The impact of generative AI on banking business models is likely to be minimal. While it may not fundamentally undermine the basic business model of banks, it will require changes in how banks execute and implement that model.
In his recent report, Generative AI: It’s Here, and It Defies Static Definition, Christopher Miller, Lead Analyst of Emerging Payments at Javelin Strategy & Research, explores this further.
“The fundamental business model of banks is to borrow short and lend long,” Miller said. “Essentially, banks create a house of cards that’s based on the concept that not everybody wants their money all the time. So, they can take some of that money, and lend it to other people, profiting off the interest.”
However, if that changes—and everybody wants their money all the time—banks will need to differentiate themselves by offering higher interest rates or cutting costs. To achieve greater efficiency, banks may need to integrate generative AI into their operations, but this can be challenging and may require restructuring of workflows and tasks. The process is nonlinear and may not result in immediate gains.
Overall, generative AI creates pressure for banks to become more efficient, but there are many reasons why they may not be able to do so right away. Using technology to automate tasks can streamline processes for banks, but it’s not easy. Each job has many tasks, and automating one task at a time doesn’t necessarily mean they can cut jobs right away. Organizations need to reorganize the work and assign tasks differently to see the benefits—an on many occasions—they’re faced with unexpected challenges that further delay their plans.
“For any given institution, it’s generally very hard to harvest the savings that come from automation,” Miller said. “That’s because most people’s jobs consist of many tasks, and you only automate one task at a time. And just because I automate one onboarding flow doesn’t mean that I can just cut the whole call center, right?”
Learn more about how financial institutions and fintechs can position themselves wisely to take advantage of Generative AI.