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Saturday, February 16, 2019

2019, A "Very Bloody Affair"--Intelligence in an Age of Political Chaos

By Mark P. Dangelo
January 28, 2019

Topics:
Mark Dangelo
Technology
Innovation


MarkDangelo(Mark P. Dangelo is president of MPD Organizations LLC, featuring books, industry reports and articles. He is a strategic management consultant, outsourcing advisor and analytics specialist with extensive process, technology and financial results and is a frequent contributor to MBA Insights. He can be reached at mark@mpdangelo.com or at 440/725-9402.)

Hello 2019, a big welcome! I must say, as the years pass, I get more appreciative of being on the top side of the grass. But I have a real fear that as 2019 unfolds, it may become a "do-over" time for 1973--where government gridlock, dirty deeds and the whispers of "treason" increasingly surface.

For financial institutions, the days of hoping for regulatory repeals are over and the debt legacy of the last decade now appears to be at the edge of a cliff.

A Quantum Shift
Yes, 2019, a time when the Federal Reserve is paralyzed by political retribution fears surrounded by a global and domestic economic rebalancing (e.g., recessionary, tariff and growth pressures). A time when regulatory oversight stalls, as flagbearers from the political left and right conduct scorched earth campaigns with financial institutions as the disinclined pawns consigned to their battlefields. It will be a time when former political allies and friends become foes leaving financial institutions to bleed out for "public good" after being repeatedly attacked by each side looking to gain an upper hand against the other. The acronyms TBTF, TBTS, TBTE and TB-la-la-la will be the rage again, but this time, the top 5 financial institutions now control nearly 50% of all consumer deposits--a nearly 400% increase from a decade prior.

2019 is shaping up to be a "Very Bloody Affair" that will melt into 2020 with operating budgets, delivery risks and political chaos substantially eating away at profit margins--the rebound years (2008-2018) are now in our rearview mirror. With pandemonium growing, stretched snowflake consumers will be edgy (e.g., student debt at record of $1.5 trillion doubling since 2008), media outlets will broadcast their version of reality, presidential election cycles will sap goodwill (along with their genetic results) and congeal political tribes at their continuums, as each will attempt to claim the moral, legal, business and technological high grounds.

So, what should financial institutions be looking for in a prolonged era of chaos (likely until 2021)? Where are the leadership roles that need to be mapped out now using less than definitive guidelines and skill sets? In an age of declining privacy and heightened (and porous) data security, what ethical pitfalls await progressive financial institutions as they increase their automation, augmented intelligence and layoffs to improve efficiencies?

Think this is all a whim? Just look at the smaller housing market projections, builder promotions enticing would-be buyers, the overextended debt burdens, sovereign debt levels now exceeding GDP, stock equity reversals (as of this writing at 14-month lows and likely heading farther south) and the $8 trillion of global negative-yielding debt (up from $5.7 trillion in 2017). 2019 could be a brutal year for financial institutions--so it's time to focus on using "intelligence" renderings in a pursuit of new efficiencies.

Chaos will Usher in Rapid Adoption of Artificial and Transferred Intelligence Offerings
As 2019 pushes on, the lines between "real" and "artificial" begin to merge with devices and solutions taking on the behaviors and learning once singularly associated with human cognition. It appears that the age of transferred intelligence is underway spurred by advances that take us beyond linked silicon chips (i.e., Moore's Law) and moves us into emerging areas such as quantum computing, multi-dimensional processors (see "Team Invents Method to Shrink Objects to Nanoscale," MIT News, December 2018), and rapidly accelerating DNA integrated with biohacks. It is indeed a brave new world complete with AI-generated "fake faces" incorporated into machine intelligence. (See "Nvidia's Scary AI Generates Humans That Look 100% Real," TomsGuide.com, December 2018)

Yet, gratitude or not for another year, what lurks in the future for those financial institutions seeking to remain relevant, address their snowflake consumers and deliver to their investors (and employees) meaningful returns all in an age of historic low unemployment, stagnant wages, and a global debt crisis likely by 2020? (see "Titans of Junk: Behind the Debt Bing That Now Threatens Markets," Bloomberg, July 2018)

Factor in the rapid revolutionary nature of emerging AI technologies underpinned by fluid, opaque processes, and it is not a surprise that across the record breaking financial institution profits of the past five years is future uncertainty and fear within leadership ranks.

Why? Aren't banks, lenders and FinTech providers "now solid as the day is long?" Aren't the gaggles of regulators ensuring that a reprise of "bad actors" won't bring down the local, national and international financial supply chains? Aren't consumers smarter, financial products soundly architected and lending more diverse and "qualified?" Don't regulators have a "handle" on what it means to compete in a data-driven, intelligent learning financial ecosystem (as compared to the 2006-2008 failure of regulations and regulators)?

As machine intelligence (along with deep-data analysis) finds new ways to move beyond the inherent and biased vulnerabilities of individual minds and associated actions, don't these trends improve and strengthen the delivery of (emerging) financial products to consumers and investors? More importantly, how does any of this impact the new annual business cycle-or are they just tangential items that will create outlier impacts?

Beyond Customer Service--This Will be Different
The progression of AI can be simplified as a process that deploys "augmented intelligence" (which is where most financial institutions describe their work and independent innovation centers of excellence) to artificial intelligence (typically a compartmentalized set of functions trained with huge databases designed to remove bias and risk) to emerging, transference artificial intelligence (TI will be focused increasingly on general intelligence, mimicking the human experience and even downloading your brain).

For a great deal of financial institutions, their operating efforts concentrate around "augmented intelligence"--not artificial intelligence (nearly 60-65% of institutions have 2019 budgets with some form of intelligence initiatives). And in many cases, financial institutions' AI initiatives are highly concentrated around customer service, pattern recognition and projected outcomes (with discretely rudimentary, autonomous decision-making).

As traditional branch strategies are reduced in favor of far fewer brick and mortar locations, the use of intelligence solutions will need to expand into the back-office operations, product decisions and innovation strategies (for products, services and the supply chains). A December 2018 U.S. Senate report offers a glimmer of the increasingly negative perceptions being formed around a common customer service thrust where augmented intelligence has gained media attention--social media.

"Social media have gone from being the natural infrastructure for sharing collective grievances and coordinating civic engagement to being a computational tool for social control, manipulated by canny political consultants and available to politicians in democracies and dictatorships alike," the Senate report said.

Social media has received tens of billions in investment and budget dollars by financial institutions over the past two decades, but since 2015, the shine of being THE method of reaching younger demographics (e.g., Gen Y, Millennials) is quickly tarnishing complete with worms and rot (regardless of what your advertising agencies might advocate).

Moreover, use of AI into delivery mechanisms such as virtual assistants, investment (robo) advisors, and chat bots (along with numerous, other forms of bots), has over the past five years been a shining example of how forms of AI technology can extend and revolutionize foundational customer service channels. However, with the perceptions of consumers and the media attention yet to come, a safe bet might be that it has reached its peak?

As 2019 emerges, those lessons learned from AI deployment into other financial institution delivery vehicles and products (e.g., appraisals, loans, bundling, reporting, diligence) will be invaluable for in-house innovation labs eager to leverage their billions in AI investments, proof of concepts, and prototypes. However, the gap from the top 25 financial institutions to the remaining 5,950 institutions has never been bigger--those with very large budgets have a multiplicative competitive advantage when it comes to AI, and its future, TI.

The result will likely usher in a faster pace of financial institution consolidation (i.e., losing more than the 200-250 institutions yearly) as industry leaders seek to differentiate their offerings, and at a minimum, be perceived as having financial relevance as AI moves into all aspects of operations and delivery. As the "very bloody affair" begins and expands, those institutions culturally dependent on FOMO (fear of missing out) will be left on the shorelines. AI will not be a "bolt-on" FOMO approach (like social media was previously). AI requires a cultural, strategic and investment transformation that cannot be merely added by writing a check, so smaller operations that lack commitment and partners will become early causalities of any downturn.

Unintended and Overlooked Consequences
As 2019 progresses, the rush for survival will push to the front several initiative themes for those seeking to weather a downturn. Some enterprises will focus on peer-to-peer; others will concentrate on comprehensive digital consumer channels; a few will seek indispensability using state or sovereign finance route maps; and likely all will publicly tout their conformity to political demands and regulatory burdens.

Additionally, those financial institutions that invested in the AI before the bloodletting will quickly push into their channels solutions that will aid with profitable consumer retention, differentiate themselves from those in distress and brand and market their advancements as "intelligence" for financial success.

Yet, as the intelligence grows in its capabilities, the impacts to staffing levels and expertise will have to be reduced to accommodate the reality of AI. Yes, there will be different skill sets required--some that will be very scarce and high paying. However, what large financial institutions and their consultants forget is that AI as it matures it will greatly reduce employment levels within institutions who are automating expertise, while also delivering greater general intelligence within the apps--and between the discrete AI solutions familiar in pre-2019. (See "AI in Banking--An Analysis of America's 7 Top Banks," TechEmergence.com, September 2018). These advancements and cross-functional integrations will render obsolete functions from legal analysis to assessments (e.g., loans, payment potential, appraisals, GSE validations, et al) to numerous back-office processing and monitoring once the sole prevue of legacy and cloud solutions.

For financial institutions, their end of year 2019 efficiencies mapped against their business models will likely create surpluses of once highly qualified, highly paid management and subject matter experts. These pre-AI experts will either adapt their skill sets to serve and continually enhance their AI creations, or given the sheer number that will likely be displaced, be forced to seek out the 98% of institutions struggling to compete with AI-enabled financial institutions. And like the Industrial Revolutions of old, the displacements will have a (brief) impact on industry employment, while leaders will suffer reputational risks at the hands of political and media pundits (likely the same ones that backed them just a year or two prior).

So, the consequences long-term will like traditional innovation curves be positive for society and even the individuals displaced. However, the since these AI advancements will likely coincide with a global economic rebalancing, the unintended consequences for those seemingly trying to lead an industry to the next "curve" may be neutral to negative in all but the snowflake consumer circles.

I wonder if an AI "fake face" created AI "fake news" is that a "double fake," which then adhering to mathematical properties, makes it "real AI news?" And if it was a double fake, would it be attributed to a "state actor?" And, if I acted upon the fake of a fake, could I get a congressional investigation into the harm it did to society? And, if it turned out to be beneficial, could I be complicit if it benefited me? And, in a new world with seemingly circular contradictions, could the AI (newborn or transferred) get a headache from too much thinking?

And one more thing, would the cure be some equivalent of a pill (e.g., an electrical jolt) or a mental illness (and a new set of psychological disciplines for "troubled" AI personalities)? And, yes one more thing, would it be (medically) ethical to shock an AI program without endangering its rights? OK, I think I've reached the end of my "ands"--for now.

A brave new world indeed! Hang on--2019 is going to be a very bumpy, very bloody affair.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)

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