Artificial intelligence doesn’t only threaten to put herds of software businesses out to pasture. Anthropic PBC’s schooling of its Claude models in financial modelling has also sent a cold shiver down the spines of bankers and analysts. While I mostly suspect that the banking industry’s talent for self-preservation will defend it from technological change, I do wonder if the extreme version of our fully automated AI future could make financial services as irrelevant as everything else.

Finance has a very long history of always finding new ways to get paid even as the world of money keeps changing. In only the past few decades, collecting peoples’ savings, buying and selling securities and sending money to the other side of the world have all become faster and cheaper. The internet and smartphones have taken out the frictions and delays that were long a source of revenue for intermediaries.

And yet banks, brokers and money managers are still in business and making handsome profits. The process of turning a dollar of savings into a dollar of investment hasn’t gotten cheaper in more than 130 years, according to studies by Thomas Philippon, a finance professor at NYU Stern School of Business. From the age of the telegraph in the late 1880s to the era of high-frequency, algorithmic trading, the all-in cost of intermediation has remained close to 2% of financial assets, Philippon found.

How does that work? For every development that undercuts what financiers did previously, they’ve been able to come up with more sophisticated or complex products and services to sell. Some of the names have changed but the overall cost to the economy remains much the same.

Look at asset management for one recent example. Traditional actively managed funds have been brutally squeezed by passive index trackers for years, which do a similar job at a fraction of the cost. But the industry has kept its income flowing through the rise of hedge funds and private capital, which charge even higher fees for more complex products. Globally, the fund industry’s total revenue was 34 cents per $100 of assets managed in 2024, little changed from 36 cents in 2005, according to Boston Consulting Group.

Another example is investment bank trading desks, which were hit hard by tighter regulations after the 2008 crisis as well as electronification and greater transparency and automation. But in the past few years, they’ve reversed a long steady decline by lending more to those costly alternative managers and by selling more derivatives and structured trades, for instance. Even in something as dull as processing payments for big companies, banks have protected income by combining simple low-cost transactions with premium add-ons like clever cash management and analytics.

To be sure, banking and money has been helped by social and political forces, too. Since the 1980s, a vast cloud of surplus financial capital has been inflated, in the words of strategist and author Viktor Shvets. The generation that grew up after World War II wanted less government and more individualism. Politically, that delivered rapid deregulation and policies that prioritized assets over income, Shvets argues in his recent book The Twilight Before The Storm. More people and companies gained access to greater amounts of debt for all kinds of investment and consumption. Insurance and savings products mushroomed. Global trade and corporate borrowing exploded. And the global financial system, which had been roughly the same size as the real economy through the 1970s, grew rapidly to being more than five times the value of global economic output today.

Combined with technology, this has made almost everyone better off, but increased inequalities in many places. Shvets’s warning is that AI unchecked will swiftly widen and deepen the resulting social fractures. As this technology slashes the need for labor, the marginal cost of producing goods and services will drive towards zero — and the returns available from winning ideas rocket ever higher. Consequently, it’s never been easier to become a billionaire or to sink into inescapable poverty, Shvets told me.

The utopian promise of AI is abundance, but the only guaranteed beneficiaries are the super elites that own the machines. But here’s the rub: In a future where most industries need hardly any workers, who’s going to consume all the services and goods they produce? Shvets, like many others, thinks a good part of the answer will need to be a universal basic income for all, whether they have any kind of job or not, paid for out of taxes.

But that will be very little help to financial services. When you’re guaranteed a wage for life and have little chance of doing much else, there won’t be any point in saving for retirement and probably no reason to take on debt to buy a house either. The financial deepening of the past 50 years could rapidly reverse.

What could Wall Street do? One idea already taking hold is to turn money into entertainment: Prediction markets, gambling with stock options and crypto are just that. The inglorious future of finance could be economically pointless game playing. Only an ever shrinking super elite would need financial services at all — and they’d probably just ask machines to do it. In the end, money itself could end up a hollow prop in an economy where the decisions of most individuals no longer matter at all.

Some think this is the way things will go. I have no idea, but even leading finance executives are realizing that politicians need to start figuring out how to slow the disruption and set up guardrails to protect society from greater polarization and chaos.

Recently in Davos, Jamie Dimon, chief executive officer of JPMorgan Chase & Co., suggested that governments could figure out a way to stop banks like his from cutting staff numbers quickly as AI takes their work. It was a thought that didn’t bear much scrutiny, but the finance industry could still be worth listening to. After all, few others have been so consistent in reinventing ways to employ people and charge fees for products the world never knew it needed.

© The Japan Times