Finance

How will AI change financial services? Is it possible to make a profitable investment?

AI (artificial intelligence) has become very popular in our daily lives. Whether you’re online, buying goods or services, playing, or working, you’re unknowingly or visibly touching AI.

And AI is now changing financial services as well. We are looking for a profitable investment destination with AI, and Amazon is assisting banking operations with AI.
Introducing the present and future of AI finance.

AI plays an active role in investment

WealthNavi Co., Ltd. (Headquarters, Shibuya-ku, Tokyo) provides a robot advisor “WelthNavi”, which is a financial service that allows you to automatically invest with a smartphone app(※1、2).

Investing automatically means that individual investors who are WealthNavi users do not have to select financial products such as stocks, real estate, and bonds.
investing is a means of securing income by selecting and buying financial products that are likely to increase in price and waiting for the price to increase, but with WealthNavi, you do not have to select financial products.
This is because the AI ​​installed in WealthNavi selects financial products.

※1:https://www.wealthnavi.com/
※2:https://www.nikkei.com/article/DGXZQODZ01FNV0R00C21A4000000/

We have a track record of depositing 500 billion yen

WealthNavi’s assets under custody exceeded 500 billion yen in July 2021, and the number of users (individual investors) reached 260,000.
In terms of operational performance, there is a case where 2.95 million yen was deposited with WealthNavi in January 2016 and reached 4.59 million yen (profit was 1.64 million yen) in June 2021.(※3).

The company first deposits 1 million yen in WealthNavi, and after that, if it continues to invest 30,000 yen every month for 30 years, the total principal of 11.8 million yen will be 22.25 million yen with a 50% probability.

It is calculated that the investment profit for 30 years will be 10.45 million yen (= 22.25 million yen – 11.8 million yen).

Surprised that AI can pull off

The profit of 10.45 million yen is “awesome”, but at the same time it can be said to be “not surprising”. The great thing about WealthNavi is that it makes a profit of 10.45 million yen with a computer called AI.

On the other hand, what makes you think it’s not surprising is “50%”. A 50% chance of making a profit of 10.45 million yen also means a 50% chance of not making a profit of 10.45 million yen. And “50% probability of not making a profit of 10.45 million yen” includes a small amount of profit and a loss as well as a profit of 0 yen.

Also, if you invest 11.8 million yen first and then do not make an additional investment, and if it becomes 22.25 million yen 30 years later, the annual profit will be 350,000 yen (≒ (22.25 million yen-11.8 million yen) ÷ (22.25 million yen-11.8 million yen) ÷ Since it will be 30 years), the annual interest rate will be 2.97% (≒ (350,000 yen ÷ 11.8 million yen) x 100) by a simple calculation.

Investment trusts that generate an annual interest rate of 2.97% are not uncommon, so even if WealthNavi continues to perform well, it is not “surprisingly profitable.”

However, even with ordinary investment trusts, the probability of loss is about 20% (* 4). In other words, even a professional fund manager can make a loss, so it is surprising that “AI can pull off” from 11.8 million yen to 22.25 million yen with a 50% probability in 30 years of operation. It can be said that.

※3:https://www.wealthnavi.com/performance
※4:https://www.morningstar.co.jp/market/2021/0413/fund_01240.html

What Happens When British Banks and Amazon AI Connect

In 2020, Barclays, a major British bank, and Amazon in the United States formed a business alliance and started a shopping settlement service in Germany(※5).

It’s not great that British banks and American e-commerce work together in Germany, but the point of this event is that major banks have helped Amazon to develop their financial business.

Barclays has a credit card department and is already able to provide its own financial services called shopping settlement services. But that wasn’t enough, so I got the help of Amazon. So what was missing?

※5:https://www.nikkei.com/article/DGXMZO66542660T21C20A1TCR000/

Financial Business is No Longer Just for Financial Institutions

Barclays’ failure to deploy a shopping settlement service in Germany on its own shows that the financial business is no longer just for financial institutions. The financial business has become quite complex as a result of being streamlined by IT and the Internet. Therefore, financial institutions such as banks cannot produce the latest financial services.

Rather, it can be said that IT companies and Internet companies are producing more convenient financial services. This phenomenon is occurring all over the world including Japan, and IT companies and Internet companies are playing an active role in cashless and crypto-assets represented by pay payments using smartphones.

The same applies to shopping settlement services.

Traditional credit card services can be handled by financial institutions, but modern shopping payment services will not. This is because payments have undergone remarkable updates by making full use of AI and big data.

I Needed Amazon’s AI Power and Big Data Power

Credit is an important theme for shopping payment services. If anyone can easily obtain a credit card, there will be many accidents that cannot be repaid, and the credit card company will suffer a loss. However, if the credit screening that checks individual repayment ability is strengthened too much, the number of users cannot be increased and sales will not increase.

That is where the power of Amazon’s big data analysis and the power of AI comes into play. When an individual applies for the shopping settlement service, Amazon’s big data can be used to check the credit of the applicant from the purchase history. What’s more, AI can be used to automate credit screening.

Furthermore, in the shopping settlement service, the function of recommending products and services such as recommendations contributes to sales improvement. If you’ve used Amazon multiple times, you know the excellence of Amazon’s recommendation feature, which then invites you to buy.

Without the help of Amazon, even Barclays in the world could not offer a new shopping settlement service. That’s clear when Barclays CEO Jess Staley said, “The partnership with Amazon is the most important thing that has happened to Barclays in the last five years”(※5).

AI Delivers Financial Services to Low-income Earners

AI will bring democratization of financial services.

In 2020, the CEO of Thailand’s Siam Commercial Bank said, “Using AI will enable us to provide financial services to low-income earners”(※6).
The nominal GDP per capita in Thailand is $ 7,190, which is about one-sixth of Japan’s $ 40,146 (* 7). Although Thailand is developing rapidly, there are still many low-income earners.

Siam Commercial Bank has long focused on assessing the creditworthiness of individuals and micro-enterprises. We have used data analysis technology to objectively judge creditworthiness, and if there are no problems, we have actively financed. This is because it leads to getting out of poverty and hardships.

Siam Commercial Bank CEO pointed out that AI will make data analysis more sophisticated and efficient, which will enable better financing for hard-working people and micro-enterprise companies.

According to the World Bank, there are 1.7 billion people around the world who do not have a bank account(※6). However, as AI, smartphone finance, and fintech evolve, they will also be able to access financial services.

※6:https://www.nikkei.com/article/DGXMZO66087350R11C20A1000000/
※7:https://www.globalnote.jp/post-1339.html

Summary – I Have a Feeling that New Services Will be Born

When you hear the word AI of a financial institution, many people think of improving the efficiency of bank operations(※8). Money, which is a product handled by financial institutions, is easy to quantify and digitize, so it is compatible with computers, and therefore it is easy to manage with AI.

But AI is more than just a computing computer, it can think and predict. Therefore, financial AI can think of good investment destinations and guess the creditworthiness of people and companies.

I am looking forward to what kind of financial services will be born next.

※8:https://www.nikkei.com/article/DGXMZO63914590W0A910C2X20000/