One is that market power in the past came down to the scale of assets but in the new world, competitive battlegrounds will be fought over the scale of data – and the ability to gain insights from data.

A second is that while the Australian banking oligopoly has been built on high barriers to entry and big barriers to switching, driving customer retention and enshrining market share, in the AI future, it will be continuously improving product performance that will keep clients engaged.

In the past, physical footprint and standardised products have driven cost-effective revenue growth but in the future new platforms will recommend and advise customers to compare and automatically switch between products and providers. Competitive advantage won't be about cost but personalised advice based on data and the continuous optimisation of highly-customised products, selected by algorithms, the WEF reckons.

Part of the difficulty for banks in getting their heads around AI is the lack of clarity around its definition. The WEF also helps here: it is talking about the suite of new technologies that enhance predictive power, using some degree of autonomous learning. The discussion about AI is one about how computers are helping to enhance pattern detection, foresight, customisation, decision making and interactions. It's also clear AI shouldn't be viewed in isolation and will be influenced by interactions with other emerging technologies, including blockchain, quantum computing and cloud.

National Australia Bank is in the midst of a big workforce transformation right now, culling 12 per cent of its workforce, or a net 4000 bankers. Fairfax Media

Regulatory dilemmas

The advent of an AI economy is also going to be highly challenging for regulators. AI "poses a new source of systemic risk that has the potential to disrupt national and global economies," the report notes. The technology will demand proactive collaboration between institutions and regulators to identify and address potential sources of bias in machine decisions and other exclusionary effects. It may also be difficult to predict how models will respond to market events.

AI will also change the very nature of regulation itself. While bank capital and stability have been the defining regulatory issues for decades, the WEF suggests regulations governing the privacy and portability of data will become "as important as traditional regulations to the competitive positioning of firms" because they will "shape the relative ability of financial and non-financial institutions to deploy AI".


The federal government last week released a draft bill to create a "consumer data right" in Australia; financial services will be the first industry to which it applies. "The evolution of data regulations will be the critical driver in determining the roles and relative positioning of different players in financial services," the WEF says.

For mid-tier banks and credit unions, the WEF report will be bleak reading. Markets will increasingly become bifurcated; incumbents with scale and big investment budgets might be able to prosper but they will be joined by global technology giants and fintechs. This could push out existing institutions playing the middle of the market.

Mizuho Financial Group of Japan is developing AI tools that could replace 19,000 staff, around a third of its total.

Collaboration challenges

So for the big banks, managing partnerships with potential competitors will be critical – but not entirely comfortable – given the tech giants have a big advantage: access to more data, the very fuel that AI systems rely on. The report suggests the arrival of GDPR2 in Europe, and similar open banking policies around the world including in Australia, will open door for large tech companies to enter financial services.

Google, Amazon and Facebook may be able to access financial data and use it alongside a wealth of other personal data which will "give them a head start in developing new AI applications for customers' finances".

But incumbent financial institutions "do not have the reciprocal ability to access non-financial data from technology companies". So to remain relevant, banks will have to become more specialised, highly networked and dependent on the capabilities of a variety of technology players.

The report does a deep dive into the impact of AI in six particular areas of finance: deposits and lending, capital markets, payments, insurance, investment management and market infrastructure. It also sets out some "wildcard scenarios", including the death of deposit accounts and formation of a central anti-money-laundering utility.


Deloitte's global financial services industry leader Bob Contri says the journey to understand and direct the benefits of AI "will not be without its struggles" Louise Kennerley

The deposits and lending section predicts the line between the two will become blurred, as cash-flow management is delivered as a service. "Lending products will become smaller and more agile as they are customised to specific uses," it says – but this will put pressure on net interest margins.

While all of this sounds uncomfortable for banks, it could be beneficial to many customers, including business ones. "AI is launching a commercial banking renaissance through improved data integration and analytics tools that unlock a vast under-served market," the report says.

Impact on jobs

However, the report also calls out the need for a comprehensive discussion about ethics to develop an understanding of how AI can discriminate against parts of society. There are also plenty of lessons throughout about how banks need to manage the transition of their workforces, given the impact that AI will have on jobs.

National Australia Bank is in the midst of a big workforce transformation right now, culling 12 per cent of its workforce, or a net 4000 bankers. Yet the report shows other global banks are moving even more aggressively; for example. Mizuho Financial Group of Japan is developing AI tools that could replace 19,000 staff, around a third of its total.

Google, Amazon and Facebook may be able to access financial data which will "give them a head start in developing new AI applications for customers' finances".

The WEF says institutions will need to source more technical skills to develop AI solutions, but will also need more staff with skills to complement them: those with creativity, ingenuity and insight.


"In order to unlock the full potential of this workforce, institutions must effectively re-task existing talent as well as source new external talent," it says. But "the lack of vision and co-ordinated strategy puts institutions at risk of a prolonged skills deficit".

There are many challenges policy makers, regulators and bank management will need to get their head around as disruptive technologies continue to roll out. As the Financial Review Innovation Summit was told by from the Shadow Minister for the Digital Economy and the Future of Work Ed Husic: "We can't stumble or scramble our way to success with this. We need to think, plan and act in advance."

Deloitte's global financial services industry leader Bob Contri says the journey to understand and direct the benefits of AI "will not be without its struggles" and "collaboration between key stakeholders will be critical to manage the risks and opportunities of AI in financial services".

Jesse McWaters, the financial innovation lead at the World Economic Forum and lead author of the report, also said that his 10 months of research talking to more than 200 industry leaders around the world has shown that "while emerging questions about consumer protections and systemic risks remain the purview of regulators, effectively responding to these challenges will require collaboration between public and private stakeholders in order to resolve regulatory uncertainties and manage the risks and opportunities of AI in financial services".

The advent of an AI economy is also going to be highly challenging for regulators. Patrick Cummins