Holiday Edition: Five big shifts in banking for 2024 as GenAI hype is dialed up to 11! CBDC wins a crypto convert with Ripple!

Artwork of the day: “Virgin Mary” by Lu Hongnian (1919-1989).

Lu Hongnian was one of the most celebrated Chinese Catholic painters, using ink and vivid colors to paint biblical scenes in the traditional Chinese manner. In his painting titled “Virgin Mary,” Lu painted a slender woman in traditional Chinese clothing surrounded by auspicious clouds. The piece mixes the thematic birth of Jesus with the traditional Chinese painting style.

Lu adapted the halo — a radiant circle surrounding the head of a holy figure — with a Chinese flair. The halo is often found in religious paintings across cultures, from Christianity to Buddhism. People in China simply saw Virgin Mary as Guanyin, the bodhisattva of compassion and mercy in Chinese Buddhism.

Guanyin is the goddess of mercy and is considered the physical embodiment of compassion. She is an all-seeing, all-hearing being who is called upon by worshipers in times of uncertainty, despair, and fear.

Banking has FIVE BIG SHIFTS coming, many are because they didn't keep up with tech.

Mckinsey Five Big Shifts Shaping A New World For Corporate And Investment Banks

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With an end-of-year report on Commercial and Investment Banks (CIB), McKinsey lays down five major shifts impacting bankers in 2024.

It’s a sobering read and shows how many of their problems are digital and are born of their reluctance to adopt the latest technology.

What I found most interesting is that nonbank competitors are eating banks’ lunches because they are more digitally focused. See the graph above showing how bank valuations are way behind nonbank competitors.

While I agree that some of the five shifts like macroeconomic trends and the Net Zero are not digital, the rest of the bank’s problems most certainly are.

??TAKEAWAYS:

Banks will be subject to five major “shifts” that will rock their world they are:

1. Radically different macroeconomic environment,Rising interest rates allow banks to make more money on lending portfolios going forward, but they are getting killed on legacy deals made in a zero-rate environment.
2. A new, technology-led ‘art of the possible’Banks can finally get that "digital front office" they always dreamed of, meaning they can transact digitally without paying front office salaries! GenAI is, of course, a part of the new tech plan.
3. Changing regulatory and risk environmentThis part never changes, and as McKinsey doesn’t reference a specific new regulation, I don’t see why this is a “shift.” Here, too, better bank digitization would help!
4. New market structuresTokenized assets will create a new market structure. Banks are advised to seek relationships with existing market players to enhance their digital asset and tokenization skills. Most banks never acquired these digital skills, so they now have to outsource them.Nonbanks like Alternative Asset Managers, Payment companies, and Trading platforms encroach on banks' territories. These nonbanks are killing bank valuations and taking their high-margin business. Unsurprisingly, the majority are DIGITAL!face
5. Long-term trends in certain sectors and productsMcKinsey is correct that net-zero, infrastructure, energy and unfunded pension liabilities represent long-term challenges but are definitely not digital!

Asia is where the money is! How’s that for Asia rising?

??STRAIGHT TALK??

Banks face big changes, but I don’t feel sorry for them.

Three of McKinsey’s five major shifts directly result from the rise of digital services, and as banks have not been fast to move on digital, they’ll have to pay the price.

They are already paying if you look at nonbank competitors; many are digitally savvy and beating banks at their own game. Banks have no one to blame but themselves.

Nonbanks are just one problem. Tokenization and other institutional DeFi are coming, which will reduce transaction costs. This will have a devastating impact on bank revenues that can no longer be postponed. Banks have been trying to delay CBDCs, tokenization, and crypto because they all cut into margins.

Banks have, for the most part, tried to delay the shift to digital assets. Their dislike of everything from CBDC to crypto isn't exactly a secret. The problem is that, having tried to delay it for so long, most don't have the skills to harness the technology. This leaves them, ironically, looking to partner with crypto companies as a way of acquiring digital skills.

Banks are so slow at adopting digital that I suggest that they keep their front office employees very happy. It will be quite a while before banks get the “digital front office” that they dream of and can replace high-salaried employees with digital services.

The problem is that tech is always a few steps ahead of banks.

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GenAI In Finance: ??HYPE ALERT IS ON ELEVEN??

Oecd Genai In Finance

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The OECD Rolls out a great read on GenAI and its impact in finance. I like it because it makes it clear that the hype around AI far exceeds the reality.

We all agree that GenAI is a game-changer. Still, given how new the tech is, it is a stretch to expect it to be immediately rolled out to start changing our financial world.

Let’s face reality: banks and finance are conservative and aren’t letting GenAI out of its cage until it is completely tamed!

??TAKEAWAYS:

Today’s takeaways will focus on two quotes from the OECD that counter the hype:

Quote 1: “Despite the hype around GenAI, advanced use cases of AI in financial markets involving full end-to-end automation without any human intervention remain largely at development phase, if any.”?

• As of today, GenAI and LLMs are being deployed as tools to assist financial service provision (e.g. content generation, summarisation of documents used by financial advisors, human resources processes)
• Yes, GenAI will make it to front-end use cases, but that isn’t happening yet!
• The expectation that it should happen now ignores all risks to banks that have a high duty of care for ethics, accuracy, explainability, and customer service!

Quote 2: “Such slow-paced deployment of GenAI by financial market participants could be attributed to the fact that finance is a highly regulated space (including model governance and risk management), as well as to the significant risks that GenAI involves in terms of false or deceptive outputs or other adverse consumer impact.”

• The premise that the development of GenAI by banks or financial services is “slow” is wrong.
• Banks cannot be expected to roll out untested AI tech on clients as though they were guinea pigs.
• The very notion that banks are slow underestimates the damage to clients that an ill-trained or hallucinating AI might cause

??STRAIGHT TALK??

I credit the OECD for tackling the hype surrounding GenAI’s use in finance.

It would be easy for GenAI fans to call the OECD a “Cassandra,” or prophet of disaster, or even a Luddite. That would be a mistake.

GenAI is already adept at generating personalized material used to commit bank fraud. When it gets even smarter, you can bet it will be used to manipulate markets. It could do this now by spewing out some fake news!

Should we also ignore the lack of explainability for GenAI systems? What do you tell someone rejected for a loan or other service? “I don’t know, the AI says so” doesn’t cut it.

The OECD doesn’t mince words, and I don’t think they should be penalized for being candid. They advise caution, and I think that they are on target.

GenAI adoption should proceed cautiously in financial services because for all the good GenAI can do, it can do equal amounts of bad.

Love AI, but stop the hype!

All I want for Christmas is more subscribers to the email edition!

Open Finance Needs Data To Break The Monopoly of Credit Ratings

Open Finance is the future; few debate that, but just how open is open? The UK’s Centre for Finance, Innovation and Technology (CFIT) gives us a glimpse.

Most of us are willing to share bank details with third parties for “Open Banking,” but the next step, “Open Finance,” is far bigger and has implications for data privacy.

CFIT proposes additional data sources to help break the monopoly of credit reports.......

Read the rest of the article by clicking on this link and while you're their give me a Christmas present. Subscribe!

Ripple believes in CBDCs seeing them as crucial for asset tokenization!

If only Ripple could get others in crypto to like CBDC!

Ripple is going “all-in” for CBDC and I congratulate them for their support and efforts building CBDCs.

Ripple is infamous because it fought and beat the SEC this summer when its XRP tokens were declared not securities. Just to add insult, the SEC’s appeal was denied!

Ripple is wise in seeing CBDC as a means of achieving the benefits of tokenization which will unlock “the internet of value.”

To try to get you to subscribe click on this link to download Ripples SUPERB CBDC write up. You shouldn't miss it!

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