Technical, economic and social factors will determine the pace and extent of automation, say Ian Gauci and Abdalla Kablan from Caledo Group.

Which financial services sectors are ripe for disruption – or have already been disrupted – by AI and blockchain?

Ian GauciIan Gauci

Ian Gauci: The financial services industry has seen drastic technology-led changes over the past few years through AI as well as DLT, and fintech is transforming the financial service arena. Fintech start-ups are taking on established markets, leading with customer-friendly solutions developed from the ground up and without needing to carry the burden of legacy systems. Existing businesses are retransforming themselves. Regulators are also embracing these technologies and demanding more from the industry. With the emergence of regtech and suptech, they started to adopt these new technologies to revolutionise their ability to supervise and regulate the digital economy.

In this ever-changing landscape and with innovation showing no signs of slowing down, one cannot rule out any particular sector as being safe from disruption. Those who do not innovate or at least adapt to innovations around them will find it hard to survive.

Abdalla KablanAbdalla Kablan

In what ways does automation contribute to business efficiency?

Abdalla Kablan: Broadly speaking, business efficiency measures how well a business converts inputs such as capital, human resources and materials into outputs like revenue, products and services. While it does not make sense to simply measure everything in terms of efficiency (creativity, for example, is not efficient by design), every business can improve their overall efficiency by automating a portion of their business.

When done right, automation ultimately improves financial efficiency by allowing businesses to service customers with less running costs. This can be measured as a sum of parts of other types of efficiency, mainly labour productivity, process efficiency and operational efficiency. Human beings cannot compete with algorithms in terms of efficiency and cost for tasks which are recurring and can be performed well by algorithms.

Automation of activities can enable businesses to improve performance, by reducing errors and improving quality and speed, and in some cases achieving outcomes that go beyond human capabilities. Automation also contributes to productivity, as it has done historically. At a time of lacklustre productivity growth, this would give a needed boost to economic growth and prosperity and help offset the impact of a declining share of the working-age population in many countries.

Can increasingly sophisticated automation threaten employment levels?

IG: This issue is currently a hot topic of debate on global level and has given rise to debates about the future of work revolving around the introduction of Universal Basic Income. According to McKinsey, almost half the activities that people are paid for, which is almost $16 trillion in wages in the global economy, have the potential to be automated by adapting currently demonstrated technology. While very few occupations can be automated entirely, about 60 per cent of all occupations have at least 30 per cent of constituent activities that are automatable.

However, this doesn’t mean that all occupations will be automated away. In fact, history has shown that it is more likely that such occupations will change and involve different skill sets by which human beings, machines and algorithms will work side by side to perform tasks.

About 60 per cent of all occupations have at least 30 per cent of constituent activities that are automatable

Technical, economic, and social factors will determine the pace and extent of automation. The cost of technology, competition with labour and social and regulatory acceptance will affect the pace and scope of automation. McKinsey suggests that half of today’s work activities could be automated by 2055, but this could happen up to 20 years earlier or later depending on the various factors, in addition to other wider economic conditions.

People will need to continue working alongside machines to produce the growth per capita GDP to which countries around the world aspire. Productivity estimates assume that people displaced by automation will find other employment. The anticipated shift in the activities in the labour force is of a similar order of magnitude as the long-term shift away from agriculture and decreases in manufacturing share of employment in the Western countries, both of which were accompanied by the creation of new types of work not foreseen at the time.

Humanity will always carry the spectre of super-intelligent machines doing us harm. How can we ensure AI remains friendly?

AK: Technology will not intentionally do us harm unless it is specifically programmed or allowed to evolve in a way that would do so by a human being. However, given that the magnitude and complexity of things that one may achieve with technology is constantly on the rise, one cannot disregard the risk that third parties will use Artificial Intelligence in order to harm human beings or the AI itself may evolve in a way that may cause an existential threat to humans.

We are living in unprecedented times where technology is more ingrained into our daily lives than ever. This, in turn, brings with it a number of risks that we must do our best to prepare for. The prevalence of AI has led to a number of jurisdictions toying with the idea of regulating AI. However, the current state-of-play is that AI is self-regulated by independent ethics boards across the major players in the industry. This may need to change in the near future where AI that has the potential to affect people’s lives may need to be scrutinized and evaluated before being made available for mass consumption. In Malta the National Malta.AI taskforce has a working group dedicated to the area of legal and ethical frameworks in relation to AI and a public consultation was issued in that regard.

Within the fintech context, how does automation free up valuable resources and time?

IG: Automation comes in many different flavours. There is automation that does not require any particular intelligence and that results from computer programs following rule-based approaches to accomplishing tasks. Robotic Process Automation (RPA) is one such approach that has started to be widely adopted in the industry. Examples of outcomes that one may achieve through this are synching data across systems, sending notifications to users when certain events occur, detecting fraud based on manually configured rules and so on. This simple form of automation by nature frees up the time of employees by automating aspects of their job that are purely repetitive and mundane.

The second flavour of automation is autonomy of algorithms which are intelligent, through AI and can make smart decisions without being told specifically how to do so by human beings. There are several use cases which are currently already in use today, such as identity verification, performing due diligence, intelligent customer service chatbots, AI-based fraud detection, automated risk assessment, intelligent construction of financial portfolios, risk management and so on. All of the above tasks were traditionally done by human-beings.

Hence, if such tasks can be automated, this will naturally free up more time and resources for financial institutions.

Beyond automation, will certain human elements – such as fostering human relationships – still be the backbone of financial services?

AK: Human beings are social creatures and will always value human relationships. However, depending on the nature of a particular transaction, having a human element may be either an advantage or a disadvantage depending on that transaction and the preferences of the individuals involved in it. Human relationships will probably not remain the backbone of financial services because most people today and more so in the future will have more choices when choosing providers and they will be able to evaluate their choice more precisely. In summary, most financial institutions in the near future will still have the human element as their backbone. However, this may very well change in the near future as the market continues to become more competitive.

Since last year’s pitch as ‘Blockchain Island’, in what ways has Malta advanced its blockchain offerings?

IG, AK: Malta has advanced its blockchain offering in a number of ways. First of all, the Malta Digital Innovation Authority is now operational and processing applications meaning that Malta now has a regulator focussed specifically on technology and innovation. The Malta Financial Services Authority has also followed suit and has pitched its vision of Malta becoming a centre of excellence for fintech companies by 2020. Furthermore, a number of international companies have moved to Malta in order to pursue their strategies.

All of these factors contribute to the ecosystem of innovation currently being pursued in Malta. A lot of work still needs to be done but we are getting there.

Caledo offers technical, legal, regulatory and business consultancy services under the same roof. It is spearheaded by Dr Ian Gauci and Dr Abdalla Kablan. For more information visit www.caledogroup.com

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