Automation in Finance: The Fourth Industrial Revolution

“I visualise a time when we will be to robots what dogs are to humans, and I’m rooting for the machines.” said by Claude Shannon, an American Mathematician also known as Father of Information Theory. New technologies are disrupting society and organizations at a rapid pace. Technologies like artificial intelligence (AI), blockchain, 3D printing, nanotechnology, and many more are growing exponentially instead of linearly. 

This article explores the impact of automation in the finance industry, specifically focusing on the Fourth Industrial Revolution. With the rapid advancement of technology and the integration of artificial intelligence, machine learning, and robotics, finance is undergoing a transformative change. This paper analyses the benefits, challenges, and implications of automation in various aspects of finance, including trading, risk management, customer service, and decision-making processes. It also examines the potential future developments and the role of human professionals in this automated landscape.

Financial automation is the process of using technology to complete financial tasks, so you need less manual labour, resulting in cheaper and more efficient financial processes. Ideally, automating these financial processes frees up time for employees to spend on more complex tasks.

The Fourth Industrial Revolution refers to the ongoing transformation of industries through the integration of advanced technologies, such as artificial intelligence (AI), machine learning (ML), robotics, and the Internet of Things (IoT).

Technologies are converging; they are interacting with each other. This means advancements in AI create new opportunities with other technologies, for example, Virtual Reality. The same applies to 3D printing, nanotechnology, biotechnology, drones, robotics, and many more. The combination of both, the exponential growth of a respective technology, and the converging acceleration make technologies and their implications for the future extremely difficult to predict. But considering the current development, exponential technologies are on the verge of completely reshaping society and the way how we do business in the future.

 The world-changing effect of technological growth becomes more evident when we look at predictions made by futurist Ray Kurzweil, who is a director of engineering at Google. According to him by 2030 AI will, for the first time in human history, achieve human levels of intelligence. 15 years later, by 2045, Ray Kurzweil believes that we have reached the singularity. This means the capabilities and intelligence of AI will surpass the intelligence of humans, and machines become smarter than human beings. Kurzweil’s predictions continue with possible scenarios like uploading our brain to the cloud, merging our intelligence with AI, or enhancing our memory artificially. One example of this exponential growth can be seen with AI. The computational speed of AI is doubling approximately every 3.4 months according to Stanford’s University AI index.

The Benefits of Automation in Finance:

Enhanced efficiency and speed:

Earlier we used to call the stock brokers  in order to buy or sell shares/ stocks in the Stock market, which was a very time consuming process , And now we could just buy , sell or whatever we want to do in stocks in our fingertips within fraction of Seconds. Therefore,

Automation enables faster and more accurate execution of tasks, such as transaction processing, data analysis, and reporting, leading to increased operational efficiency.

Reduction of errors and risks:

We encounter with lot of accounting software’s during our audit procedures including Tally, Zoho, Quick Books etc. And in each one of them the trial balance will always be tallied. Software doesn’t give an unbalanced or Untallied Trial Balance, But the real struggle is when we try to tally our Balance Sheets in the Exam. Therefore,

By minimizing manual intervention, automation helps reduce human errors and mitigates risks associated with data entry, compliance, and regulatory requirements.

Cost savings and increased profitability:

Hiring one Employee incurs so much of expenses for the company, His Salary, Training, Travel Allowance, Laptop Allowance etc. That’s a huge amount right. In contrast purchasing a software incurs less expenses compared to the same. Please note, I am only talking about employees, we articles are work for 1500 per month, which is less than the AMC of the software.

Automation can lead to cost savings through reduced labour expenses and improved resource allocation, ultimately contributing to increased profitability.

Improved decision-making through data analytics:

Suppose think of a hypothetical situation where we have to find the Present Value of let’s say 1000 Investment Plan giving Cash flows in different years at different discounting rate and We have to comment whether the Investment Plan is beneficial or Not, If we try to solve the same manually, By the Time we finish Solving The company will get into Liquidation. So, automation facilitates the collection, analysis, and interpretation of vast amounts of financial data, enabling more informed and data-driven decision-making processes.

The positive impact on organizational performance has been confirmed by several studies. McKinsey found in their survey of 2,400 business executives a significant increase in revenue and decrease in costs due to the adoption of AI. Another study summarized the benefits of AI adoption across various industries in their research paper. The experienced benefits for companies range from increased speed in transactions in financial service organizations, improving personalization and customization in e-commerce, elimination of faulty processes in the automobile sector, reduction of decision-making time in the transport and logistics industry, to the automatic analysis of social media posts.

Automation in finance offers numerous benefits. It enhances efficiency and speed, reducing errors and risks associated with manual processes. This, in turn, leads to cost savings and increased profitability for financial institutions. Additionally, automation enables data analytics, providing valuable insights for improved decision-making.

Automation in Trading and Investment:

Algorithmic trading and high-frequency trading:

Algorithmic trading also called Automated Trading, Black- Box Trading or Algo- Trading uses a computer program that follows a defined set of instructions or Algorithms to Place a trade.

The Trade, in theory, can generate profits at a speed and frequency that is impossible for a human trader.

The defined set of instructions are based on timing, Price, quantity, or any mathematical model.

For Example: PPT

Using These two simple instructions, a computer program will automatically monitor the stock price and place the buy and sell orders when the defined conditions are met. The trader no longer needs to monitor live prices and graphs or put in the orders manually. The Algorithmic trading system does this automatically by correctly identifying the trading opportunity.

Robo-advisors and automated portfolio management:

Robo–advisors are a class of financial advisors that provide financial advice and investment management online with moderate to minimal human intervention. They Provide digital financial advice based on mathematical rules or algorithms. Therefore,

 Robo-advisors leverage automation to provide personalized investment advice, asset allocation, and portfolio management services, making investment accessible and cost-effective for individual investors.

 It’s entering the investment management space; we are now seeing its potential beginning to emerge from Siri and Alexa to Amazon and IBM’s Watson. Computer Programs driven by artificial Intelligence draw on massive amount of Data to solve Intractable Problems

Therefore, machine learning is employed to analyse market trends, predict asset prices, and enhance investment research, aiding financial professionals in making informed investment decisions.

Automation in Risk Management:

Fraud detection and prevention: Automation tools, powered by AI and ML, enable real-time monitoring and analysis of transactions, patterns, and behaviours, aiding in the detection and prevention of fraudulent activities.

It’s Shocking, But it’s true! According to McAfee’s Latest Report, Cybercrime Presently damages the global economy by $600 Billion, or 0.8 Percent of Global GDP. Fraud is Becoming a more and more serious threat to banks and their consumers, costing billions of dollars each year. Scams Including False Invoices, CEO fraud, and Business Email Compromise etc. Here Comes the Significance of AI. When Fraud is suspected, AI models may be used to reject transactions altogether or flag them for further investigation, as well as rate the likelihood of fraud, allowing investigators to focus their efforts on the most promising instances.

Fraud Detection is a very vast Topic, I could speak a whole session on that, but due to time constraints, I will just say a popular story of a programmer who diverted fractions of a Rupee from every transaction in a bank to another account. That is, If I was going to receive ₹ 100.17 as Interest income from bank, the Programmer diverted the ₹ 0.17 to his account. Nobody cares if they don’t get ₹ 0.1. But imagine a bank having billions of transactions. It only worked the first time in 1970s. Now Controls in any competent financial organization will detect any unusual activity to accounts that historically don’t receive any or such abnormal activity.

Real-time monitoring and compliance:

Automation helps financial institutions monitor transactions, identify suspicious activities, and ensure compliance with regulatory requirements, reducing the risk of non-compliance and penalties.

Stress testing and scenario analysis:

Stress testing is a forward – looking risk management tool for evaluating the potential impact of both unexpected events and changes in a firm’s financial variables – including capital, asset quality and profitability. It incorporates risk into planning by providing the “what if” scenarios for the strategic and capital planning Process. i.e., What if this risk arises, how to mitigate the same, whether the company have adequate risk capacities i.e., capital or earnings To mitigate with the Risk Exposure i.e., Credit Market, Operational Etc.

Since the 2008-09 financial crisis, with the help of severely adverse scenarios and other stress tests, Banks have significantly increased their capital buffers relative to risk – weighted assets. The financial system, moreover, now seems much better prepared to withstand a severe shock.

Therefore,

 Automation allows for the creation of sophisticated models to conduct stress tests and scenario analysis, assessing the impact of potential market fluctuations and identifying vulnerabilities in the financial system.

Automation in Customer Service:

Chatbots and virtual assistants: Automated chatbots and virtual assistants provide instant customer support, answering common queries, assisting with transactions, and enhancing customer engagement.

Everyone would be familiar with the company Chegg.

Chegg is known for providing online tutoring, textbook rentals, and homework help services to millions of students around the world. However, with the emergence of AI technologies, the company is now facing an uphill battle to maintain its relevance in the market. Chegg's downfall can be attributed to several factors, including the company's inability to keep up with the rapid pace of technological innovation. Chegg's tutoring services are based on human expertise, which can be costly and time-consuming to scale. In contrast, AI-powered platforms like ChatGPT are scalable and can provide instant answers to millions of students worldwide. Even I used to earn money by answering questions in Chegg. But right now, there are no more questions since students are preferring artificial intelligence more than human intelligence.

Personalized customer experiences: Automation enables the customization of customer experiences by leveraging data analytics to offer tailored recommendations, personalized offers, and proactive services.

Have you noticed after you search for a dress in Myntra or Flipkart or in any other platform, you will be able to notice numerous advertisements showing that dress in all our social media accounts. If you check my social media account right now in my phone, you can see many ads for the suit that I have been looking to buy for this conference.

Streamlined account management:

 Automation simplifies account management processes, such as onboarding, KYC (Know Your Customer) procedures, and account maintenance, enhancing customer convenience and reducing administrative burdens.

Challenges and Ethical Considerations:

Job displacement and reskilling: Automation may lead to job displacement, requiring a focus on reskilling and upskilling the workforce to adapt to the changing roles and responsibilities.

Not all people share the excitement of organizations about the adoption of technology. Employees are concerned about the effect technological adoption has on their job. In a recent study conducted by the European Commission, 74% of respondents mentioned that they expect a loss of jobs due to AI and robotics. Around 40 % of the respondents believe that their job might be done by technology in the future. And the concerns of the respondents are not without any reason. A conducted study among 104 managers in companies around the world about the state of humans in 2020 showcased 30% of the managers believe that businesses in the future will be run almost entirely by AI. Even though the study is not representative of the global world it gives us an indication of where the future might lead us. On top of that, the McKinsey Global Institute published a report about workforce transitions in times of automation. They explored how AI and automation impact the global workforce. Depending on the speed of adoption of automation and technology they found that by 2030 some 800 million people might be displaced by the adoption of technical automations

Data privacy and security:

 The increased reliance on automation raises concerns about data privacy, requiring robust security measures and adherence to regulatory guidelines to protect sensitive financial information.

Bias and fairness in automated decision-making:

It is crucial to address biases embedded in algorithms and ensure fair and unbiased automated decision-making processes, particularly in areas like loan approvals, underwriting, and credit scoring.

It is interested to note that Vijay Nallay gets 9000 crores loan with seconds while normal citizens require 100’s of papers & Securities for an approval of 1 lakhs Rupees loan.

The Role of Human Professionals in an Automated Finance Industry:

Shifting skill sets and job roles: Automation reshapes job roles, necessitating the development of new skills, such as data analysis, programming, and strategic thinking, to complement the capabilities of automated systems.

Collaboration between humans and machines: The future of finance lies in human-machine collaboration, where humans leverage their expertise, judgment, and creativity, while machines provide data processing, analysis, and automation capabilities.

Importance of ethics, judgment, and creativity: Human professionals play a vital role in ensuring ethical decision-making, exercising judgment in complex situations, and applying creative thinking to tackle emerging challenges.

Future Directions and Implications:

Blockchain technology and smart contracts:

Over the past few years, you have consistently heard the term ‘Block Chain Technology’ probably regarding Cryptocurrencies like Bitcoin. We have already heard and learned enough about block chain. So, I am not going to dig deep into the blockchain concept, I will just give a brief overview. Block chain is a method of recording information that makes It impossible or difficult for the system to be changed, hacked or manipulated.

Blockchain technology, coupled with automation, has the potential to revolutionize financial transactions, facilitate secure and transparent data sharing, and streamline processes through smart contracts.

Central bank digital currencies (CBDCs):

CBDCs are a form of digital currency issued by a country’s central bank. They are similar to cryptocurrencies, except that their value is fixed by the central bank and equivalent to the country’s Fiat Currency.

Now we have to understand what is fiat Currency, Fiat Money is a government issued currency that is not backed by a physical commodity such as gold or silver, but rather by the government that issued it.

Therefore, the emergence of CBDCs presents opportunities for automation in payment systems, remittances, and monetary policy implementation, transforming the financial landscape.

Regulatory frameworks for automated finance:

As automation continues to evolve, establishing regulatory frameworks becomes crucial to address issues related to accountability, transparency, and consumer protection.

Technology is omnipresent in our lives. We are talking to virtual assistants to place orders online or control the lights in our smart home. We utilize our personal computer, the smartphone in our pockets wherever we go, giving us access to an abundance of applications to make our life easier. There is no question that technology is fully embedded in our daily life. And technology is not only omnipresent in our private life. With the fourth industrial revolution on its’ way, digital transformation has become a key focus in recent years among businesses and upper management. Companies started to explore new technologies such as blockchain, augmented reality, virtual reality, AI, or wearable devices. Furthermore, they began to invest in the field of the internet of things, cloud infrastructure, machine learning, and advanced analytics. Leveraging these technologies is imperative to maintain competitiveness. It does not only allow businesses to optimize existing processes and make them more efficient. It can increase organizational performance and provide new ways to create and deliver value to customers. Embracing automation as a catalyst for innovation is crucial in the finance industry.

There is no right or wrong, good or bad, left or right when it comes to the topic of Artificial Intelligence. What we know is that it is growing and improving at an exponential rate and that there is a high probability of machines eventually outperforming humans. In which way, this will go? Nobody knows. It is barely predictable, and we, as human beings can be excited about the future and the many innovations to come. Afterall, “The key to artificial intelligence has always been the representation.”