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Technology Frontiers: Humans and Machines - Financial Services


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This article is excerpted from a Economist Intelligence Unit report, Humans and machines: The role of people in technology-driven organisations. The report was published on 5th March 2013 to coincide with the "Technology Frontiers 2013" summit, hosted by The Economist Events. Both the report and the summit are sponsored by Ricoh.

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Technology Frontiers: Humans and Machines - Financial Services

  1. 1. HUMANS AND MACHINES The role of people in technology-driven organisations MONEY, RISK, PEOPLE AND PROCESS* Humans and machines in the financial services industry August 1st 2012 began as a relatively peaceful day on responsiveness to customer requests are some of the New York Stock Exchange (NYSE) trading floor. The the more everyday problems caused by human- latest monetary policy statement from the Federal technology mishaps. Others are more consequential: Reserve was due later that morning, and much of a programming error in June 2012 caused a lengthy the market was quiet ahead of the news. Then, in a outage of Royal Bank of Scotland (RBS) customers’ matter of seconds, a surge in trading volume started online access to their accounts, costing the bank an affecting stock prices. Violent swings of more than estimated £175m in compensation payments.3 10% within a five-minute period saw many stocks halted by the exchange’s circuit breakers. “Stocks When it comes to suffering material losses, they are moving all over the place,” noted one investor are not alone. Over one-third (37%) of the financial at the time; “it is weird, they are trading millions of industry executives surveyed for this report—who shares, 100 shares at a time; something went haywire include retail bankers, commercial bankers, insurers somewhere.”1 and others4—say that an automated decision made by a computer programme cost their organisation money The source of the chaos was Knight Capital Group, a at least once in the past six months. Nearly one in large trading firm that uses automated high-speed three (30%) report that such issues have resulted in a trading to buy and sell shares. The firm told clients it loss of customers. was dealing with a “technical issue” and was forced to turn away customers. It took just 45 minutes for the Industry executives are largely positive when asked glitch to wipe out much of the company’s capital base, about the present and future nature of human and causing a pre-tax loss of US$440m and forcing it to technology interaction in their firms, but many seek new funding to avoid bankruptcy.2 nevertheless voice concerns. For example, 43%—more than other sectors in our survey—feel that technology For many, the event was yet more evidence of an is complicating person-to-person communication over-reliance on technology in the financial markets. more than it is facilitating it. (The substantial It is also a dramatic manifestation of what occurs in increase in time spent using e-mail in the last three many parts of the financial sector, including banks years, reported by 45% of respondents, may be partly and insurers, when something goes wrong in the to blame for this.) And little more than one-quarter interaction between information technology and the believe that technology has freed up people’s time humans who operate it. Within banks, for example, to be more innovative. Disconnected systems (for missed payments, incorrect statements or inefficient example, between front and back-office functions), 3 “Cost of RBS IT glitch grows to £175 million”, Information Age, * This article is excerpted from a forthcoming Economist Intelligence Unit November 2nd 2012. report, Humans and machines: The role of people in technology-driven 4 The survey of 432 senior executives was conducted online in NovemberSponsored by: organisations. The report will be published on 5th March 2013 to coincide with the “Technology Frontiers 2013” summit, hosted by The Economist and December 2012. Of the 63 financial industry executives who took part, Events. Both the report and the summit are sponsored by Ricoh. roughly equal numbers hail from Europe, Asia-Pacific and the Americas. A majority of 55% hold C-suite or board positions, with the rest being other 1 “New York Stock Exchange’s ‘weird’ glitch causes volatility; some trading senior managers. Just under half of the financial industry firms in the survey halted”, Huffington Post Business, August 1st 2012. (48%) have annual revenue in excess of US$500m, with 11% having US$10bn 2 Knight Capital Group Press Release, August 2nd 2012. or more. 1 | © Economist Intelligence Unit 2013
  2. 2. HUMANS AND MACHINES The role of people in technology-driven organisations Have you encountered these situations in the past 6 months? (% of respondents from financial sector) An automated decision made by a computer An automated decision made by a computer programme has cost the organisation money programme has resulted in the loss of customers 6 5 11 5 Yes, several times Yes, 25 once or twice 32 No Don’t know/ Not applicable 57 59 Source: Economist Intelligence Unit survey, December 2012. and technologies evolving faster than the processes A matter of trust developed to use them, are seen as especially Retail banking was once a people-centric business significant challenges finance industry firms face in but has become increasingly automated. Systems dealing with technology. now make rapid decisions on numerous aspects of personal finance, such as whether customers qualify Trading, for example, was a very social, people-driven for a loan or a new credit card. Some start-ups within activity. “Whether it happens upstairs on trading the sector use this speed as a means of competing desks or on the floors of exchanges, there has always against slower, more traditional banks. For example, been human-to-human interaction,” explains Jose, a UK firm which provides short-term loans Marques, Deutsche Bank’s global head of equity online, not only promises loan decisions in less than electronic trading. But over the past ten years this has half an hour but will also deposit the funds within the changed dramatically. Today, 73% of all equity orders customer’s account in that time. (by volume) in the US and 40% in Europe are handled by high-frequency trading firms.5 One reason why online firms can automate the process of credit checking is that the nature of how Such speed and efficiency have opened up myriad applicants’ reputations are established and enhanced new strategies for traders to exploit, leading to an is fundamentally changing. Where credit managers explosion in market activity. But they have also have traditionally determined whether an individual given rise to the types of risks highlighted at the is creditworthy or not, a host of new variables are start of this article. In other parts of the sector, the now coming into play. These include information challenges that arise as technology advances at a aggregated and sold by online data brokers relating to rapid pace manifest themselves in different ways. customers’ purchasing activities on the web. eBureau, for example, a predictive analytics firm, gathers masses 5 “Regulators globally seek to curb supercomputer trading glitches”, Reuters, of data about consumers which it uses to calculate August 31st 2012. “e-scores” of some 20m people each month for banks, insurers and other financial services firms.6 Another❝ online firm, Movenbank, now even tracks consumers’ activity on various social media platforms as an element in determining their financial credibility.7Disconnected systems (for example, between front and According to Rick Robinson, an executive architect atback-office functions), and technologies evolving faster IBM, the importance of online trust and reputationthan the processes developed to use them, are seen as has risen rapidly in parallel with the growth of peer-especially significant challenges finance industry firms 6 “Secret e-scores chart consumers’ buying power”, New York Times,face in dealing with technology. 18 August 2012 7 “Is the world ready for social media credit scores”, The Financial Brand, 14 August 2012 2 | © Economist Intelligence Unit 2013
  3. 3. HUMANS AND MACHINES The role of people in technology-driven organisations help redress imbalances caused by rapid technology In which of the following activities has the role of human advances. Deutsche Bank, for instance, is developing imagination or intuition declined most rapidly in the past five years? a system to help visualise the logic being deployed (top responses; % of respondents from financial sector) within its automated trading systems. “Very few Inputting data people feel comfortable handing off a very large, 37 important trade to a machine when it’s not doing Managing risk 28 something entirely transparent to the human,” Interacting with customers 22 explains Mr Marques. Making strategic investment decisions 16 Developing new financial products/services 14 Machine processors and human processes Auditing financial results 12 In general, the positive impact of smart technology Making tactical investment decisions 12 on financial services is clearly evident in our study. Ensuring information security 12 Nine in ten executives surveyed for this report Evaluating employee performance emphatically deny that technology is usually the 12 single point of failure when things go wrong in their Ensuring regulatory compliance 10 organisations. Indeed, technology is typically at Source: Economist Intelligence Unit survey, December 2012. the heart of many of the innovations being made: 41% of financial sector respondents say their team’s to-peer activities, such as choosing to buy from a best innovations of the past three years could not stranger online. “There has been an evolution in have been delivered without it, and three in ten say both business models and technologies that aim to they could not even have been conceived without provide trust within that online context,” says Mr technology. About eight in ten (78%) say it makes Robinson. “Take the peer-to-peer personal loans them more productive, while three-quarters deny market. There are traditional banking processes to that technology is making it more difficult to be give loan providers a reason to trust that their money imaginative and creative in their work. is reasonably safe. But there are also things like reputation systems, which use online networks to The caveat to this optimism is that the vast majority see who applicants are friends with and how they’re of those we spoke to believe that human-technology connected, all of which provide additional reasons to interaction will only add value if humans are more trust [or not to trust] the applicant.” creative with the processes developed to connect the two. Ultimately such innovation should lead to As is often the case in the financial industry, such machines and humans working in symphony, but at technology-based services are developing much the moment a large minority (40%) are not confident faster than the rules governing them, resulting in new that the difficulties involved in human-technology risks. When an online credit scoring agency gets it interaction will all be ironed out. It is yet another wrong, the lender may not have much recourse when a reminder that, in as transaction-intensive an loan goes bad. (By the same token, borrowers can find industry as financial services, technology will only it difficult to repair one’s reputation.) Fortunately, be as good as the processes that people develop to technology is also allowing third parties to step in and guide it. help borrowers and lenders retain some control over these processes. Services such as can A case in point is how banks are beginning to use help borrowers, for example, to take better control of artificial intelligence to gain a better understanding their online profiles. of customers. BBVA Compass, a retail bank, uses web ‘robots’ to scour the Internet for paragraphs Back in the trading sector, banks themselves are and sentences relating to the bank and its major developing process improvements and risk controls to competitors. The process, known as sentiment analysis, interprets what it finds to give decision-❝ makers insights that would take traditional focus groups and surveys months to uncover. To properly benefit from this technology banks have“Very few people feel comfortable handing off a very to change the way they work, in particular re-thinkinglarge, important trade to a machine when it’s not doing their traditional sales, marketing and product development processes. The norm has been a gradualsomething entirely transparent to the human.” and linear process of research, followed by productJose Marques, global head of equity electronic trading, Deutsche Bank development, then annual sales and marketing planning. Today banks like BBVA Compass operate 3 | © Economist Intelligence Unit 2013
  4. 4. HUMANS AND MACHINES The role of people in technology-driven organisations in a more dynamic, fluid and adaptive environment. portfolio company. They have a conversation, and the They can respond in days to new trends, customer firm’s management disclose the information that they concerns and the competition; bad decisions are legally allowed to disclose. But there are additional can be immediately identified and reversed, and data in that conversation, in the body language or opportunities can be taken faster than ever before. the inflection of the voice, which cannot be captured Without this shift in approach and processes, daily within a quarterly filing or the annual accounts.” web sentiment analysis has limited value. Free to think creatively and brainstorm, humans Still a place for the human touch can add value by shaping and optimising whatever Beyond making changes to business processes, technology is helping to enable. “At the end of the there is still a vital role to be played by humans in day,” believes Mr Marques, “we’ll end up in a place this sphere. Gauging the feelings and emotions of where man and machine are working together as an customers from what they write on the Internet is integrated system to achieve far better outcomes a massive challenge for machines. Here as in loan than we can today.” approvals and credit checking, while the technologies continue to develop from infancy, the information Technology has revolutionised many aspects of how gathered and interpreted by people—such as branch banks and other financial institutions deal with their staff talking face-to-face with customers—will remain customers, and has likewise enabled enormous leaps vital in banking for the foreseeable future. in their operating efficiency. But as the examples in this article suggest, technology change in this This is also the case in the investment sector. Says industry is likely to continue at a relentless pace. The Deutsche Bank’s Mr Marques: “One of the things we risk of sacrificing a degree of human imagination and miss when we are automating social human processes intuition at the altar of technological progress will is subtlety. In constructing an asset portfolio, an thus remain ever present. In finance as everywhere analyst might meet with the senior management of a else, that would be an irretrievable loss. About the sponsor Whilst every effort has been taken to verify the accuracy Ricoh provides technology and services that can help of this information, neither The Economist Intelligence organisations worldwide to optimise business document Unit Ltd. nor the sponsor of this report can accept any processes. Offerings include managed document services, responsibility or liability for reliance by any person on production printing, office solutions and IT services. this white paper or any of the information, opinions or conclusions set out in the white paper. London New York Hong Kong GenevaImage: © 20 Cabot Square 750 Third Avenue 6001, Central Plaza Boulevard des London 5th Floor 18 Harbour Road Tranchées 16 E14 4QW New York, NY 10017 Wanchai 1206 Geneva United Kingdom United States Hong Kong Switzerland Tel: (44.20) 7576 8000 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Tel: (41) 22 566 2470 Fax: (44.20) 7576 8476 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 Fax: (41) 22 346 93 47 E-mail: E-mail: E-mail: E-mail: 4 | © Economist Intelligence Unit 2013