongoing economic pressures are having a substantial effect on vulnerability and food security, particularly for the poor, whose savings have been drained as a result of recent shocks. The share of Myanmar’s population living in poverty is expected to have doubled compared to pre-COVID-19 levels. Combined with pressures on agricultural production, rapid price inflation and reduced access to credit are expected to further compound food security risks.

Over the longer term, events since February 2021 are expected to limit Myanmar’s growth potential. “Most indicators suggest that private investment has fallen markedly, and previously viable projects are becoming unviable as demand remains weak, the cost of imports has risen, and kyat-denominated revenues are worth less in foreign currency terms,” said World Bank Senior Economist for Myanmar Kim Edwards. “In addition, lost months of education, together with large increases in unemployment and displacement, will substantially reduce human capital, skills and productive capacity over the longer term.”

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Structural Reforms Needed to Put Tunisia on Path to Sustainable Growth

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Decisive structural reforms and an improved business climate are essential to put Tunisia’s economy on a more sustainable path, create jobs for the growing youth population and better manage the country’s debt burden, according to the Winter 2021 Edition of the World Bank’s Tunisia Economic Monitor.

Titled “Economic Reforms to Navigate out of the Crisis” (in French, “Réformes économiques pour sortir de la crise”), the report estimates a slow economic recovery from COVID-19, with projected growth of 3% in 2021. Weighing on this recovery is rising unemployment, which increased from 15.1% to 18.4% in the third quarter of 2021, affecting the youth and people in the western regions hardest.

The report outlines how the weak recovery puts pressure on Tunisia’s already strained public finances, with the budget deficit still elevated at 7.6% in 2021, despite a small contraction from 9.4% in 2020.  The budget deficit is projected to gradually decline, reaching 5% to 7% of GDP in 2022-23, helped by lower health-related expenditures and provided that the moderately positive trajectory of spending and revenue are maintained. However, Tunisia’s rising public debt will be hard to finance without decisive public finance and economic reforms, the report noted.

“Just like everywhere else, COVID-19 has adversely affected Tunisia’s economy and the report strongly highlights the need to address longstanding challenges to sustainable growth, including improving the business environment,” said Alexandre Arrobbio, World Bank Country Manager for Tunisia. “To emerge from this crisis, Tunisia needs to adopt decisive reforms to promote private sector development, boost competitiveness and create more jobs, especially for women and youth.”

The first chapter of the report analyzes potential reasons behind Tunisia’s slow economic recovery and highlights two specific factors: the country’s reliance on tourism and transport services; and the rigidity of the business climate, including restrictions on investments and competition which constrain the reallocation of resources in the economy.

The second chapter elaborates on key barriers to competition, arguing that Tunisia’s current regulatory environment restricts competition and discourages the development of new businesses. Looking ahead, the report recommends that policy reforms to ensure a level playing field in every sector are essential in order to boost employment for Tunisians and to increase purchasing power.  

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Lebanon’s Crisis: Great Denial in the Deliberate Depression

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The scale and scope of Lebanon’s deliberate depression are leading to the disintegration of key pillars of Lebanon’s post-civil war political economy. This is being manifested by a collapse of the most basic public services; persistent and debilitating internal political discord; and mass brain drain. Meanwhile, the poor and the middle class, who were never well served under this model in the first place, are carrying the main burden of the crisis.

According to the World Bank Lebanon Economic Monitor (LEM) Fall 2021 “The Great Denial”, Lebanon’s deliberate depression is orchestrated by the country’s elite that has long captured the state and lived off its economic rents.  This capture persists despite the severity of the crisis –one of the top ten, possibly top three most severe economic collapses worldwide since the 1850s; it has come to threaten the country’s long-term stability and social peace. The country’s post-war economic development model which thrived on large capital inflows and international support in return for promises of reforms is bankrupt. In addition, the collapse is occurring in a highly unstable geo-political environment making the urgency of addressing the dire crisis even more pressing.

The LEM estimates real GDP to decline by 10.5 percent in 2021, on the back of a 21.4 contraction in 2020. In fact, Lebanon’s GDP plummeted from close to US$52 billion in 2019 to a projected US$21.8 billion in 2021, marking a 58.1 percent contraction—the highest contraction in a list of 193 countries.

Monetary and financial turmoil continue to drive crisis conditions, under a multiple exchange rate system which poses valuable challenges on the economy. The sharp deterioration in the Lebanese Lira persisted in 2021, with the US$ banknote rate and the World Bank Average Exchange rate depreciating by 211 and 219 percent (year-on-year), respectively, over the first 11 months of the year. Exchange rate pass through effects on prices have resulted in surging inflation, estimated to average 145 percent in 2021—ranking 3rd globally after Venezuela and Sudan. Inflation is a highly regressive tax, disproportionally affecting the poor and vulnerable, and more generally, people living on fixed income like pensioners. Food inflation remains concerning as it forms a larger proportion of the expenses incurred by poorer households who are struggling to make ends meet with their deteriorating purchasing power.

Government revenues are estimated to almost halve in 2021 to reach 6.6 percent of GDP, marking the 3rd lowest ratio globally after Somalia and Yemen. The expenditure contraction was even more pronounced, led partially by drastic cutbacks in primary spending, which has reinforced the economic spiral. Meanwhile, gross debt is estimated to reach 183 percent of GDP in 2021, taking Lebanon to the 4th highest ratio in the world preceded only by Japan, Sudan and Greece.

A rare relative bright spot in 2021 has been tourism, which helped hold the current account deficit-to-GDP ratio steady.

Starting Spring 2021, a disorderly termination of the foreign exchange (FX) subsidy commenced and was in full force by the summer. The path authorities followed to the subsidy removal was opaque, inadequately coordinated and lacked timely pro-poor alleviation measures. As a result, subsidy removal mostly benefited importers and smugglers while precious and scarce FX resources were drained.

“Deliberate denial during deliberate depression is creating long-lasting scars on the economy and society. Over two years into the financial crisis, Lebanon has yet to identify, least of all embark upon, a credible path toward economic and financial recovery,” said Saroj Kumar Jha, World Bank Mashreq Regional Director. “The Government of Lebanon urgently needs to move forward with the adoption of a credible, comprehensive and equitable macro-financial stabilization and recovery plan and accelerate its implementation if it is to avoid a complete destruction of its social and economic networks and immediately stop irreversible loss of human capital. The World Bank reconfirms its readiness to continue to support Lebanon in addressing the pressing needs of its people and challenges affecting their livelihoods.”

As detailed and called for in previous issues of the LEM, this strategy would be based on: (i) a new monetary policy framework that would regain confidence and stability in the exchange rate; (ii) a debt restructuring program that would achieve short-term fiscal space and medium-term debt sustainability; (iii) a comprehensive restructuring of the financial sector to regain solvency of the banking sector; (iv) a phased, equitable, fiscal adjustment to regain confidence in fiscal policy; (v) growth enhancing reforms; and (vi) enhanced social protection.

Particularly, initiating a comprehensive, well-structured and swift reform of the electricity sector is critical to address the long-standing and compounding challenges of this sector which is at the center of Lebanon’s economic and social recovery. In addition, Lebanon needs to step-up efforts to ensure efficient and prompt delivery of social protection assistance to the poor and vulnerable households struggling under the continuing economic crisis.

The Special Focus section of the LEM “Searching for the External Lift in the Deliberate Depression” examines the reasons for the weaker than expected increase in exports considering the Lebanese Lira’s sharp depreciation; it analyzes the failure thus far for the external sector to sufficiently benefit from increased price competitiveness and become a more robust driver of growth. The Special Focus finds that Lebanon’s exports are inhibited by three factors (outside of the crisis itself): (i) (pre crisis) economic fundamentals; (ii) global conditions; and (iii) political/institutional environment.

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