Most Investment Banks Are Applying AI According To This Study

First, we had the blockchain, and everybody was talking about cryptocurrencies and their use cases.

But none of that really took off to any large degree, especially non-fungible tokens, which were touted as the best new investment, but ended up as a cratered market when people decided that NFTs just weren’t that cool anymore.

Since then, we’ve been on to the next wave of AI implementations, which are much more practical, as a whole, than anything people can create with the blockchain.

I was looking at a report lately that shows some of the progress of AI in financial markets, and more specifically, its progress in applications to investment services.

Farsight AI did a survey on 50 industry professionals representing different kinds of financial businesses. (Disclaimer: I am associated with the firm itself.) What they found relates to how AI is being used in the sector…

“The integration of AI to investment banking promises to shift the market landscape, substantially boost efficiency, and unlock new opportunities for growth,” researchers wrote. “However, common drawbacks including lack of customization to templates, sparse data coverage on small, private companies and uncertainty around use cases are currently clouding adoption trends.”

Noting that around 2/3 of investment banks surveyed have at least created a pilot program with AI, the study also found more adoption in boutique and middle market businesses, which the team characterized as investment banks with less than 500 employees. Researchers wrote:

“While larger banks are experimenting with genAI, few apps and use cases are being used consistently in production at that scale. At the mid-market and boutique levels, the encouragement of in-house experimentation, combined with the willingness to work with third-party vendors, has accelerated the time-to-value of genAI apps.”

Here’s another finding that might take some some interpretation:

Study authors said that – “the value perceived by bulge brackets from successful implementations, was significantly higher on a per employee basis than their mid market and boutique peers.”

First of all, “bulge brackets” are larger global banks, since I feel like most people would not be inherently familiar with that term. Also, a per employee basis is a strange way to word that. But the idea is that the larger banks get even more bang for their buck, per person.

Survey authors go on to note that that’s because of the scale of the projects initiated by these larger banks. It’s sort of counterintuitive, because you would think that the smaller firms have a lower bar to rank higher on a per employee basis, but perhaps these larger banks develop Cadillac systems that deliver a lot more firepower in general.

The surveyers also mention challenges – security, education and awareness, and change management.

They look at metrics like deal volume, and address the perceived benefits and risks of AI.

Some of the value propositions involve deal making, visibility for brands, and competitive advances.

As for tools, ChatGPT outweighs others with 71% of respondents indicating their firms used this application, compared to 43% for Microsoft Copilot, 29% for Bard and 29% for other tools. (These don’t have to add up to 100% since companies can use more than just one.)

Holy Grail Use Cases

Later on, the study asked people what they would use AI for in an ideal world. Respondents came up with the following:

· Pitch decks

· NDA processing

· Sell side prospecting

· Buyer list generation

· CIM creation

· New deal sourcing

· Market overview

· Contact log management

· Precedent transaction screens

· Modeling checker

· Profile generation

Here’s a number that stood out to me – the assertion that the study found AI can potentially generate up to $1 million annually in value, per employee, in many investment banks.

“Our survey corroborates this potential…” authors wrote.

I’m going to also share a few quotes that were added into a summary of the survey itself:

• On AI Awareness: “AI is the buzzword everyone is talking about, but few truly understand its full potential in our field.” — VP, Houlihan Lokey
• On Big Tech AI Offerings: “I’m AI-aware, but we haven’t made any real purchases. Microsoft has those in-built tools, but they don’t really take you that far in our job function” — Partner, Edgepoint Capital
• On Security Concerns: “We hit the brakes quickly once we saw our junior staff using ChatGPT and Perplexity. There’s a huge potential data issue here, if people can see what we’re searching.” — VP, Dyal & Co
• On Potential Market Share Impacts: “AI today allows us to take on more deals that would typically be outside our strike zone. We can get up to speed much more quickly, and generate the necessary content much faster with less.” — MD, Raymond James
• On AI’s Impact: “There will be a real competitive advantage for those firms that are able to marry their proprietary knowledge with AI systems that can help across prospect generation, deal execution and content creation in a unique way for each specific firm.” — Partner, Union Square Advisors

What about actionable advice for AI integration into finance?

Survey authors recommended a “crawl, walk, run” approach, prioritizing data security, investing in training, and leveraging partnerships, among other best practices.

This is just one example of how AI is taking off in the financial world. We’re very attuned to these kinds of industry cases, because they start to explain and illustrate how we’re going to be coexisting with these powerful technologies in the future.