Rise of the machines: banks embrace automation despite the cost

Retail banks are turning to automated technology despite the costs

Flawed decisions taken by machines are causing financial services firms to lose customers and suffer unexpected costs, according to a new report by the Economist Intelligence unit. Yet retail banks are increasingly turning to technology to assess customers.

The research, Humans and Machines, found that more than one-third of European firms surveyed (37%) had lost money because of a decision taken by an automated computer programme in the last six months. It also found that 31% of respondents had lost customers over the same period because of the machines. For example, in June 2012 RBS suffered an outage that lasted two days and left 17 million customers unable to access their online accounts. The bank was forced to pay an estimated £175 million in compensation.

Technology errors in the capital markets can be even worse. In June, broker Knight Capital was forced to recapitalise after a $440m loss caused by an error within its market making algorithms brought the firm to the brink of bankruptcy in less than an hour. The incident was far from the first of its kind, and followed on from the flash crash of May 2010, in which a large sell order that was executed by an algorithm with no regard to time or price resulted in a chain effect of different computer programmes feeding off each other to wipe $1tn off the value of the US stock market within minutes.

However, retail banking is likely to become even more dependent on technology in the near future. Automated systems are already beginning to make decisions on personal finance, including whether customers qualify for a loan or a new credit card, according to the Economist Intelligence study. Online bank Movenbank takes customer interactions on social media sites like Facebook into account when assessing their credit worthiness. Meanwhile, eBureau gathers data about consumers which it uses to calculate e-scores for 20 million people each month for banks, insurers and other financial services firms.

These kind of initiatives are already spawning spin-off businesses. Reputation.com is a website that is designed to help borrowers take better control of their online profiles, potentially helping consumers obtain better rates from lenders. Meanwhile, retail bank BBVA Compass uses web robots to scour the internet for paragraphs and sentences relating to the bank and its competitors. According to the Economist Intelligence report, this process can help the organisation gain insights that would otherwise take months to uncover.

Although the study acknowledges that 78% of respondents felt technology makes them more productive, it also warns that 40% are not confident that the difficulties involved in human-technology interaction will be resolved. Those difficulties have been displayed most forcefully in the capital markets, where a series of technical glitches at exchanges, brokers and asset managers has brought the entire market structure under intense scrutiny from politicians and regulators across the globe.

The flash crash of May 2010, followed by the failure of the BATS IPO in March last year and the debacle surrounding the Facebook IPO two months later, are merely standouts in a long list of technological failures and glitches that have cost investors money and damaged the reputations of some of the world’s largest financial institutions. The flash crash in particular created a huge impact among market participants and regulators, generating the impression that markets were no longer functioning under human control.

For many longer-term investors, an over-reliance on technology has been damaging and even disastrous. “It all adds to a general sense that markets are under-regulated and technology has got out of hand,” Paul Squires, head of trading, trading and securities financing London at AXA Investment Managers told Banking Technology. Meanwhile others, such as Adrian Fitzpatrick, head of dealing at UK-based asset management firm Kames Capital, have called for the computers behind “aggressive” high-frequency trading to be reined in and brought under tighter control.

“The regulators need to decide who and what the market is for – a playground for automated HFT strategies, or a genuine market place for retail and institutional investors,” said Fitzpatrick.

Technology has already revolutionised many aspects of how banks and other financial institutions deal with their customers, and has enabled enormous leaps in their operating efficiency, according to the Economist Intelligence report. The document adds that the pace of change is unlikely to diminish any time soon – a point illustrated by SunGard’s acquisition of automation specialist XSP earlier this month. HSBC’s recent trials in Brazil of an entirely automated branch, staffed solely by machines without human intervention, is another pointer to the future. Yet the report also warns that human creativity, intuition and imagination should not be sacrificed at the altar of technological progress.

“The risk will remain ever present,” said the document. “But in finance as everywhere else, that would be an irretrievable loss.”