The New AI Decade: Financial Services with Barbara Gray: Part III

Key Take-Aways

1. Concern for sustainability is upending decades-old assumptions about business and capitalism

2. Artificial Intelligence will create massive job disruption in Financial Services

3. Insurance industry will be massively transformed by factors such as climate change and autonomous driving 4. Movement of large technology companies into banking will completely transform that industry

In Part 3 of our interview with Barbara Gray, founder of Brady Capital Research, she applies the Value Pyramid model explained in Part 2 to the Financial Services Industry. If you missed the earlier parts of our interview, please find Part 1 here.

Customer Capital

Barbara began by looking at Financial Services through the customer capital side of the Value Pyramid: “If you look at the customer capital side, you have the stock discount brokerage offerings that have gone down to zero percent, no commission, and no fees. That’s a race to the lowest common denominator with companies competing on price, convenience, and variety of choice. What we’ve seen is if you just try to compete on a functional level, you will make no money, so that’s a big warning to these companies. Successful companies will be those like the wealth managers that can build relationships with their customers. I think what we’re going to see is more disruptive companies like Wealthfront that are reaching people, especially millennials, on the psychological level. The other big thing we’re going to see on the customer capital side is sustainability. With 20-year-olds now, they just assume that ESG and sustainability are normal. When I was growing up and studying for my CFA, I was taught Milton Friedman’s theories that basically companies can do whatever they want as long as they make a profit. It was this shareholder-based business doctrine, which is not the case anymore, it’s a huge shift in the way we think!

In January Larry Fink, the CEO of BlackRock, a large money manager with $7 trillion in assets under management came out and basically said that you have to now include ESG risk on par with credit risk and liquidity risk. MSCI has also come out and basically said you can’t just think of ESG on its own, it has to be incorporated into everything.”

Barbara explained how this shift towards sustainability is rocking the foundations of the oil and gas industry: “The oil and gas industry in Canada is huge, but some major investment firms have reclassified oil and gas producers to list them as nonrenewable energy, basically blacklisting them. The reason they did this is that Norway’s $1 trillion sovereign wealth fund wanted to divest its portfolio of all the fossil fuel investments, and they wanted a classification system to do that. In addition, at the end of January, CNBC’s Jim Cramer said ‘I’m done’ with oil stocks. I think sustainability is going to become a big part of the wealth management industry going forward, and they need to do this because millennials and Gen X, who are the next generation of wealth, do not want to put their money into companies that create negative externalities for society and the environment. I think this mindset is going to really shift the way companies invest their capital. It’s a disruption not so much in terms of technology but a societal disruption that is going to fundamentally reshape the way people invest their money.”

Economic Capital

Barbara talked about the seismic impact of the big technology companies moving into Financial Services: “On the economic side, I think of platform economies and the big technology companies moving into Finance. Amazon is moving into banking, Apple is moving into banking, Google is probably going to move into banking. These companies will be disruptive because they own the customer relationship and, more importantly, the data. Amazon knows way more about me than my bank does. My bank knows nothing about me, even though I’ve been a customer for 20 years, they know virtually nothing about me! Amazon knows everything about my spending.
These big tech companies moving into the banking sector will drive costs down because they create transparency and their customers trust them. I also think there will be generational factors.

My boys are six and nine and I think they’re more likely to have an account with Amazon than with a traditional bank in the future. Millennials are all in with Robinhood and Wealthfront. Facebook, Apple, Google, and Amazon have built up incredible customer, structural and economic capital. They might partner with the banks initially, but that’s the typical roadmap: your partner initially and then you basically go in and take over. The big thing for Amazon is Alexa. I think voice-based banking will be huge in a couple of years and the banks have not yet developed their own in-house voice technology. I don’t think they can compete with Alexa; Amazon has 10,000 employees working on it and others can’t scale at that magnitude!”

We will be continuing our conversations with Barbara in the future on a wide range of topics including her new report on “The Ghost Economy” triggered by the Coronavirus. If you have questions you would like to ask her or would like to share some perspectives on what she has said, please email us or you can leave a response in the comments section below.