The Robots Are Coming!

by Andres Oppenheimer

  BRANCHES WILL DISAPPEAR MORE SLOWLY IN LATIN AMERICA AND INDIA

  The decline in physical bank branches won’t be taking place at the same rate in all countries. According to Citi’s “Digital Disruption” report, while the number of banks and bank employees will continue to fall in developed countries like the United States, Japan, Germany, and South Korea, that won’t happen in emerging nations, where a large part of the population still remains outside the banking system. “We agree with Antony Jenkins’ comment that the number of branches could well halve over the next decade—however, while we believe that this will be the case in some European markets, it would be overly simplistic to assume a reduction of branches globally at the same rate because of regional differences in customer digital acceptance and demographic mix,” the report says. “In an emerging market where retail banking penetration is low, branches will continue to grow—for example, in India.”

  The report also shows that, while the number of bank employees fell in both the United States and Europe, the number in Latin America is actually up: between 2009 and 2014, it increased from 690,000 to 1 million. But it won’t be long before the penetration rate of Latin American banks reaches the levels of more developed countries, and there will be no need to add more physical branches. In the next decade—and perhaps even before that—the number of Latin Americans with a bank account will soar, as will the percentage of those who will interact with their banks online. It’s inevitable, and it’s already happening in some of the region’s more developed countries. In late 2017, Banco Falabella of Chile opened its first digital financial center—or virtual branch—in Santiago, the Chilean capital. The branch has only one human assistant to teach clients how to manage their accounts online or from the convenience of their smartphone or home computer. The experiment worked so well that the bank’s CEO, Gastón Bottazzini, said he was planning to open seven more virtual branches by the end of 2018.

  Bank branches probably won’t disappear altogether, but they will transition into financial advice centers, with many fewer employees. Physically they’ll look more like living rooms, with works of art on the walls and comfortable sofas where customers can sit and have a coffee with a consultant instead of standing in line to wait for their turn with a teller at the counter. Or they may be just kiosks, in supermarkets or other stores, where people can withdraw cash, deposit checks, or speak with an adviser by video conference. Banks will no longer need to handle transactions and accounting work in house, because all of these sorts of things will be automated.

  “Roughly 60 to 70 percent of retail banking employees are doing manual processing driven jobs,” says Jonathan Larsen, Citi’s former global head of retail and mortgages. “If all the current manual processing can be replaced by automation, these jobs can disappear or evolve.” Banks will have to shrink because “branches and associated staff costs make up about 65 percent of the total retail cost base of a larger bank and a lot of these costs can be removed via automation,” he says. Processing jobs will be cut not only because virtually all transactions will be carried out electronically, but also because physical money, checks, and credit cards will increasingly be replaced by new forms of virtual payment. In fact, most of Europe’s Nordic countries have already become cash-free societies.

  THE END OF CASH

  In Sweden, checks have disappeared since about a decade ago, having been almost entirely replaced by electronic payment systems. Ask a Swede to write you a check, and he will stare at you in bewilderment. Bills and coins now represent just 2 percent of all money exchanging hands in Sweden, compared with 7.7 percent in the United States and an average of 10 percent across all of Europe. Most Swedish kids have never even seen a check, because they have grown up buying things with debit cards and—increasingly—with their cell phones. There is so little cash that even the homeless now have cell phone apps to accept money on the streets.

  And what’s even stranger is the fact that more than half of all major bank branches in Sweden no longer accept cash deposits, because the overall amounts are so small that it’s just not worth for them to pay for security services. Many are also eliminating ATMs, which are attracting more dust than customers. This same trend is taking place across Denmark, Norway, and the Netherlands, which are rapidly becoming cashless societies.

  In 2015, the government of Denmark proposed allowing restaurants, clothing stores, and other retail establishments to stop accepting cash payments as part of a package of measures designed to help small businesses cut their monitoring and processing fees and to allow for better tax accountability. The proposal, which called for eliminating cash completely by 2030, was not passed by the Danish Parliament because of domestic political disputes. But the banks are supporting it to save processing costs, and experts believe it will eventually become law.

  Anette Broløs, the president of the Fintech Innovation and Research Centre in Copenhagen, told me she expects cash to completely vanish from her country in the next ten years. When I asked her about the advantages of a society’s being cashless, she replied that it would save a lot of money. “Cash isn’t necessarily expensive for the individual consumer, but it is for society as a whole. It’s expensive to print, to redesign, and to transport, and moving it every day from one place to another produces a lot of toxic gas emissions,” she told me. Why incur all these costs if fewer people are using it than ever? she asked.

  IN DENMARK, BANK ROBBERS ARE LEAVING EMPTY-HANDED

  Banks in Denmark now handle so little cash that even criminals have lost interest in robbing them. The Danish Bankers Association issued a press release in February 2016 stating that “for the fifth year in a row, banks have experienced a fall in the number of bank robberies. The number has fallen from 21 bank robberies in 2014 to 14 bank robberies in 2015.” The statement added, a bit pompously, that “the Danish Bankers Association is very pleased with this development.”

  Intrigued by this news, I called up Michael Busk-Jepsen, executive director of the Danish Bankers Association, and asked him why bank robberies are on the decline. He confirmed that thieves no longer bother robbing banks because banks no longer have much cash. “We’ve had cases where the robbers found so little cash that they basically left empty-handed,” he told me matter-of-factly. “Business has really fallen off for back robbers these days.” Supporters of gradually eliminating cash also point out that it would also be a great idea for developing nations because it would help them put an end to tax evasion, corruption, and the underground economy. Indeed, in a cashless society, it will be much more difficult to bribe an elected official or to do business off the books. The question in emerging economies, for the time being, will be how to eliminate cash without further marginalizing large numbers of poor people who don’t have smartphones or access to online banking.

  THE NEW VIRTUAL BANKS

  In the United States, virtual banks like Schwab.com, Betterment.com, Nutmeg.com, Wealthfront.com, and Robinhood.com are capturing deposits from growing numbers of young people who don’t want to pay the relatively high administration fees charged by traditional banks, which have to pay for rents and customer service employees. Most virtual banks have practically no overhead—they operate with only a few managers supported by algorithms—and can afford to manage investments charging a commission of only 0.25 percent per year, which is considerably less than the average 1 percent charged by brick-and-mortar banks. And they boast of having algorithms that are as sophisticated as, if not more sophisticated than, physical banks. By 2016, virtual banks and their robo-advisers were already managing around $20 billion in assets. That’s still just a fraction of the market when compared with the trillions of dollars managed by traditional banks, but with the growing popularity of online banking among young adults, it seems likely to grow rapidly. According to McKinsey, they could be handling as much as $13.5 trillion in assets within just a few years.

  Will robo-advisers make human financial a
dvisers obsolete? According to Citi’s analysis, the need for financial analysts will decrease in the coming years but won’t disappear entirely. While artificial intelligence will make financial advice much cheaper, there will be more people out there wanting to receive it and able to afford it. Millions of people who didn’t have access to investment banks will now have such access, while upscale customers will continue to get more specialized advice from humans, Citi says.

  “We see the advent of robo-advice as an example of automation improving the productivity of traditional investment advisers, and not a situation where there is significant risk of job substitution,” the study says. It estimates that while the number of personal financial advisers doubled in the United States between 2000 and 2010, it is expected to increase by only 27 percent from 2012 to 2022. “Higher net worth or more sophisticated investors will, in our view, always demand face-to-face advice. However, we believe the services offered by advisers have the potential to be augmented by virtual and robo-advice tools, increasing individual adviser productivity, and ability to service more clients, or in more user-friendly and/or sophisticated ways,” it concludes. But, as we will see, this bank’s predictions may be overly optimistic.

  THE AUTOMATION OF BIG BANKS

  In response to the threat posed by online banking—and the expected entry of giant nonbank players, such as Amazon, into the banking industry—large investment banks like Goldman Sachs and JPMorgan Chase are stealing from their rivals’ playbook and offering increasingly more of their services online. As Jamie Dimon, CEO of JPMorgan, has noted, “Silicon Valley is coming. There are hundreds of start-ups with a lot of brains and money working on various alternatives to traditional banking.” To confront this challenge, JPMorgan Chase and other banks began buying up financial technology companies and using their algorithms to increasingly replace human analysts. So much so that Goldman Sachs CEO Lloyd Blankfein, talking about the future of his firm, calls Goldman Sachs “a tech company.”

  Instead of hiring more young people with economics or finance degrees, Goldman Sachs began looking for engineers and programmers. In 2015, the company had roughly 33,000 employees, of whom 9,000 were engineers and programmers. Ironically, Goldman Sachs already had more engineers and programmers than either Facebook or Twitter. Goldman Sachs had acquired in 2014 part of a firm called Kensho Technologies, whose algorithms could in a matter of seconds make financial calculations and projections that previously took hundreds of human analysts hours—if not days—to compile.

  Before becoming Kensho’s largest investor, Goldman Sachs’s human analysts used to eagerly wait for the U.S. Bureau of Labor Statistics to release its monthly employment report. It is one of the primary tools for measuring the state of the economy both in the United States and around the world, and it’s released on the first Friday of every month at 8:30 A.M. As soon as the statistics were released, an army of analysts calculated their impact on the economy, and based on those numbers, they made their recommendations to investors. But now Kensho’s algorithm can run those same numbers in minutes. By 8:32 that same morning, Kensho has already analyzed the information, produced a brief synopsis, and offered thirteen forecasts on how the new statistics would affect various types of investments, based on how the market had behaved in the past under similar conditions. And by 8:35 in the morning, after cross-checking the information with dozens of other databases, Kensho has placed its recommendations up on the computer screens of Goldman Sachs analysts so they can be immediately passed along to their clients. Overnight, the robots have become major players on Wall Street.

  ALGORITHMS THAT REPLACE BANKERS

  Kensho’s founder, thirty-two-year-old Daniel Nadler, came up with the name for his company after a trip to Japan one summer while working on his Ph.D. in economics at Harvard. He dabbled in meditation and learned the word kensho, which is the term for one of the first states of awareness in the Zen Buddhist progression. Less than two years after selling his tech company to Goldman Sachs, Nadler was already openly admitting fears that his algorithms would put an end to a number of Wall Street banking jobs.

  In an interview with The New York Times, Nadler predicted that within the next decade, between a third and a half of financial sector workers would lose their jobs because of Kensho and other algorithms. It will be part of a continuing trend, he said. First to go were the administrative assistants, who became redundant when stock tickers and trading tickets became automated, Nadler explained. Then came the financial researchers and analysts, forced out by software that could process much more data in much less time. In the coming few years, many of the bankers who deal directly with clients will be gone because more sophisticated and customer-friendly websites will allow clients to do most of their investing online. “I’m assuming that the majority of those people over a five- to ten-year horizon are not going to be replaced by other people,” Nadler predicts.

  “THE NET-NET TO SOCIETY…IS A NET LOSS”

  “We’ve created, on paper at least, more than a dozen millionaires,” the young multimillionaire, who counts a number of other large investment banks besides Goldman Sachs among his clients, says. “That might help people sleep better at night, but we are creating a very small number of high-paying jobs in return for destroying a very large number of fairly high-paying jobs, and the net-net to society, absent some sort of policy intervention or new industry that no one’s thought of yet to employ all those people, is a net loss.”

  Not only are robo-analysts more efficient than humans when it comes to processing data like the Department of Labor’s monthly employment statistics, but they can analyze policy trends and make economic forecasts with much greater precision, Nadler explains. In the past, when the civil war in Syria was in the news, many clients called their bankers to ask whether they should be investing in oil companies, or to find out how the latest events would affect their portfolios. When faced with questions like that, investment bankers would huddle with their analysts to find out how the markets had reacted to similar situations in the past and then make their recommendations based on the consensus of their experts. The problem with this approach was that it took time, and when the bank was finally ready to make a recommendation, circumstances on the ground had often changed and the opportunity to invest was gone.

  Now all a banker has to do is fire up his Kensho program, type in Syria along with other search terms like oil prices and the name of an oil company, and he or she will get an answer in much the same way a Google search operates. But whereas a general Google search engine gives us all possible results that contain the search keywords, Kensho automatically classifies the results based on how they will affect certain stocks. After doing a search with the terms escalation in the Syrian civil war, a trader can get recommendations—based on similar events in the past—on whether to invest in a particular oil company or on how events will impact the market in Germany or affect the value of the peso in Mexico. Doing the same analysis without automation “would have taken days, probably forty man-hours, from people who were making an average of $350,000 to $500,000 a year,” Nadler says.

  FINANCIAL ADVISERS WILL BE A LUXURY FOR THE ULTRARICH

  Increasingly, people will be getting financial advice primarily from algorithms, but there will still be some jobs for human financial advisers. According to the EY consulting firm, formerly known as Ernst &Young, “while the data-crunching can be automated, the role (of a financial adviser) itself requires a degree of human interaction and—critically—judgment that cannot be effectively marshaled by machines.” As Karl Meekings, one of the primary authors of this study and the strategic analyst of global banking and capital markets of EY, explained to me, “algorithms will become increasingly efficient at making financial forecasts, but they don’t work as well when something unexpected happens, so a human presence will always be needed to deal with unanticipated events.” When I asked him specifically which kinds of financial adviser
s will survive, Meekings responded that it will be those who can coach clients through very complex business or tax structures, who can break down the algorithms’ recommendations in a personalized way, or who specialize in nontraditional investments like fine art, wines, or other collectibles.

  John Garvey, the global financial services leader at PwC and one of the lead authors of his company’s study on the future of banking, explained to me that human financial advisers work better than algorithms when there isn’t much information available to the public about a particular potential investment. “For example,” he said, “when it comes to investing in real estate, or wine, or film projects, where there isn’t much public information available, a real-life financial adviser can do a better job making some phone calls, going to look at the actual building, or consulting with wine specialists. The less public information there is, the more need there will be for a personal financial adviser.”

  HUMANS WILL BE NEEDED TO ANSWER THE UNSCRIPTED QUESTIONS

  The increasing popularity of online banking will require more qualified people to personally answer clients’ questions. Who among us hasn’t been annoyed when we call a bank and get an automated response, or an employee who can do no more than read off canned responses from a list that doesn’t address our particular question? To solve this problem, banks will need versatile people who can answer questions about their financial services in a clear and understandable way. Communication skills will be as necessary as, or more necessary than, financial knowledge. “Call centers” will be rebranded as “specialized advisory centers,” and will need more highly educated workers, with better communication skills.