Latest / Startup & Tech News from Germany, Austria, and Switzerland by Startuprad.io™ / The AI Revolution in Banking: Paolo Sironi (IBM) on Fintech's Future
Transcript
- WEBVTT 00:00:00.000 --> 00:00:19.600 <v Music> 00:00:20.024 --> 00:00:24.984 <v Narrator>Hello and welcome, everybody. This is Joe from StartupRate.io coming to you 00:00:24.984 --> 00:00:27.644 <v Narrator>today with another subject matter expert. 00:00:27.904 --> 00:00:33.804 <v Narrator>When Paolo says his first words, most people will recognize him. Ah, Paolo again. 00:00:34.324 --> 00:00:42.684 <v Narrator>You most likely don't need an introduction, but I still do it because we're growing like crazy. 00:00:42.904 --> 00:00:48.764 <v Narrator>I welcome you back to my podcast. You are the most frequent guest on StartupRate.io. 00:00:48.764 --> 00:00:51.944 <v Narrator>You are a thought leader in the world of fintech and banking. 00:00:52.284 --> 00:00:56.564 <v Narrator>You're a trusted expert in the intersection of technology, banking, and capital markets. 00:00:56.724 --> 00:00:59.984 <v Narrator>With years of experience at the forefront of banking innovation, 00:01:00.284 --> 00:01:03.124 <v Narrator>Paolo's insight are shaping the future of financial services. 00:01:03.644 --> 00:01:08.764 <v Narrator>Today, we'll be discussing his latest research at the IBM 2025 Banking and Capital 00:01:08.764 --> 00:01:13.764 <v Narrator>Markets Outlook and how it will influence the next generation of financial strategies. 00:01:14.084 --> 00:01:16.324 <v Narrator>Paolo, welcome again to my show. 00:01:16.324 --> 00:01:21.364 <v Joe Menninger>So with such an introduction, I have to start with the right foot. 00:01:22.004 --> 00:01:25.024 <v Paolo Sironi>Buongiorno, buon pomeriggio, buonasera to everyone, 00:01:25.204 --> 00:01:26.204 <v Joe Menninger>Wherever you are in the world. 00:01:27.344 --> 00:01:31.304 <v Narrator>As we are at the start of a new era in banking and capital markets, 00:01:31.544 --> 00:01:32.744 <v Narrator>one question dominates. 00:01:33.064 --> 00:01:38.244 <v Narrator>How will emerging technologies like AI, blockchain and digital currencies shape 00:01:38.244 --> 00:01:40.664 <v Narrator>the financial world in 2025 and beyond? 00:01:40.664 --> 00:01:46.504 <v Narrator>Today, we are diving deep into the IBM 2025 Banking Capital Markets Outlook 00:01:46.504 --> 00:01:50.104 <v Narrator>with one of leading voices in fintech and banking transformation. 00:01:50.484 --> 00:01:54.424 <v Narrator>Stay tuned to discover what the future holds for financial institutions, 00:01:54.844 --> 00:01:56.604 <v Narrator>investors and entrepreneurs alike. 00:01:56.804 --> 00:02:01.384 <v Narrator>And we also may tell because most people are listening to this, 00:02:01.884 --> 00:02:06.524 <v Narrator>your name tag also say the bank is bookshelf. So you're also a podcaster there. 00:02:06.944 --> 00:02:12.504 <v Joe Menninger>Yes, I am. I'm following your inspiring episodes. 00:02:13.264 --> 00:02:13.784 <v Paolo Sironi>So the Bankers 00:02:13.784 --> 00:02:19.944 <v Joe Menninger>Bookshelf is the opportunity to have on the show the most interesting book authors 00:02:19.944 --> 00:02:24.904 <v Joe Menninger>and researchers that are helping us to understand the present of banking and its fintech future. 00:02:25.384 --> 00:02:29.044 <v Joe Menninger>So happy for you to also attend our episodes. 00:02:29.344 --> 00:02:34.344 <v Joe Menninger>But we can share some key insights here with you, Jorn. So this is a wonderful podcast. 00:02:34.524 --> 00:02:38.184 <v Joe Menninger>I'm always happy to get back. You know, this is amazing. So let's make it happen. 00:02:38.744 --> 00:02:43.564 <v Narrator>Happy to come over for a recording to you. Paolo, in your recent research with 00:02:43.564 --> 00:02:47.424 <v Narrator>IBM, you highlighted the growing importance of AI in banking. 00:02:47.704 --> 00:02:52.324 <v Narrator>How do you envision artificial intelligence reshaping the landscape of banking 00:02:52.324 --> 00:02:54.084 <v Narrator>and capital markets in 2025? 00:02:54.084 --> 00:02:55.964 <v Paolo Sironi>Well, there's nothing new, 00:02:56.104 --> 00:02:58.424 <v Joe Menninger>Right? So just becoming important. 00:02:59.624 --> 00:03:02.124 <v Paolo Sironi>Let's put it into perspective. 00:03:02.124 --> 00:03:08.524 <v Joe Menninger>So maybe this helps to understand where the industry is effectively leaning to. 00:03:09.176 --> 00:03:11.776 <v Paolo Sironi>If we go back 15 years ago, 00:03:11.956 --> 00:03:16.576 <v Joe Menninger>Say at the start of the global financial crisis, which is always an important 00:03:16.576 --> 00:03:18.336 <v Joe Menninger>moment in time in the history of banking, 00:03:19.596 --> 00:03:23.696 <v Joe Menninger>back then banks realized that they could not operate the way they were operating 00:03:23.696 --> 00:03:27.636 <v Joe Menninger>before because their capability to generate revenues was much more reduced, 00:03:27.936 --> 00:03:30.216 <v Joe Menninger>I guess, before there were a few excesses. 00:03:31.036 --> 00:03:32.456 <v Joe Menninger>And so there 00:03:32.456 --> 00:03:32.976 <v Paolo Sironi>Was also the 00:03:32.976 --> 00:03:37.536 <v Joe Menninger>Time when digitalization started. The iPhone was invented in 2007, 00:03:37.676 --> 00:03:42.476 <v Joe Menninger>more or less. So we saw a growing trend of people be more inclined to use the 00:03:42.476 --> 00:03:47.136 <v Joe Menninger>website or even start using a phone for doing some basic banking transactions. 00:03:47.516 --> 00:03:50.556 <v Joe Menninger>So for the banks was, you know, Brandon to say, hey, let's close branches. 00:03:50.556 --> 00:03:55.656 <v Joe Menninger>We rationalize because we can push some of those activities on a website and then on an app. 00:03:55.876 --> 00:04:00.476 <v Paolo Sironi>But in essence, that didn't change. The banking was working. 00:04:00.476 --> 00:04:05.956 <v Paolo Sironi>was primarily a lift and shift of a branch on a digital architecture, 00:04:06.236 --> 00:04:12.396 <v Joe Menninger>Which in many cases meant more investment in cloud computing and APIs to power 00:04:12.396 --> 00:04:16.356 <v Joe Menninger>up banking in a different way, not in the premises of a branch, 00:04:16.496 --> 00:04:19.236 <v Joe Menninger>but mediated by a technology piece. 00:04:19.436 --> 00:04:23.556 <v Paolo Sironi>So that I would call digitalization of right. Of course, in the very beginning, 00:04:23.696 --> 00:04:26.756 <v Joe Menninger>Banks were like, can I use cloud or not? Regulators learned that maybe that's 00:04:26.756 --> 00:04:28.616 <v Joe Menninger>important. So they started doing it. 00:04:29.746 --> 00:04:35.546 <v Joe Menninger>Banks realized that just having an app on a phone or a nice website doesn't 00:04:35.546 --> 00:04:38.426 <v Joe Menninger>mean that clients are comfortable in navigating through. 00:04:38.826 --> 00:04:41.546 <v Joe Menninger>So they started thinking we need to personalize that. 00:04:41.866 --> 00:04:48.026 <v Joe Menninger>So we move from an age of digitalization of write into an age of personalization. 00:04:48.186 --> 00:04:49.626 <v Joe Menninger>And how do you personalize use AI? 00:04:49.866 --> 00:04:50.766 <v Paolo Sironi>So they started 00:04:50.766 --> 00:04:56.686 <v Joe Menninger>Using machine learning in particular to, in a sense, manage the SEOs, 00:04:56.686 --> 00:04:59.426 <v Joe Menninger>to create the content more relevant for the client. 00:04:59.746 --> 00:05:04.086 <v Joe Menninger>to streamline the processes, make onboarding a bit easier, let's clumsy. 00:05:04.526 --> 00:05:05.326 <v Paolo Sironi>So that's a period 00:05:05.326 --> 00:05:10.966 <v Joe Menninger>Where AI starts entering the banking scene in a variety of fields, 00:05:11.046 --> 00:05:15.266 <v Joe Menninger>but in particular there when you have to do banking activity on mobile, 00:05:15.506 --> 00:05:19.726 <v Joe Menninger>when you do a bit more automation, you need to streamline the processes. But still, 00:05:20.226 --> 00:05:20.946 <v Paolo Sironi>That was not 00:05:20.946 --> 00:05:29.026 <v Joe Menninger>Enough to shift a lot of important operations from a face-to-face branch onto the digital app. 00:05:29.746 --> 00:05:32.006 <v Paolo Sironi>Now, if generative AI is 00:05:32.006 --> 00:05:35.766 <v Joe Menninger>Famous for something, it's about communication, language. So I think that 00:05:35.766 --> 00:05:40.086 <v Paolo Sironi>Now we're entering the stage where we had years where we had digitalization 00:05:40.086 --> 00:05:44.406 <v Paolo Sironi>to core as a key theme, years when we started talking about personalization, 00:05:44.586 --> 00:05:46.546 <v Joe Menninger>And we could use AI, machine learning in that respect. 00:05:46.886 --> 00:05:49.466 <v Paolo Sironi>But now it's about communication in many cases. 00:05:49.726 --> 00:05:53.586 <v Joe Menninger>So how can you transform the way you effectively talk to clients, 00:05:53.786 --> 00:05:56.826 <v Paolo Sironi>As well, I would say, the way you talk inside the organization? 00:05:56.826 --> 00:06:02.986 <v Joe Menninger>And that is where AI has now more capabilities to transform the way banks operate 00:06:02.986 --> 00:06:05.106 <v Joe Menninger>because up to the past was 00:06:05.106 --> 00:06:06.046 <v Paolo Sironi>Sort of a linear 00:06:06.046 --> 00:06:10.686 <v Joe Menninger>Approach in terms of plugging in an algorithm here and there where you could grab some value. 00:06:10.726 --> 00:06:15.526 <v Joe Menninger>Now you can rethink the way effectively everything works inside the bank and 00:06:15.526 --> 00:06:16.746 <v Joe Menninger>in front of the customers. 00:06:17.801 --> 00:06:23.621 <v Narrator>Actually, as you said, that it kind of reminded me we first talked about cloud. Yes or no. 00:06:23.841 --> 00:06:26.601 <v Narrator>Crypto. Yes or no. Now we're talking AI. 00:06:26.981 --> 00:06:31.681 <v Narrator>Yes or no. And it was always a slow approval by the regulators. 00:06:31.921 --> 00:06:35.761 <v Narrator>And then the banks went in more or less over time. 00:06:35.881 --> 00:06:41.921 <v Paolo Sironi>And there's quite a misunderstanding there that come to the surface with time. 00:06:42.181 --> 00:06:45.861 <v Joe Menninger>We could have seen that at the very beginning, the strong of push of narratives 00:06:45.861 --> 00:06:49.881 <v Joe Menninger>around. but we see that. And if you think about cloud, 00:06:50.321 --> 00:06:52.981 <v Paolo Sironi>Cloud is not what many expected to be. 00:06:53.221 --> 00:06:58.441 <v Joe Menninger>The economic model of cloud that doesn't hold through in many cases. 00:06:58.761 --> 00:07:02.161 <v Joe Menninger>Now private cloud can do as much as public cloud. And so I don't know what the 00:07:02.161 --> 00:07:03.001 <v Joe Menninger>upper scalars are thinking. 00:07:03.161 --> 00:07:06.121 <v Joe Menninger>Actually, I see the upper scalars trying to move on, if you like, 00:07:06.161 --> 00:07:08.361 <v Joe Menninger>compared to the propositions before. 00:07:08.861 --> 00:07:12.801 <v Joe Menninger>Lots of institutions realized that with growing volumes, you know, 00:07:12.881 --> 00:07:16.781 <v Joe Menninger>the thing was not operating as expected. So it's an hybrid cloud mix. 00:07:17.061 --> 00:07:18.661 <v Paolo Sironi>The crypto world as well, 00:07:18.801 --> 00:07:24.801 <v Joe Menninger>Of course, there was a lot of fantasy and excitement. And there is still for the pure crypto world. 00:07:24.921 --> 00:07:28.321 <v Joe Menninger>But now we're leaning towards a different aspect, which is around the regulated 00:07:28.321 --> 00:07:31.321 <v Joe Menninger>space with the CBDCs and the stable coins. 00:07:31.681 --> 00:07:33.381 <v Paolo Sironi>So it's more 00:07:33.381 --> 00:07:38.201 <v Joe Menninger>Like going there where it is traditional, though with technology instead of 00:07:38.201 --> 00:07:41.421 <v Joe Menninger>taking a direction where it is completely revolutionary, 00:07:42.001 --> 00:07:42.281 <v Paolo Sironi>Right? 00:07:42.401 --> 00:07:45.761 <v Joe Menninger>But out of the mainstream. Some of these elements have been, 00:07:45.781 --> 00:07:49.161 <v Joe Menninger>if you like, digested inside the system as well. 00:07:49.241 --> 00:07:53.421 <v Joe Menninger>That's true. But it's very different from the early stages, proclamations of, 00:07:53.421 --> 00:07:57.681 <v Joe Menninger>if you like, total decentralization and transformation. 00:07:58.361 --> 00:08:00.021 <v Paolo Sironi>And with AI, maybe it's the same, 00:08:00.141 --> 00:08:04.301 <v Joe Menninger>Right? So we're going through phases to understand exactly what it does, 00:08:04.441 --> 00:08:05.761 <v Joe Menninger>what it can do, what it can't do. 00:08:05.881 --> 00:08:11.041 <v Joe Menninger>It's so easy to get trapped into a hype that doesn't help anyone but a few. 00:08:13.001 --> 00:08:16.241 <v Joe Menninger>AI, however, is different from the previous two because 00:08:17.027 --> 00:08:24.327 <v Joe Menninger>AI started in the 1950s, so it's a long track record in terms of usage and understanding. 00:08:24.587 --> 00:08:27.707 <v Joe Menninger>Even before Generative AI, AI was already part of banking. 00:08:28.147 --> 00:08:35.207 <v Joe Menninger>It was just talked maybe with less emphasis from the general public compared to what it is today. 00:08:36.007 --> 00:08:38.087 <v Paolo Sironi>And what is happening is now 00:08:38.087 --> 00:08:39.807 <v Joe Menninger>The technology is becoming more 00:08:39.807 --> 00:08:43.587 <v Paolo Sironi>Accessible and more flexible, which typically is 00:08:43.587 --> 00:08:49.507 <v Joe Menninger>Important when technology starts unfolding real value for transformation because 00:08:49.507 --> 00:08:52.707 <v Joe Menninger>it cannot be just rigid, so it needs to be adaptable in a sense. 00:08:53.227 --> 00:08:57.987 <v Joe Menninger>Now, data adaptability is not risk-free. It requires a professionality. 00:08:57.987 --> 00:09:03.267 <v Joe Menninger>It requires a good risk management approach. It requires platforms and architectures to execute it. 00:09:03.367 --> 00:09:04.307 <v Paolo Sironi>And that's where 00:09:04.307 --> 00:09:09.087 <v Joe Menninger>We will see the differentiating elements. It's not about who has the best AI, 00:09:09.907 --> 00:09:17.567 <v Joe Menninger>But it's about who has the best way of using AI, which is a different type of investment in IT. 00:09:17.927 --> 00:09:21.947 <v Joe Menninger>AI is becoming more open source. It's multimodal. It's multimodal. 00:09:22.167 --> 00:09:28.887 <v Joe Menninger>So that's the story. But for a long while, we thought about the best AI is the best institution. 00:09:29.127 --> 00:09:31.327 <v Joe Menninger>It's the best way to use it. It's not the best. 00:09:31.747 --> 00:09:34.027 <v Narrator>I actually totally agree with you. 00:09:34.027 --> 00:09:38.747 <v Narrator>when you talked about like the new technologies going into the old ways. 00:09:38.907 --> 00:09:43.327 <v Narrator>What came to mind is the tokenization of securities that is currently ongoing. 00:09:43.507 --> 00:09:46.947 <v Narrator>And I also thought about application of AI. 00:09:47.207 --> 00:09:51.167 <v Narrator>Basically, it's a nightmare for a bank because you have to keep track on all 00:09:51.167 --> 00:09:52.987 <v Narrator>the AI agents you have there. 00:09:53.147 --> 00:09:56.127 <v Narrator>They're working there because not one agent from one department, 00:09:56.327 --> 00:10:00.927 <v Narrator>an agent from another department do something like crazy, You're shifting money 00:10:00.927 --> 00:10:04.427 <v Narrator>back and forth in the billions on seconds basis. 00:10:04.607 --> 00:10:07.147 <v Narrator>And then you have a big vest. Nobody wants that. 00:10:07.787 --> 00:10:14.687 <v Narrator>Before we get too far for our audience, for our listeners, how are you or your 00:10:14.687 --> 00:10:17.387 <v Narrator>company preparing for a ice roll in the future? 00:10:17.707 --> 00:10:21.507 <v Narrator>Feel free to share your thoughts on LinkedIn or Twitter or Let's Connect. 00:10:21.867 --> 00:10:22.907 <v Paolo Sironi>No, I think 00:10:22.907 --> 00:10:26.427 <v Joe Menninger>That you hit the bottom of a propeller into the future. 00:10:26.647 --> 00:10:31.147 <v Joe Menninger>You talked a lot about agents. as agent TKI is coming as well, 00:10:31.407 --> 00:10:32.647 <v Paolo Sironi>But not yet there, 00:10:32.667 --> 00:10:36.627 <v Joe Menninger>You know, to have that complex system that operates through agents. 00:10:36.767 --> 00:10:42.647 <v Joe Menninger>But that's another interesting evolution of technology, which is getting more 00:10:42.647 --> 00:10:47.447 <v Joe Menninger>and more prone to make decisions which are unstructured, that are not part of 00:10:47.447 --> 00:10:50.147 <v Joe Menninger>a defined rule set, and take responsibility for that, 00:10:50.807 --> 00:10:53.727 <v Joe Menninger>which could only be dreamt about years ago. 00:10:53.727 --> 00:10:57.507 <v Joe Menninger>So now it's becoming effectively a reality where people want to engage, 00:10:57.547 --> 00:11:03.227 <v Joe Menninger>you know, down the road to that type of configuration is another story, 00:11:03.427 --> 00:11:06.747 <v Joe Menninger>but effectively, this is happening as well. 00:11:07.467 --> 00:11:09.167 <v Narrator>When I was thinking about how. 00:11:10.392 --> 00:11:13.112 <v Narrator>a bank could use ai of course what came to 00:11:13.112 --> 00:11:16.352 <v Narrator>mind is like a lot of menial tasks done in 00:11:16.352 --> 00:11:18.992 <v Narrator>the background um but then a lot of 00:11:18.992 --> 00:11:22.332 <v Narrator>banks would need new systems where agents could 00:11:22.332 --> 00:11:27.572 <v Narrator>access plus you need to kind of a controller of all the ai agents make sure 00:11:27.572 --> 00:11:32.072 <v Narrator>they all work properly you need to document them you need to monitor them so 00:11:32.072 --> 00:11:37.672 <v Narrator>i'm not too sure if like there's a huge win in efficiency there. 00:11:38.172 --> 00:11:39.252 <v Narrator>What are your thoughts on that? 00:11:40.812 --> 00:11:41.072 <v Paolo Sironi>Okay. 00:11:41.372 --> 00:11:47.512 <v Joe Menninger>It's another key point here. The way you measure it, but also what you want 00:11:47.512 --> 00:11:51.052 <v Joe Menninger>to do with that, because if you don't unleash new value, you know, 00:11:51.192 --> 00:11:53.472 <v Joe Menninger>it's a zero-sum game, in essence, right? 00:11:53.552 --> 00:11:56.392 <v Joe Menninger>Or you reach a floor, so you cannot expand further. 00:11:56.592 --> 00:12:00.572 <v Joe Menninger>So the point is, how can you do it not just to simplify what you're doing, 00:12:00.712 --> 00:12:04.492 <v Joe Menninger>but then to create something new? Because that's where you justify most of the investments. 00:12:05.812 --> 00:12:11.252 <v Joe Menninger>If you look at the cost structure of banks, so the total operating expenses, 00:12:11.352 --> 00:12:14.652 <v Joe Menninger>I give you a number, which is about banks worldwide, and there could be differences 00:12:14.652 --> 00:12:16.472 <v Joe Menninger>bank by bank or across the regions. 00:12:17.972 --> 00:12:20.552 <v Joe Menninger>From 2007 until 2024, 00:12:21.132 --> 00:12:24.852 <v Paolo Sironi>The cost, the percentage of cost that banks had 00:12:24.852 --> 00:12:32.972 <v Joe Menninger>To spend for people, which is a good cost, salaries and benefits, went from 50% to 54.6%. 00:12:32.972 --> 00:12:40.412 <v Joe Menninger>The percentage of expenditures in technology that can come went from 6% down to 6.6%. 00:12:40.412 --> 00:12:46.012 <v Joe Menninger>So the amount of costs allocated to the workforce increased over time, 00:12:46.292 --> 00:12:48.012 <v Joe Menninger>notwithstanding all of the investment technology. 00:12:48.232 --> 00:12:49.732 <v Paolo Sironi>There are a few reasons for that, 00:12:49.832 --> 00:12:53.152 <v Joe Menninger>But that tells you that essentially banking is a people business anyway. 00:12:53.672 --> 00:12:54.612 <v Paolo Sironi>And if you want to 00:12:54.612 --> 00:13:00.052 <v Joe Menninger>Get benefits out of automation with AI, you always need to ask yourself, 00:13:00.052 --> 00:13:03.432 <v Joe Menninger>How do I also augment the employees to do something more, something different? 00:13:03.792 --> 00:13:04.672 <v Paolo Sironi>Because if you don't 00:13:04.672 --> 00:13:08.632 <v Joe Menninger>Put both elements into the right perspective, you may not justify the economic 00:13:08.632 --> 00:13:10.972 <v Joe Menninger>model anyway. For the good and for the bad, right? 00:13:11.132 --> 00:13:12.592 <v Paolo Sironi>So that is, I believe, 00:13:12.692 --> 00:13:16.972 <v Joe Menninger>The most complex things that bankers have to do because they not only have to 00:13:16.972 --> 00:13:20.152 <v Joe Menninger>innovate what they're already doing in automatizing it because they have to 00:13:20.152 --> 00:13:21.412 <v Joe Menninger>change it in automatizing it that way. 00:13:21.592 --> 00:13:22.972 <v Paolo Sironi>But they have to imagine how to 00:13:22.972 --> 00:13:29.072 <v Joe Menninger>Do things differently, okay, or new things. And, you know, you really have to think out of the box. 00:13:29.272 --> 00:13:31.332 <v Paolo Sironi>But, hey, we have hundreds of banks worldwide, 00:13:31.832 --> 00:13:35.132 <v Joe Menninger>You know, thousands of people working on that. I'm sure that here and there 00:13:35.132 --> 00:13:36.792 <v Joe Menninger>we see good ideas popping up. 00:13:38.952 --> 00:13:44.232 <v Narrator>We've spoken quite frequently about neobanks and fintech startups disrupting 00:13:44.232 --> 00:13:45.492 <v Narrator>traditional banking models. 00:13:45.732 --> 00:13:51.012 <v Narrator>What trends in 2025 do you see that will allow these fintech players to continue 00:13:51.012 --> 00:13:56.012 <v Narrator>to challenge incumbent banks? And where do you think established players need to innovate? 00:13:56.192 --> 00:13:57.172 <v Paolo Sironi>That's me a lot. 00:13:57.853 --> 00:14:04.033 <v Joe Menninger>Because end of last year, in September, October, I published a new research 00:14:04.033 --> 00:14:08.593 <v Joe Menninger>dedicated to banking for small and medium enterprises, commercial banking, 00:14:08.913 --> 00:14:11.993 <v Joe Menninger>putting on the side the sole entrepreneurs, which are more like retail, 00:14:12.233 --> 00:14:13.833 <v Joe Menninger>so small and medium enterprises. 00:14:14.173 --> 00:14:19.693 <v Joe Menninger>Say companies with more than 50 employees and below 200 million of revenues, 00:14:19.873 --> 00:14:21.613 <v Joe Menninger>maybe 100 million in places like Brazil. 00:14:22.053 --> 00:14:28.613 <v Joe Menninger>Why does this excite me a lot? because this is where the competition between 00:14:28.613 --> 00:14:31.573 <v Joe Menninger>bank and new bank is intensifying in the next five years. 00:14:32.093 --> 00:14:33.553 <v Paolo Sironi>And there's a reason for that. 00:14:33.933 --> 00:14:39.673 <v Joe Menninger>The last 17 years were about retail markets, which are overly commoditized. 00:14:39.913 --> 00:14:44.173 <v Joe Menninger>And there, to move the needle with technology, you really need to get into larger 00:14:44.173 --> 00:14:46.373 <v Joe Menninger>volume. That's why Revlon needs to have more and more clients. 00:14:46.693 --> 00:14:51.353 <v Joe Menninger>New bank got 100 million customers in Brazil, and it's still growing. 00:14:51.373 --> 00:14:53.933 <v Joe Menninger>So you need to get to a very large scale. 00:14:54.033 --> 00:14:56.213 <v Joe Menninger>to grab all the benefit in retail 00:14:56.213 --> 00:14:59.693 <v Joe Menninger>markets with this type of transformation technology. So it's not for all. 00:15:00.193 --> 00:15:04.533 <v Joe Menninger>Corporate banking is not for every player. It's really a relationship on a few. 00:15:05.033 --> 00:15:11.073 <v Joe Menninger>And capital markets, again, is for a few banks that have the shoulders to basically 00:15:11.073 --> 00:15:16.693 <v Joe Menninger>do trading and become more prominent in that highly volatile space. 00:15:17.153 --> 00:15:20.513 <v Joe Menninger>But small and medium enterprises are everywhere in every country, 00:15:20.513 --> 00:15:24.753 <v Joe Menninger>in Germany, in Italy, in Brazil, in Portugal, in China, in Australia, 00:15:25.013 --> 00:15:29.753 <v Paolo Sironi>And they were not served that well by banks, 00:15:29.933 --> 00:15:34.293 <v Joe Menninger>Or banks could not invest in transforming their services. So the fintech 00:15:34.293 --> 00:15:39.353 <v Paolo Sironi>In the past years for a few reasons, because all of these clients, 00:15:39.553 --> 00:15:42.853 <v Joe Menninger>The SMEs are very different. You have a restaurant, you have a dentist, 00:15:43.013 --> 00:15:45.373 <v Joe Menninger>you have a lawyer, you have a travel agent. 00:15:45.593 --> 00:15:46.773 <v Paolo Sironi>So for the bank or 00:15:46.773 --> 00:15:51.613 <v Joe Menninger>The fintech to talk to these communities is complicated, because you have pockets 00:15:51.613 --> 00:15:56.033 <v Joe Menninger>of communities at different ecosystems which have different problems that pop 00:15:56.033 --> 00:15:58.013 <v Joe Menninger>up at different times in the economic cycle, 00:15:58.313 --> 00:16:00.593 <v Paolo Sironi>Which have different ways of reporting their 00:16:00.593 --> 00:16:04.553 <v Joe Menninger>Numbers and their data. It's not structured. So the cost to serve in 00:16:04.553 --> 00:16:05.773 <v Paolo Sironi>Banking for the 00:16:05.773 --> 00:16:09.333 <v Joe Menninger>SMEs is the highest across the group of clients. 00:16:10.168 --> 00:16:12.448 <v Paolo Sironi>Now, given the latest two, 00:16:12.528 --> 00:16:19.208 <v Joe Menninger>Three years advances in the AI capabilities, I think that now we're at the point where 00:16:19.208 --> 00:16:21.008 <v Paolo Sironi>That problem can 00:16:21.008 --> 00:16:26.228 <v Joe Menninger>Be more easily tackled because with the combination of traditional regenerative 00:16:26.228 --> 00:16:30.968 <v Joe Menninger>AI, now you can basically have new means to systematize the process of onboarding 00:16:30.968 --> 00:16:34.868 <v Joe Menninger>and understanding these ecosystems and therefore lowering the 00:16:34.868 --> 00:16:36.168 <v Paolo Sironi>Cost to serve, which can be 00:16:36.168 --> 00:16:40.328 <v Joe Menninger>Passed to the clients in terms of a lower lending rate, making the bank more 00:16:40.328 --> 00:16:46.088 <v Joe Menninger>competitive or the fintech more competitive without consuming the prudentiality, 00:16:46.208 --> 00:16:51.468 <v Joe Menninger>okay, because giving away for free has never been a good idea and you see clearly, 00:16:51.468 --> 00:16:54.268 <v Joe Menninger>you know, the marcuses of the cases and so on and so forth. 00:16:54.588 --> 00:16:55.808 <v Paolo Sironi>So now, given 00:16:55.808 --> 00:17:02.588 <v Joe Menninger>The fact that AI made a leap in terms of capabilities, especially with the larger language models, and 00:17:02.588 --> 00:17:03.208 <v Paolo Sironi>The fact that 00:17:03.208 --> 00:17:07.668 <v Joe Menninger>That segment of the market is where the cost of service is the highest in banking, 00:17:07.668 --> 00:17:09.648 <v Paolo Sironi>Any dollar invested 00:17:09.648 --> 00:17:14.068 <v Joe Menninger>In the transformation of the business can generate the biggest benefit. 00:17:14.248 --> 00:17:15.828 <v Joe Menninger>So they are the highest return investment. 00:17:16.108 --> 00:17:17.208 <v Paolo Sironi>But two, three years ago, 00:17:17.268 --> 00:17:18.288 <v Joe Menninger>I guess, was too early. 00:17:18.928 --> 00:17:21.268 <v Paolo Sironi>So it was not yet possible. 00:17:21.688 --> 00:17:23.588 <v Joe Menninger>So the economic model was not working. 00:17:23.828 --> 00:17:25.188 <v Paolo Sironi>And then last but not least, 00:17:25.468 --> 00:17:32.868 <v Joe Menninger>These companies are like the, you know, 3TP in the gold mine that are the first 00:17:32.868 --> 00:17:36.628 <v Joe Menninger>to suffer when There's an economic downturn, so of course, they tend to be riskier. 00:17:36.808 --> 00:17:37.788 <v Paolo Sironi>And now is 00:17:37.788 --> 00:17:43.468 <v Joe Menninger>Where the opening of a lot of ecosystems through the API economy allows to ingest 00:17:43.468 --> 00:17:48.848 <v Joe Menninger>new data in the risk management model, even just with a traditional machine learning model, 00:17:49.248 --> 00:17:50.648 <v Paolo Sironi>That might allow to 00:17:50.648 --> 00:17:56.348 <v Joe Menninger>Better risk manage the positions with these ecosystems. There are varied, 00:17:56.388 --> 00:18:00.548 <v Joe Menninger>and they need to engage a bit more on digital compared to what is happening so far. 00:18:00.548 --> 00:18:02.048 <v Paolo Sironi>So even in that front, 00:18:02.288 --> 00:18:06.808 <v Joe Menninger>I think because of the API economy spreading around banking more than in the 00:18:06.808 --> 00:18:11.348 <v Joe Menninger>past five years of open banking and open finance, now things are possible that 00:18:11.348 --> 00:18:12.208 <v Joe Menninger>were not possible before. 00:18:12.887 --> 00:18:13.307 <v Paolo Sironi>Mm-hmm. 00:18:13.787 --> 00:18:17.227 <v Narrator>When you've been talking about the capital markets, what I had in mind, 00:18:17.387 --> 00:18:21.147 <v Narrator>what used to be called, for example, flow monsters and some research, 00:18:21.507 --> 00:18:25.587 <v Narrator>big banks with big organizations, where it doesn't make a difference if you 00:18:25.587 --> 00:18:28.787 <v Narrator>have two or three additional billions flowing through a day, 00:18:28.927 --> 00:18:32.947 <v Narrator>but they generate additional profits for their talk about economies of scale. 00:18:32.947 --> 00:18:37.467 <v Narrator>That kind of leads me to the capital markets transformation. 00:18:38.107 --> 00:18:42.787 <v Narrator>The capital market sector has faced various challenges over the last decade, 00:18:42.947 --> 00:18:44.767 <v Narrator>according to IBM's outlook. 00:18:45.027 --> 00:18:52.667 <v Narrator>How are emerging technologies expected to impact investment strategies and asset management by 2025? 00:18:53.627 --> 00:18:56.307 <v Paolo Sironi>So when we talk about asset management, 00:18:56.927 --> 00:19:02.347 <v Joe Menninger>We need to tell us also a bit of the truth about capital markets. 00:19:02.947 --> 00:19:04.627 <v Paolo Sironi>So, this is an 00:19:04.627 --> 00:19:09.047 <v Joe Menninger>Industry where few people pretend to know too much about the future and know 00:19:09.047 --> 00:19:12.747 <v Joe Menninger>nothing, because fundamental uncertainty is a structural market. 00:19:13.147 --> 00:19:17.627 <v Joe Menninger>And a lot of people, all of us, are afraid not to know anything about the future, 00:19:17.727 --> 00:19:20.007 <v Joe Menninger>but we know enough to be prudent in essence, right? 00:19:20.307 --> 00:19:21.267 <v Paolo Sironi>It's just that 00:19:21.267 --> 00:19:25.927 <v Joe Menninger>In the necessity of positioning all financial markets, capital markets, 00:19:26.007 --> 00:19:29.147 <v Joe Menninger>because in the end of the pension funds are for the attorneys, 00:19:30.347 --> 00:19:33.847 <v Joe Menninger>There is a way narratives are created and opinions are generated to talk to 00:19:33.847 --> 00:19:35.647 <v Joe Menninger>people. Now, the question becomes, 00:19:36.007 --> 00:19:36.987 <v Paolo Sironi>Do you have now 00:19:36.987 --> 00:19:40.267 <v Joe Menninger>A better capability to predict the future because of technology? 00:19:40.507 --> 00:19:43.667 <v Joe Menninger>That's not the point. I think you're not getting into more predictions. 00:19:43.847 --> 00:19:49.887 <v Joe Menninger>You can have more capability to compete, algo to algo, which is different than predictive, 00:19:50.247 --> 00:19:51.327 <v Paolo Sironi>But you still have the 00:19:51.327 --> 00:19:56.687 <v Joe Menninger>Same old problems to basically position yourself in terms of understanding market. 00:19:56.687 --> 00:19:58.567 <v Paolo Sironi>What is changing, however, 00:19:58.847 --> 00:20:03.567 <v Joe Menninger>To me is the following as every activity that happens in the upper space of 00:20:03.567 --> 00:20:07.847 <v Joe Menninger>capital markets needs to boil down into a conversation that has to be had with 00:20:07.847 --> 00:20:11.507 <v Joe Menninger>a client that needs to make a decision about their investing is the capability 00:20:11.507 --> 00:20:17.067 <v Joe Menninger>to better inform people about how they can make their decisions in a world that is very uncertain. 00:20:17.067 --> 00:20:21.967 <v Joe Menninger>by testing the hypothesis, right, and creating more easy conversations right 00:20:21.967 --> 00:20:27.607 <v Joe Menninger>to grasp, that can transform the way we are building the various bets in capital markets. 00:20:27.807 --> 00:20:30.427 <v Joe Menninger>So that is where I see the biggest transformation happening. 00:20:30.747 --> 00:20:35.487 <v Joe Menninger>For the rest, of course, modeling is always en vogue. 00:20:36.087 --> 00:20:40.307 <v Joe Menninger>What matters there is that the model of the bank that has the biggest shoulders, 00:20:40.307 --> 00:20:43.007 <v Joe Menninger>it becomes the dominant model because it's paid for pricing, 00:20:43.187 --> 00:20:49.707 <v Joe Menninger>and everybody else is a price taker. But I think there will be four banks and business as usual. 00:20:49.727 --> 00:20:52.747 <v Joe Menninger>We're not going to crack, if we like, the market. 00:20:53.721 --> 00:20:57.801 <v Joe Menninger>We have just one case of somebody that apparently has solved the market. 00:20:58.041 --> 00:21:01.381 <v Joe Menninger>We don't know yet how we did that, whether we did that. Renaissance technologies 00:21:01.381 --> 00:21:05.061 <v Joe Menninger>will be interesting to learn more, but we don't know much about that. 00:21:05.261 --> 00:21:08.401 <v Joe Menninger>But for the rest, I think that the structure itself doesn't change, 00:21:08.481 --> 00:21:16.461 <v Joe Menninger>but what can change is the way people can access and advisors can talk to people for a lower cost. 00:21:16.501 --> 00:21:20.781 <v Joe Menninger>They might transform the way they ask, basically to tap into opportunities in 00:21:20.781 --> 00:21:26.381 <v Joe Menninger>capital markets, therefore changing, if you like, the average tower of the trading floors. 00:21:27.141 --> 00:21:32.141 <v Narrator>We talked about the person who sold the market. I'm very sure there are a handful 00:21:32.141 --> 00:21:36.381 <v Narrator>of projects out there in the world where somebody is trying to train an AI to 00:21:36.381 --> 00:21:37.581 <v Narrator>think like Warren Buffett. 00:21:38.541 --> 00:21:39.961 <v Paolo Sironi>Well, Warren Buffett did 00:21:39.961 --> 00:21:43.081 <v Joe Menninger>Not solve the market in a sense. There was more a relationship, 00:21:43.521 --> 00:21:45.121 <v Joe Menninger>but Warren Buffett as well was very risky. 00:21:45.341 --> 00:21:47.921 <v Paolo Sironi>Now, successful, you see, 00:21:48.161 --> 00:21:56.581 <v Joe Menninger>It's a very different process. you can make a lot of money because you're very 00:21:56.581 --> 00:22:00.041 <v Joe Menninger>concentrated in your bets, or you can lose a lot of money because you're very 00:22:00.041 --> 00:22:00.801 <v Joe Menninger>concentrated in your bets. 00:22:00.941 --> 00:22:06.041 <v Joe Menninger>And then overall, in a long time, if you buy the market, more or less, you are there. 00:22:06.201 --> 00:22:10.101 <v Joe Menninger>So Warren Buffett is an example where he was very specific in his bet, 00:22:10.161 --> 00:22:15.401 <v Joe Menninger>which could be very risky, but it's a very complex process. 00:22:15.961 --> 00:22:22.941 <v Joe Menninger>It doesn't conform with high frequency trading or automated trading in that respect. 00:22:25.061 --> 00:22:27.181 <v Joe Menninger>And again, if you look, 00:22:27.421 --> 00:22:29.701 <v Paolo Sironi>If you try to imagine what's beyond the curve, 00:22:29.721 --> 00:22:34.161 <v Joe Menninger>Not knowing what will be on there, you try to imagine something which is not in the data. 00:22:34.441 --> 00:22:35.941 <v Paolo Sironi>The data may inspire you, 00:22:36.041 --> 00:22:41.541 <v Joe Menninger>But you get your intuition to go beyond that, and that's very hard to be replicated, 00:22:41.881 --> 00:22:42.881 <v Joe Menninger>whether it can be replicated. 00:22:44.683 --> 00:22:50.503 <v Narrator>For our audience, what changes do you think AI and blockchain will bring to the investment space? 00:22:50.843 --> 00:22:56.623 <v Narrator>Drop your comments below the episode to let us know what you think. 00:22:56.963 --> 00:22:59.283 <v Narrator>Paolo, we'll be back after a short ad break. 00:23:04.883 --> 00:23:09.563 <v Narrator>Paolo, guys, everybody, welcome for coming back. We're still talking to Paolo 00:23:09.563 --> 00:23:15.043 <v Narrator>Signori, thought leader, podcaster, and awesome person here on StartupRate.io, 00:23:15.303 --> 00:23:17.023 <v Narrator>plus the most frequent guest. 00:23:17.823 --> 00:23:22.803 <v Narrator>Now we get into, unfortunately, a little bit the boring but necessary part of 00:23:22.803 --> 00:23:26.883 <v Narrator>this, the regulatory and risk management in AI. 00:23:27.323 --> 00:23:29.483 <v Narrator>What AI and automation transformation? 00:23:30.383 --> 00:23:37.403 <v Narrator>How do you foresee regulatory frameworks evolving to ensure that AI-powered 00:23:37.403 --> 00:23:41.423 <v Narrator>systems in banks remain secure, ethical, and compliant? 00:23:43.183 --> 00:23:45.923 <v Paolo Sironi>I never thought that risk management is boring. 00:23:46.143 --> 00:23:47.903 <v Joe Menninger>Maybe a regulation could be. 00:23:50.603 --> 00:23:55.343 <v Narrator>I completely forgot you are a former risk manager. I'm so sorry. 00:23:55.523 --> 00:23:59.143 <v Paolo Sironi>A lot of work to do and stuff. It can also be fun. 00:23:59.143 --> 00:24:03.903 <v Joe Menninger>And you know why it's not boring? Because being based on data and data is always corrupted. 00:24:04.003 --> 00:24:09.223 <v Joe Menninger>So, you know, you can get entertained every day with something new, 00:24:09.243 --> 00:24:11.263 <v Joe Menninger>new problems popping up that you have to resolve. 00:24:12.401 --> 00:24:13.721 <v Paolo Sironi>But it's a very 00:24:13.721 --> 00:24:19.581 <v Joe Menninger>Important question because this question contains the solution to most of the problems. 00:24:21.461 --> 00:24:22.801 <v Paolo Sironi>Let's start saying this. 00:24:23.021 --> 00:24:29.961 <v Joe Menninger>In the 1990s, CEOs of banks used to say that every one of their employees was 00:24:29.961 --> 00:24:34.581 <v Joe Menninger>a risk manager because risk management is the core business of a bank, 00:24:34.741 --> 00:24:37.621 <v Joe Menninger>managing the bank's risk or the risk of the clients. 00:24:37.621 --> 00:24:42.461 <v Joe Menninger>Now I'm saying every risk manager, every banker must be an AI risk manager. 00:24:42.641 --> 00:24:46.461 <v Joe Menninger>That means he needs to understand how to manage the risk of AI, 00:24:46.601 --> 00:24:50.521 <v Joe Menninger>also the risk with AI, but how to manage these algorithms or this new way of working. 00:24:50.701 --> 00:24:56.221 <v Joe Menninger>And why is that important? I was actually talking to the global CIO of one of 00:24:56.221 --> 00:24:59.321 <v Joe Menninger>the top 10 banks in the world a few days ago. 00:24:59.641 --> 00:25:02.001 <v Paolo Sironi>And we asked him the question, 00:25:02.321 --> 00:25:06.801 <v Joe Menninger>What is missing to scale AI enterprise-wide in financial institutions? 00:25:06.801 --> 00:25:11.141 <v Joe Menninger>and basically said, well, it's the reinterpretation of the role of the craw 00:25:11.141 --> 00:25:13.041 <v Joe Menninger>and the risk management area. 00:25:13.261 --> 00:25:18.761 <v Joe Menninger>Because AI being an algorithm, that's about validating the algorithms, 00:25:19.141 --> 00:25:22.081 <v Joe Menninger>creating the confidence that the algorithm can be used and deployed, 00:25:22.281 --> 00:25:25.501 <v Paolo Sironi>Right, in a business process. And the confidence is to be 00:25:25.501 --> 00:25:29.201 <v Joe Menninger>Higher and higher, the more the business process is highly relevant. 00:25:29.441 --> 00:25:31.041 <v Joe Menninger>And typically, wherever you touch a client, 00:25:31.261 --> 00:25:32.781 <v Paolo Sironi>It's one of the most relevant, 00:25:32.941 --> 00:25:34.221 <v Joe Menninger>Okay, model. 00:25:34.921 --> 00:25:37.741 <v Paolo Sironi>And so, because in the past, 00:25:38.081 --> 00:25:43.301 <v Joe Menninger>The old risk management infrastructure was based on validation of defined algorithms. 00:25:43.601 --> 00:25:47.261 <v Joe Menninger>Think about BASEL 2, BASEL 3, BASEL 26, which 00:25:47.261 --> 00:25:47.981 <v Paolo Sironi>Is a large 00:25:47.981 --> 00:25:50.201 <v Joe Menninger>Set of rules that stick together. 00:25:50.381 --> 00:25:51.501 <v Paolo Sironi>Then you run them, 00:25:51.561 --> 00:25:54.301 <v Joe Menninger>You test them, and then you can validate them. You know what they're doing, 00:25:54.381 --> 00:25:57.301 <v Joe Menninger>and you can prove that basically they do what they're expected to do. 00:25:58.079 --> 00:25:59.439 <v Paolo Sironi>And that's a lengthy process, 00:25:59.579 --> 00:26:03.679 <v Joe Menninger>But it's very focused. With AI instead, it's not that you validate one AI. 00:26:03.999 --> 00:26:08.539 <v Joe Menninger>You have hundreds of different use cases in utilizations of that AI that needs 00:26:08.539 --> 00:26:11.219 <v Joe Menninger>to be in the studio validated, where the data is used in slightly different 00:26:11.219 --> 00:26:16.459 <v Joe Menninger>forms, where the reactions and the positioning of the algorithm is differing 00:26:16.459 --> 00:26:17.819 <v Joe Menninger>from what you might expect. 00:26:18.099 --> 00:26:19.099 <v Paolo Sironi>So how do you 00:26:19.099 --> 00:26:23.659 <v Joe Menninger>Transform the risk management into function that interacts in the continuum with the process? 00:26:25.279 --> 00:26:27.559 <v Paolo Sironi>Now, if I now think about the regulators, 00:26:27.559 --> 00:26:32.479 <v Joe Menninger>That are looking at all of this, the biggest challenge that they have is that they 00:26:32.479 --> 00:26:34.099 <v Paolo Sironi>Need to start understanding that 00:26:34.099 --> 00:26:38.479 <v Joe Menninger>The risk management function and the validation function needs to get transformed. 00:26:38.879 --> 00:26:39.839 <v Paolo Sironi>It's not anymore 00:26:39.839 --> 00:26:44.459 <v Joe Menninger>A process where you define the rules, things happen, and then you revalidate 00:26:44.459 --> 00:26:47.839 <v Joe Menninger>what happened, conformed with those rules, and so the algorithm also performs. 00:26:48.059 --> 00:26:49.559 <v Paolo Sironi>It has to be more in the continuum, 00:26:49.739 --> 00:26:53.999 <v Joe Menninger>Which poses a problem of independence, right, of the various functions. 00:26:54.699 --> 00:26:56.099 <v Paolo Sironi>But the point then is, 00:26:56.159 --> 00:27:00.059 <v Joe Menninger>Therefore, or what are the platforms and architectures that would enable to 00:27:00.059 --> 00:27:04.059 <v Joe Menninger>make this renewed interpretation of the risk management function that interacts 00:27:04.059 --> 00:27:09.299 <v Joe Menninger>with the way technology now asks you to basically interact with the problem 00:27:09.299 --> 00:27:11.459 <v Joe Menninger>or the opportunity that is different from the past. 00:27:11.879 --> 00:27:17.639 <v Paolo Sironi>So I was very, very inclined to try and understand how many banks are now 00:27:17.639 --> 00:27:19.579 <v Joe Menninger>Making those investments in a way that 00:27:19.579 --> 00:27:25.199 <v Paolo Sironi>They can position themselves more capable of embracing this change anytime it happens, 00:27:25.199 --> 00:27:31.519 <v Joe Menninger>Been strategic in their approach to AI and to generative AI. 00:27:31.839 --> 00:27:33.419 <v Paolo Sironi>And what I found is that 00:27:34.385 --> 00:27:35.645 <v Paolo Sironi>Only 8% of the banks 00:27:35.645 --> 00:27:42.105 <v Joe Menninger>Worldwide have a more strategic perspective and approach to the deployment of 00:27:42.105 --> 00:27:46.105 <v Joe Menninger>the latest advances in AI, while 70% of the banks wants to do it, 00:27:46.165 --> 00:27:46.905 <v Joe Menninger>but they're very tactical. 00:27:46.905 --> 00:27:49.965 <v Joe Menninger>That means that they start here or there, where there's more interest or some 00:27:49.965 --> 00:27:52.965 <v Joe Menninger>money on the table. And that's not enough, because it 00:27:52.965 --> 00:27:53.605 <v Paolo Sironi>Will not enable 00:27:53.605 --> 00:27:57.065 <v Joe Menninger>Them to build a risk management culture that differentiates. In fact, 00:27:57.725 --> 00:27:58.505 <v Paolo Sironi>What I saw is 00:27:58.505 --> 00:28:02.265 <v Joe Menninger>That it's not about the biggest banks versus the smallest banks. is 00:28:02.265 --> 00:28:02.905 <v Paolo Sironi>About the banks 00:28:02.905 --> 00:28:07.165 <v Joe Menninger>With a certain culture compared to banks without the culture. 00:28:07.705 --> 00:28:09.305 <v Joe Menninger>And the culture, big or small, 00:28:09.525 --> 00:28:11.605 <v Paolo Sironi>Is complex to build, 00:28:11.785 --> 00:28:18.505 <v Joe Menninger>Right, and to, if you like, promote in an organization. So that's my answer to your question. 00:28:18.685 --> 00:28:20.925 <v Paolo Sironi>That's how the regulators should change, 00:28:20.965 --> 00:28:25.025 <v Joe Menninger>But that is exactly where you find the solution to the problem, 00:28:25.125 --> 00:28:26.825 <v Joe Menninger>not because you have a compliance that makes sense, 00:28:26.965 --> 00:28:31.005 <v Joe Menninger>but because you have a culture based on new interpretation of risk management 00:28:31.005 --> 00:28:36.765 <v Joe Menninger>that enable you to tap into what the technology can enable you to do with transparent comfort. 00:28:38.725 --> 00:28:43.765 <v Narrator>In your research, you mentioned digital currencies, central bank digital currencies 00:28:43.765 --> 00:28:47.805 <v Narrator>will play a big role in reshaping the financial ecosystem. 00:28:48.005 --> 00:28:51.385 <v Narrator>Can you give us like a very small wrap-up? 00:28:51.685 --> 00:28:54.025 <v Narrator>What are you thinking forward from here? 00:28:54.785 --> 00:28:57.925 <v Joe Menninger>Well, it's like hard in Europe, at least for the European audience, 00:28:57.925 --> 00:29:02.925 <v Joe Menninger>said that in September, October, they will define the remaining shape of the roadmap. 00:29:03.305 --> 00:29:06.685 <v Joe Menninger>OK, so on whether and how, basically how the weather they will go ahead. 00:29:07.406 --> 00:29:12.526 <v Joe Menninger>So there are serious discussions in terms of the creation of CBDCs. 00:29:12.626 --> 00:29:15.426 <v Joe Menninger>Some of them have been created, not totally successful, right? 00:29:15.846 --> 00:29:19.306 <v Joe Menninger>But there is a needed moment of experimentation. 00:29:20.186 --> 00:29:21.426 <v Paolo Sironi>The only thing that 00:29:21.426 --> 00:29:26.006 <v Joe Menninger>I believe is to be considered here is the following. If 00:29:26.006 --> 00:29:26.506 <v Paolo Sironi>You look at 00:29:26.506 --> 00:29:31.346 <v Joe Menninger>What the Brazilian did with the PICS, which is an instant payment framework 00:29:31.346 --> 00:29:35.826 <v Joe Menninger>that will evolve at some point into CBDCs, but it's not, 00:29:36.546 --> 00:29:42.346 <v Joe Menninger>they got massive adoption in a few years because they just resolved the real 00:29:42.346 --> 00:29:44.426 <v Joe Menninger>problem with simple technology in essence. 00:29:44.606 --> 00:29:50.326 <v Joe Menninger>That was the first thing to allow anyone to use instant payments to bring their 00:29:50.326 --> 00:29:53.006 <v Joe Menninger>security and clarity in the transactions. 00:29:53.986 --> 00:29:56.966 <v Joe Menninger>CBDCs are a bit over-engineered as far as I see. 00:29:57.346 --> 00:29:58.846 <v Paolo Sironi>So every time it is over-engineered, 00:29:58.986 --> 00:30:02.246 <v Joe Menninger>That is a harder time to fly. So still have to see where, 00:30:02.306 --> 00:30:04.866 <v Paolo Sironi>You know, the ambitions map, 00:30:05.106 --> 00:30:10.246 <v Joe Menninger>The simplicity needed to operate these things on a very large type of infrastructure. 00:30:10.846 --> 00:30:14.126 <v Joe Menninger>The Americans now are moving in the directions and no civil rights, 00:30:14.286 --> 00:30:17.526 <v Joe Menninger>but a stable car. So it's interesting to see how they are positioned and they 00:30:17.526 --> 00:30:19.666 <v Paolo Sironi>Are all still positioning, right? 00:30:20.126 --> 00:30:23.306 <v Joe Menninger>Positioning is moving, but it's not executing in full. 00:30:23.306 --> 00:30:29.806 <v Joe Menninger>But I think the 2025 is the year where we will get clarity on this, 00:30:30.106 --> 00:30:36.766 <v Joe Menninger>at least across the Atlantic, the perspective of the European versus the North Americans. 00:30:36.766 --> 00:30:43.266 <v Narrator>Also a topic we've been talking about years before, embedded finance is another 00:30:43.266 --> 00:30:45.546 <v Narrator>trend highlighted in your report. 00:30:46.566 --> 00:30:51.526 <v Narrator>There's a growing integration of banking services into non-financial platforms. 00:30:51.766 --> 00:30:58.646 <v Narrator>How will this change how consumers and businesses engage with those financial products? 00:30:59.086 --> 00:31:01.146 <v Paolo Sironi>Okay, so embedded 00:31:01.146 --> 00:31:08.726 <v Joe Menninger>Finance is an important element of transformation. It is not a one-size-fits-all in terms that not 00:31:08.726 --> 00:31:09.226 <v Paolo Sironi>All of the 00:31:09.226 --> 00:31:15.806 <v Joe Menninger>Banking services can be easily or seamlessly embedded into a non-banking conversation. 00:31:16.126 --> 00:31:17.726 <v Paolo Sironi>And it's not about technology. 00:31:18.266 --> 00:31:23.806 <v Joe Menninger>It's about the way effectively people deal with uncertainty around the consumption 00:31:23.806 --> 00:31:26.006 <v Joe Menninger>of certain financial instruments. 00:31:26.086 --> 00:31:29.046 <v Joe Menninger>And it's not because people are not capable or need to be wired. 00:31:29.166 --> 00:31:31.686 <v Joe Menninger>It's just structurally so, logically speaking. 00:31:33.566 --> 00:31:35.166 <v Paolo Sironi>So, it has been 00:31:35.166 --> 00:31:41.086 <v Joe Menninger>An opportunity for banks to say what we have now can be consumed at the time 00:31:41.086 --> 00:31:43.826 <v Joe Menninger>and in the moment and in the location of need. 00:31:44.026 --> 00:31:47.706 <v Joe Menninger>And that remains a particular relevant for types of payments, 00:31:48.146 --> 00:31:51.586 <v Joe Menninger>the need of money like lending and sometimes also insurance, 00:31:51.586 --> 00:31:53.786 <v Joe Menninger>some products and some investing. 00:31:54.166 --> 00:31:55.306 <v Paolo Sironi>And what I 00:31:55.306 --> 00:31:56.626 <v Joe Menninger>Think is happening is that. 00:31:57.891 --> 00:32:04.731 <v Joe Menninger>It's not enough to have a platform that allows your banking capabilities to 00:32:04.731 --> 00:32:06.551 <v Joe Menninger>be consumed by somebody else to be successful. 00:32:07.131 --> 00:32:11.511 <v Joe Menninger>Because then it needs to be wrapped into a business case that makes a lot of sense. 00:32:11.791 --> 00:32:15.571 <v Joe Menninger>So when I interviewed the head of open banking of the major players in the world, 00:32:15.731 --> 00:32:16.571 <v Joe Menninger>that's what they basically said. 00:32:16.711 --> 00:32:20.551 <v Joe Menninger>They said we're moving from a transactional perspective into the realization 00:32:20.551 --> 00:32:23.091 <v Joe Menninger>that what matters is that use case. 00:32:23.311 --> 00:32:26.971 <v Joe Menninger>So it's a different way of selling the technology from a bank to a non-banking 00:32:26.971 --> 00:32:31.791 <v Joe Menninger>player. But also we saw banks effectively investing to orchestrate ecosystems. 00:32:32.491 --> 00:32:35.231 <v Paolo Sironi>And that has been growing in 00:32:35.231 --> 00:32:39.511 <v Joe Menninger>The last five years. Not only DBS attempted, they made five of these. 00:32:39.691 --> 00:32:44.971 <v Joe Menninger>We have Chinese banks doing so. But also Bradesco with Iagro that takes care 00:32:44.971 --> 00:32:47.311 <v Joe Menninger>of 50% of the Brazilian economy. 00:32:47.471 --> 00:32:52.251 <v Joe Menninger>Strahe launched it two years ago, successfully making a road into that type 00:32:52.251 --> 00:32:55.451 <v Joe Menninger>of business and then thinking about how to expand to different ecosystems. 00:32:55.451 --> 00:33:01.131 <v Joe Menninger>So we have State Bank of India with the ONU, which is a marketplace for retailers 00:33:01.131 --> 00:33:06.631 <v Joe Menninger>that now is aggregating SMEs, so the merchants, into the platform. 00:33:07.431 --> 00:33:11.991 <v Joe Menninger>Both of them created an external entity to operate the platform, 00:33:12.171 --> 00:33:16.751 <v Joe Menninger>but that built the platform. Okay, so that's interesting. 00:33:17.431 --> 00:33:18.951 <v Paolo Sironi>One thing that I want to say here, 00:33:19.071 --> 00:33:22.771 <v Joe Menninger>Which I believe is important, I was talking to the head of a very large bank, 00:33:22.871 --> 00:33:25.611 <v Joe Menninger>I just don't want to mention it, They launched a 00:33:25.611 --> 00:33:26.271 <v Paolo Sironi>Few months ago 00:33:26.271 --> 00:33:32.611 <v Joe Menninger>A platform for the supply chain of SMEs. And the platform is intended to allow 00:33:32.611 --> 00:33:34.171 <v Joe Menninger>the SMEs to trade the one with the other. 00:33:34.471 --> 00:33:38.211 <v Joe Menninger>Of course, there was a round-the-table excitement where we heard about that 00:33:38.211 --> 00:33:40.331 <v Joe Menninger>in terms of you're competing on payments, right? 00:33:40.391 --> 00:33:43.031 <v Joe Menninger>Because every time people transact, right, that's where you make the money. 00:33:43.191 --> 00:33:48.091 <v Paolo Sironi>But the response was no. The point is not the payment. The point is my role is to lend 00:33:48.091 --> 00:33:53.691 <v Joe Menninger>As much as I can, keeping the risk under control, okay? But to do so, I need to have data. So, 00:33:53.851 --> 00:33:55.411 <v Paolo Sironi>Can I better understand 00:33:55.411 --> 00:33:58.971 <v Joe Menninger>The ecosystem if I have that ecosystem to be concentrated digitally so that 00:33:58.971 --> 00:34:01.711 <v Joe Menninger>I can go back to the CEO of the bank and to risk manager and say, 00:34:01.851 --> 00:34:05.911 <v Paolo Sironi>Hey, now maybe we have a way of understanding everyone in the context of the ecosystem. 00:34:06.231 --> 00:34:11.751 <v Joe Menninger>So, we are more, if you like, comfortable in doing that business online. 00:34:11.971 --> 00:34:16.891 <v Joe Menninger>So, you see, the value of these non-banking platforms not necessarily is the 00:34:16.891 --> 00:34:21.211 <v Joe Menninger>non-banking transaction, but maybe what it enables you in terms of risk management 00:34:21.211 --> 00:34:23.271 <v Joe Menninger>to do your more traditional business 00:34:23.951 --> 00:34:24.731 <v Paolo Sironi>In a more 00:34:24.731 --> 00:34:30.431 <v Joe Menninger>Substantiated way. So that I found very interesting. I always say that it is the opportunity 00:34:31.343 --> 00:34:36.963 <v Joe Menninger>to basically embed that to eliminate the friction that makes the banking embedded 00:34:36.963 --> 00:34:40.923 <v Joe Menninger>to generate new value, that the definition of having when banks have a tech or platform economies. 00:34:41.203 --> 00:34:42.443 <v Paolo Sironi>So when I say new value, 00:34:42.603 --> 00:34:46.363 <v Joe Menninger>I mean new value is not a transaction, it's somewhere else. And that is an example 00:34:46.363 --> 00:34:48.603 <v Joe Menninger>that I just like to share. 00:34:48.863 --> 00:34:49.163 <v Paolo Sironi>And I see 00:34:49.163 --> 00:34:54.983 <v Joe Menninger>More and more banks are understanding this. It's a steady, long-term process, but it is happening. 00:34:55.763 --> 00:34:55.883 <v Paolo Sironi>Hmm. 00:34:57.063 --> 00:35:02.943 <v Narrator>Talking about mentioning here. I have one more question for the role of AI and 00:35:02.943 --> 00:35:04.023 <v Narrator>wealth management for you. 00:35:04.163 --> 00:35:09.483 <v Narrator>And then I'll just hit a few highlights of the topics you will be talking about. 00:35:09.643 --> 00:35:12.903 <v Narrator>So the people need to go to read your research. 00:35:13.123 --> 00:35:16.903 <v Narrator>And of course, we'll link the report down here in the show notes. 00:35:17.043 --> 00:35:19.643 <v Narrator>I also do have taken some notes. 00:35:19.963 --> 00:35:23.183 <v Narrator>We'll link your research, your LinkedIn profile, a lot of your books, 00:35:23.523 --> 00:35:30.283 <v Narrator>your podcast, Banker's bookshelf, plus your SME research that you just mentioned here. 00:35:30.683 --> 00:35:36.543 <v Narrator>And now let us get to the last question I'll be asking you, the role of AI in wealth management. 00:35:36.763 --> 00:35:43.723 <v Narrator>Looking ahead, how will AI and generative technologies impact wealth management, especially, 00:35:46.563 --> 00:35:49.603 <v Narrator>for individual and small to medium enterprises? 00:35:50.343 --> 00:35:54.523 <v Joe Menninger>Okay, so a very broad definition here, but let's say that in the world manager 00:35:54.523 --> 00:35:59.883 <v Joe Menninger>space, you have the need of creating the products, okay? And there's a lot of 00:35:59.883 --> 00:36:00.923 <v Joe Menninger>compliance around that. 00:36:01.303 --> 00:36:02.083 <v Paolo Sironi>So I do 00:36:02.083 --> 00:36:06.643 <v Joe Menninger>Believe that now there are possibilities to better streamline and systematize 00:36:06.643 --> 00:36:09.803 <v Joe Menninger>the way a lot of this documentation is prepared and orchestrated. 00:36:10.143 --> 00:36:11.223 <v Paolo Sironi>It doesn't mean that 00:36:11.223 --> 00:36:16.463 <v Joe Menninger>The banker is out of the equation, but the capability the bankers have to perform, 00:36:16.543 --> 00:36:20.963 <v Joe Menninger>to systematize that documentation is effectively augmented. 00:36:20.963 --> 00:36:28.163 <v Joe Menninger>And that's where I see a lot of basically use cases being deployed by institutions 00:36:28.163 --> 00:36:30.903 <v Joe Menninger>that are prominent in the well-management space. 00:36:31.163 --> 00:36:31.943 <v Paolo Sironi>There will be a 00:36:31.943 --> 00:36:35.223 <v Joe Menninger>Time where there will be more effective communication. I think it will still 00:36:35.223 --> 00:36:39.903 <v Joe Menninger>take some time for that, at least in terms of letting it get the compliance 00:36:39.903 --> 00:36:42.083 <v Joe Menninger>burden. And that is an opportunity right now. 00:36:43.763 --> 00:36:49.643 <v Narrator>And of course, as promised, I'll hit some of the other highlights you have in the research report. 00:36:49.643 --> 00:36:53.963 <v Narrator>sustainability and ethical innovation in fintech, future investment trends, 00:36:54.363 --> 00:36:59.323 <v Narrator>role of digital transformation in banking, global banking insights and regional 00:36:59.323 --> 00:37:03.643 <v Narrator>differences and emerging risks in fintech. 00:37:04.483 --> 00:37:08.963 <v Narrator>As we're wrapping up this insightful discussion with Paolo, we want to hear 00:37:08.963 --> 00:37:12.663 <v Narrator>from you. What are your thoughts on the future of AI and banking? 00:37:12.863 --> 00:37:17.083 <v Narrator>How is your business preparing for those technological shifts, 00:37:17.423 --> 00:37:21.503 <v Narrator>let us know in the comments below or connect with us on LinkedIn or Twitter 00:37:21.503 --> 00:37:24.323 <v Narrator>using the hashtag Banking2025. 00:37:24.983 --> 00:37:28.763 <v Narrator>Paolo, your last words, please go ahead. 00:37:31.271 --> 00:37:39.391 <v Joe Menninger>I published in 2019, launched in the Off-World Economic Forum and a week before 00:37:39.391 --> 00:37:45.291 <v Joe Menninger>in Hangzhou, China, as a preview, the Financial Market Transparency Theory and Principles. 00:37:47.351 --> 00:37:55.071 <v Joe Menninger>So transparency builds trust. Not only transparency is a matter among people, 00:37:55.291 --> 00:37:57.651 <v Joe Menninger>but definitely is an issue with technology. 00:37:57.651 --> 00:38:05.831 <v Joe Menninger>And I'm not surprised that most of the business people are asking AI to be extremely transparent. 00:38:06.791 --> 00:38:11.411 <v Joe Menninger>So that is a principle that we all need to look at. 00:38:11.531 --> 00:38:16.391 <v Joe Menninger>So if the algorithm is transparent in the incentives, first of all, 00:38:16.671 --> 00:38:22.231 <v Joe Menninger>and therefore in the positioning of the conversation with the clients, 00:38:22.231 --> 00:38:27.931 <v Joe Menninger>which brings with itself then cascading down different elements that can be on the bias, 00:38:28.451 --> 00:38:32.311 <v Joe Menninger>on the race, and whatever. So there's a multiplicity of elements. 00:38:32.491 --> 00:38:34.931 <v Paolo Sironi>But the question is, how did you 00:38:34.931 --> 00:38:38.991 <v Joe Menninger>Embed the principles of transparency in your technology process? 00:38:39.911 --> 00:38:45.631 <v Joe Menninger>There is a reverse effect now because by looking at technology and asking technology 00:38:45.631 --> 00:38:47.451 <v Joe Menninger>to be as transparent as it should, 00:38:47.811 --> 00:38:49.311 <v Paolo Sironi>I see the bankers looking 00:38:49.311 --> 00:38:50.811 <v Joe Menninger>At themselves and therefore 00:38:50.811 --> 00:38:55.111 <v Paolo Sironi>Are reviewing the way they position themselves in front of the client. 00:38:55.291 --> 00:38:59.611 <v Joe Menninger>Because the moment you ask technology to replace what you do and be very transparent, 00:38:59.811 --> 00:39:01.571 <v Joe Menninger>they basically declare the incentive of the system. 00:39:01.831 --> 00:39:03.251 <v Paolo Sironi>So there is a very interesting, 00:39:03.271 --> 00:39:06.851 <v Joe Menninger>If you like, reverse effect, as I called it. 00:39:07.151 --> 00:39:13.731 <v Joe Menninger>So I'm looking closely at how this evolves because that is a key turning point 00:39:13.731 --> 00:39:18.811 <v Joe Menninger>in the transformation of the business models that is essential, 00:39:19.091 --> 00:39:21.291 <v Joe Menninger>especially when you want to use technology. 00:39:21.491 --> 00:39:24.151 <v Paolo Sironi>And that's the reason why I published the 00:39:24.151 --> 00:39:29.371 <v Joe Menninger>Financial Market Transparency Theory as a positive theory that enables to look 00:39:29.371 --> 00:39:30.811 <v Joe Menninger>at the markets differently and 00:39:30.811 --> 00:39:33.951 <v Joe Menninger>it's positive theory because it can be transformed into a business model. 00:39:34.151 --> 00:39:38.071 <v Joe Menninger>And I discussed those business models in my latest book, Banks and Fintech on 00:39:38.071 --> 00:39:42.091 <v Joe Menninger>Platform Economies, looking at contextual banking and conscious banking and 00:39:42.091 --> 00:39:43.611 <v Joe Menninger>by the finance and advisory platform. 00:39:43.831 --> 00:39:48.491 <v Joe Menninger>So it all is consequential. So really, by asking it to be transparent, 00:39:48.751 --> 00:39:53.951 <v Joe Menninger>we have as a reverse effect, if you like, an opinion about how transparent we've 00:39:53.951 --> 00:39:55.411 <v Joe Menninger>been, they've been as bankers. 00:39:55.651 --> 00:39:56.491 <v Paolo Sironi>And from there, 00:39:56.671 --> 00:40:01.271 <v Joe Menninger>A new business model can be generated the way that value is created for everyone 00:40:01.271 --> 00:40:03.331 <v Joe Menninger>in the ecosystem, not just for the bankers. 00:40:04.851 --> 00:40:09.051 <v Narrator>Amazing closing words, Paolo. As always, it was a pleasure talking to you. 00:40:09.171 --> 00:40:12.731 <v Narrator>And maybe next time we talk, you're the host and I'm the guest on your podcast. 00:40:13.051 --> 00:40:14.211 <v Joe Menninger>Okay, welcome. 00:40:14.211 --> 00:40:17.571 <v Narrator>Great have a good day bye bye ciao paolo, 00:40:23.271 --> 00:40:27.811 <v Narrator>that's all folks find more news streams events. 00:40:27.920 --> 00:40:48.725 <v Music>