The Weekly Extract from Extractable is a condensed roundup of digital experience news for financial services institutions, and our take from San Francisco.
This week, we look at Artificial Intelligence (AI) as a driver of digital transformation and innovation for companies. We also examine the race between the US and China in AI and —innovation in general. We close out with a look at Chinese fintech.
AI — and your Digital Business Strategy
There has been much talk about the impact of COVID on innovation, not just in healthcare and medicine, but in underlying technologies such as Artificial Intelligence. In an article in Forbes, Chetan Dube, founder and CEO of IPSoft writes “Now, CEOs are starting to recognize that they need to go deeper into digital to drive productivity and want to do so with less risk and less exposure. In the new paradigm, quality of outcomes is more important than ever, especially when it comes to maintaining or improving customer service”.
Dube notes, “The next wave of innovation, or what Gartner has called the ‘algorithm economy,” was always on the way, but the pandemic has turned a marathon into a sprint.” Dube then outlines the actions organizations should take to combine AI with humans; such as investing in needs, augmenting team members, and focusing on customers.
Adoption of AI in financial services continues to grow — acting as the leading technology driving digital transformation for some organizations. In an article in The Economist, Edel McCormack lists “cognitive computing” as one of four technologies that are disrupting financial services. AI performs tasks including “predicting default rates on loans, calculating insurance premiums and ensuring compliance with industry regulations.” She also highlights roboadvisors, “chatbots,” and robotic process automation (RPA) as real-life uses of AI in the industry.
We agree with Dube’s closing argument that innovation driven by AI needs to be part of a digital business strategy:
“only a clear blueprint and strategic investments in AI will allow businesses to keep up with the unexpected and sustain beyond the pandemic-recession. The global pandemic may have turbocharged the need to abandon business as usual, but organizations still need a clear map of the journey forward to avoid running off the road.”
As we work with our clients to build their roadmaps, AI-enabled capabilities continue to dominate the discussions, particularly around better use of data to drive the business and to improve the customer experience.
U.S. Lags in the Battle for AI Supremacy
On a macro level, it seems that the US is losing its edge in innovation. As noted by Ilan Gur CEO at Activate in an article in the MIT Technology Review writes,“The US government spends hundreds of billions of dollars every year — more than any other government in the world — to stay at the cutting edge of science and technology. And yet when an incredibly predictable crisis hit, we were caught completely flat-footed.”
Gur discussed how the R&D infrastructure built by the US following World War II hasn’t been updated:
“We succeeded in building the most powerful infrastructure for academic research in the world but act as though that’s still the only priority. Meanwhile, our capacity for turning scientific advances into practical solutions has withered.”
The results of this losing edge are apparent when it comes to artificial intelligencce. While the US still has powerful organizations working on AI, many technologists are seeing China leading the way going forward. Michael Auslin of Stanford University, notes in an article for The National Interest that the issue is more fundamental than merely having more people working on AI. Auslin writes: “forget about ‘AI’ itself. It’s all about the math, and America is failing to train enough citizens in the right kinds of mathematics to remain dominant.”
Auslin adds, “take deep neural networks, which have understandably become a CIO/CTO buzzword, as an example. These are not artificial brains. They are stacks of information-transforming modules that ‘learn’ by repeatedly computing a chain of what are known as gradients (something rarely taught in high school calculus), which are the backbone of a family of algorithms known as backpropagation.”
The problem has become more acute as the US government has begun to restrict the immigration of foreign nationals that study these fields.
“America’s self-inflicted math wounds matter because the Chinese Communist Party has made global AI dominance a national goal by 2030 and is leveraging its resources to make it so. Indeed, the world now sees the battle over AI as a battle between China and the United States.”
Carl Benedikt Frey and Michael Osborne from the University of Oxford wrote in a recent article in Foreign Affairs that China still lacks the edge on innovation and is therefore less likely to overtake the United States. Richard Turrin, the author of the best-selling “Innovation Lab Excellence” and soon to be published “China’s Digital Currency Revolution”, counters in an interview with CGTN:
“Here’s what I tell anyone in the United States or the West who comes up with a statement like this. Go ahead, look at Google, Amazon and Facebook today, and look at a screen capture of what they looked like 10 years ago, and you’ll see that they’re very similar. But if you look at how Alibaba, WeChat and Baidu have transformed in a decade – the advancement of these apps to become super apps, to do far more than they once did – is simply remarkable. They have surpassed the Western internet companies. So, anybody who comes out with a statement like that, I know, has never really used any of these apps and obviously never lived in China.”
Turrin makes the point that leading in AI isn’t simply an academic exercise for China. “People in China use AI routinely on WeChat and Alipay platforms for instance. We use it on so many different platforms that it has become part of our normal lives. The lead that China has, not just in patents but also in actual implementation, which means the use of AI systems, is really impressive and shows the level of innovation that China is able to push forward.”
Lessons from Fintech in China
For those of us in Financial Services, keeping an eye on the large Fintech firms from China is of particular importance. Take Alibaba’s Ant Financial. In many major US cities, it is common to see the Ant Financial’s Alipay logo at the point-of-sale along with the more familiar Visa, MasterCard, and American Express monikers.
As noted by an interview in Jin Daily, with Ant Financial’s Joanie Xie, “The most important area (for Ant Financial) is extending the Alipay online solutions for US businesses.” She notes, “We offer different, complementary solutions to retailers. The payment system is a bridge — Alipay makes it easier and more attractive to buyers online. Alipay also has incredible marketing opportunities: We have an app and platforms that generate great insights that effectively reach consumers in China. Additionally, we have a financing tool that allows users to buy now but pay later, like a virtual credit card. This makes shoppers more comfortable converting payments, and merchants don’t have to take on risks.”
Turrin adds: “Financial technology is not only the area that I work in, but it is probably one of the better examples of innovative technology because no one in the world has gone essentially cash free, as we have in China. China has two major apps – WeChat pay and Alipay. And we live in essentially a cash free world. The West looks at science fiction movies to get that cashless dream, whereas China has attained that.”
“In China, nearly 70% of the payments that Citigroup handles for customers are done through AliPay, the payments business spawned by Alibaba.”
A few weeks ago, we wrote about central bank digital currencies (CBDC). This is another area where China is taking the lead.
In an article in OMFIF, Katie-Ann Wilson writes “in the 11th century, China was the first to issue banknotes and develop the concept of legal tender. Now, it is one of the first countries to develop a central bank digital currency that can be used for all retail payments.”
Concerns for the disintermediation of banks, as noted in our article, seems to be addressed in the current scheme. China’s central bank “will adopt a two-tier model, issuing and redeeming its CBDC via commercial banks, payment services and telecoms. Commercial banks will then distribute it to the public and retail sector. This two-tier model distinguishes itself from the more contentious one-tier model, where consumers would have their own account at the central bank and receive CBDC directly. A two-tier set up ensures that commercial banks can still offer financial services to their customers.”
Turrin adds, “I grew up in the U.S. during the space race when the U.S. had the same realization, that science and technology were critical. We need it for both national interests and to develop the country. It is the same level of government acknowledgment in China today that digital is important, and it is a very important part of our future.”
We at Extractable agree that we need to continue to look to China, at both macro and micro levels, to understand possible sources of competition — and perhaps inspiration for our own digital transformation journeys.