Automation across financial services: hype or reality?

April 2017  |  COVER STORY  |  BANKING & FINANCE

Financier Worldwide Magazine

Whether the displacement of human labour by automation is, as is often depicted, another nail in the manual coffin seems a moot assertion. But what cannot be denied is its increasing role across the financial services (FS) sector, with some players even seeing automated environments as a panacea.

Universal remedy or not, what does seem clear is that the FS sector is ripe for automation. Supporting this assertion is a 2017 report by Infosys – ‘Amplifying Human Potential: Towards Purposeful Artificial Intelligence’ – which found that FS companies across the globe (based on a poll of 1600 senior business decision makers at some of the world’s largest organisations) are looking to automation, and its subset, artificial intelligence (AI), to boost revenues and streamline structures.

“Financial institutions (FIs) are looking at automation across a fairly wide spectrum of activities,” says Tom Kimner, head of global risk marketing and operations at SAS. “One recent area of interest has been an investigation of current processes around governance and compliance. With many of these processes stabilising to some degree, FIs are looking at improving and streamlining them with some form of automation to not only reduce costs but to make them more robust and repeatable.”

Clearly, the use of automation and AI is expanding and evolving across many industries, with the FS sector a particularly active participant. Indeed, according to Infosys, companies in this space have each invested, on average, $14.5m in AI technologies to date, compared to an average of $6.7m in other industries.

The Infosys survey further reveals that: (i) 76 percent of senior decision-makers believe AI is fundamental to the success of their company’s strategy; (ii) by 2020, those currently or planning to use AI technology anticipate a 39 percent boost to their company’s revenue, on average; and (iii) eight in 10 companies that have replaced, or plan to replace, roles with technology will retrain or redeploy those who are displaced.

In its 2016 analysis of the automation debate – ‘How can RPA and other digital labour help financial institutions’ – PwC states that technology is now allowing FIs to automate many computer-based operational tasks like searching, matching, comparing, filing and more, which frees up staff to do much higher value work. Also highlighted are some of the repeatable and logic-driven activities which are deemed ideal for automation, such as: trade mismatches; management reports; regulatory information such as CCAR stress tests; client reporting; asset servicing; account opening processes, such as anti-money laundering and know your customer; and reconciliation and data remediation initiatives.

Many commentators expect the shedding of costly and cumbersome legacy IT architecture to continue apace. The stage is set for FS automation and AI to move from what was, only a few years ago, relatively vague concepts to bona fide, strategic business imperatives.

The shape of things to come

Automation can of course be found in some shape or form in virtually every industry. Its creation has greatly improved efficiency and substantially increased quality thresholds. Add to this the ongoing development of AI technologies – with numerous applications for insight, increased productivity and expanded possibilities – and the benefits of automation are abundantly clear, with the FS sector an obvious beneficiary.

“Intelligent automation has truly landed in FS, with the aim of reducing costs, simplifying processes and improving performance,” says Christopher O’Driscoll, a financial services expert at PA Consulting. “Specific trends and developments in robotic process automation, cognitive computing and Internet of Things (IoT) are being seen across banks, insurers and asset managers. These include machine learning being applied to credit risk processes, robo-advisers delivering investment advice and natural language processing being used for tasks such as speech recognition for account access. These trends will continue as automation is increasingly applied to an even wider variety of tasks.”

Further fleshing out the nature of such tasks is Capgemini’s 2016 report ‘Robotic Process Automation Solutions for Financial Services’, which proffers that optimising and improving efficiency means more than just upgrading systems or outsourcing processes – it means harnessing innovation. Repetitive tasks – which the Capgemini report estimates 40 percent of staff spend their time on – are essentially algorithms and therefore can be automated, with robotic process automation (RPA) innovation that combines user interface recognition technologies and workflow execution to follow predetermined computer pathways.

The effects of such innovation, from fighting fraud to improving the customer experience and even predicting the direction the market will head in, are already visible. “Contact tools such as the AI virtual agents introduced at a Japanese bank are a good example of how automation is already benefiting the FS landscape,” says Indivar Khosla, executive vice president and global head of FS business services at Capgemini. “They can respond and solve customer enquiries much faster, resulting in fewer calls to the bank’s main contact centre, therefore freeing up time for staff while improving the customer experience.”

Chatbot technology, which carries out complex calculations instantaneously, allowing customers to check their finances, evaluate their spending habits and monitor their credit score, is also having a big impact. The speed and efficiency of core business processes received a significant boost from the chatbot innovation.

Pros and cons

Like any endeavour poised to be a major disruptive influence on an industry’s status quo, automation in FS comes with a range of pros and cons. According to Mohit Joshi, president and head of banking, financial services & insurance at Infosys, by using automation, banks are distinguishing themselves by being technologically sophisticated and capable of meeting the financial and security needs of digitally savvy customers. “Some of the world’s largest credit card issuers, HSBC and JP Morgan Chase & Co. among them, utilise AI to analyse the buying patterns of their cardholders. Any anomalies are red-flagged and preventive measures taken before a cyber thief can do lasting damage. The 2016 Forter and PYMNTS.com ‘Global Fraud Index’ found that in the first quarter of the year, $4.79 of every $100 in online transactions was considered at risk. That is up from $2.90 year-over-year.”

Automation enables FS firms to create a measurable audit trail of activity, reduce human error, speed up transaction times, reduce costs and improve overall customer experience. But the reality, says Chris Gayner, marketing director at Genfour, is that many firms are still trying to deliver a significant return on investment (ROI) to justify further investment. “In our experience, those FS firms which are seeing ROI from automation, view automation as a journey and not a project – which typically means cross functional working, robust governance and employing the right skills to drive out maximum benefit,” he says.

Further obstacles to automation include budgetary concerns and a lack of technical capability, not to mention redundancies and the associated impact on company brand. Potential job losses is a sensitive issue in the automation debate, with no easy answers. That said, not all processes lend themselves to automation and, for those that do, the result may not be job losses but rather a form of job transfer to more important tasks like deeper, more thorough analytics. “It is important for organisations to have an understanding of what types of skills are needed now and in the future for any evolution toward automation they may consider,” suggests Mr Kimner. “Anticipating the right mix of skills is important as it will influence the types of training and the hiring that organisations may undertake.”

Dismantling architecture

An unavoidable issue when moving to automation is the need to dismantle existing IT architecture, protect underlying systems and, at the same time, keep costs under control. To help minimise costs during this process, IT architecture should be simplified and a service layer added, to allow a company to integrate its IT with other systems and intelligent automation technologies.

“Due to the size of FS organisations’ operations, changing their IT systems and ways of working can be a challenge,” says Mr Khosla. “However, investing in ways to improve the IT infrastructure and processes can help save on future costs which will only increase as systems and processes become increasingly outdated. These savings can then be passed on to other areas of the business, allowing other processes to be updated.”

One option favoured by Mr Gayner is for companies to have recourse to a considered automation roadmap – the first step toward minimising the cost of automation. Yet, given that automation tools can readily be found online and installed onto machines without involving IT, it makes sense for organisations to take a company-wide view of automation – who owns it, how it is managed and where it should be used. “FS sector firms should invest in a robust proof of concept to ensure the technology fits with their wider IT initiatives and complies with corporate policies, but also that the approach to automation is the right one. It is important that automation adds value, and is not just a replacement for bad processes,” explains Mr Gayner.

The transition from legacy systems to newer, more agile technologies and platforms is clearly a difficult and costly enterprise, with many companies mistakenly looking only at the technology costs of replacing various systems and not the total costs, which include, for example, change management, process improvement and resource training. “Organisations often start by acquiring some new technology and then trying to implement pieces of it through a patchwork of small projects that often seem like iterative, trial and error exercises,” attests Mr Kimner. “Thorough planning and an understanding of the impact and downstream effects of technology changes on people, as well as processes, must be part of a sound programme in order to keep overall costs in check.”

Embrace or resist?

With automation in FS continuing to evolve, the extent to which the sector will play ball with this evolution, whatever form it takes, is a matter of debate.“As traditional banks grapple with the challenges posed by FinTechs, legacy constraints and traditional operational models, AI is emerging as the saviour,” claims Mr Joshi. Indeed, according to the Infosys survey, 23 percent of 250 FS sector respondents confirmed that AI technologies have been fully deployed in their organisations. Moreover, 47 percent view AI as being fundamental to the success of their organisation’s strategy. “It is likely this trend will continue to accelerate and transform the financial services landscape. Furthermore, as AI is deployed more regularly and employees become increasingly familiar with it, adoption will be the common sense option,” adds Mr Joshi.

On the flipside, less focused firms could find themselves struggling to keep up with competitors taking advantage of the benefits that automated business processes can bring. “It is too early to say how far automation can go, but the next five to 10 years and beyond will certainly be exciting when it comes to the application of AI to business processes,” suggests Mr Khosla. “For under pressure FS firms, gross operating expense (GoE) reduction, return on equity (RoE) maximisation and transformation of the operating model are all key priorities. Moreover, as the technology behind automation develops, we will see it start to take on more complex tasks and create greater efficiency and potential within the workforce. Although challenges exist, AI has the capability to allow the industry to develop new highly personalised customer propositions and improve their experience.”

A tool for the future

In a landscape where competition, complex processes and regulatory demands are all challenging profits, automation is assisting the FS sector to reduce costs and reconfigure existing practices and business models. Furthermore, by making tasks more predictable and easier to control, automation is also improving performance and process quality, eliminating human error and improving efficiency.

“With the market becoming more competitive, FS companies are recognising the need to differentiate themselves,” says Mr O’Driscoll. “Automation can help with this, enabling FS providers to carry out processes faster so that new products and services can be brought to market quicker than the competition. From the robo-adviser to the automated back office, FS will continue to be a leader in the digital development, and an early adopter of RPA, cognitive technologies and AI. As the combination of high transaction volumes, level of customer service and regulation becomes ever more costly, automation will be increasingly applied.”

Going forward, it is of course difficult to predict the types, uses or limits of automation across the FS sector. However, it stands to reason that there will continue to be cases where the automation of repetitive processes, compliance activities and reporting, will be more cost effective and, in some cases, necessary. According to the 2017 ‘Robotic Process Automation: A Guide for Banks and Financial Institutions’, the global automation market is expected to see a compound annual growth rate of 75 percent, reaching $835m by 2020 – an adoption rate which strongly indicates that the sector will focus on investing for training and ownership of automation technologies.

“There will most likely be cases where automation is used to attract, convert and retain customers through various channels,” says Mr Kimner. “There may even be cases where automation is used in business decision management or perhaps portfolio optimisation. However, what is clear is that FIs need to look for ways to reduce costs and improve margins if they want to remain profitable and competitive – and automation is one of the tools that may well help them achieve this.”

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Fraser Tennant