Musing over the AI agent's impact on financials

After Tuesday's selloff, BofA Research analysts, led by Ebrahim Poonawala, examined the potential threat and made some suggestions to investors and banks. The concern is that Muse, which recently surpassed ChatGPT as the top iPhone app download, will end up reducing customer inertia by leading people to move money from low-cost deposit accounts to accounts where they can earn higher returns. If this happens it could pressure banks into raising deposit rates. With that, Poonawala said that Tuesday's knee-jerk selloff was not particularly surprising. But he suggested that investors should watch changes in bank deposits rather than app download numbers or Muse's daily active users. "If agentic AI is genuinely changing behavior, evidence should emerge through higher deposit costs, lower non-interest-bearing balances and greater competition for marginal funding," the research analyst said. "Until deposit costs rise faster than can be explained by rates or competition, the disruption thesis remains conceptual." Against that backdrop, Poonawala describes agentic AI as "a multiyear evolutionary risk rather than a near-term deposit disruption event." Even though downloads have soared, he notes that consumer concerns around "privacy, trust and the risks of granting agents access to financial accounts" may slow adoption. However, this doesn't mean that banks should just sit back and hope for the best. In fact, the analyst suggested that they may be best served by "accepting some self-cannibalization." For example, he sees a not-yet-launched "Smart Cash" product from JPMorgan JPM.N, which is expected to help customers automatically optimize balances, as a step in the right direction. Since corporate clients and high-net-worth customers are likely already sensitive to rates, BofA sees the biggest change in behavior most likely coming from regular consumers and small businesses. While acknowledging that the data is murky, they estimated that about 35% of deposit balances are "stable" at the six largest banks. But ultimately, Poonawala argues that the key question for banks is who owns the agent, the wallet and the customer relationship. Insurance stocks also took a dive on Tuesday with a 1.7% drop in the S&P 500 insurance index .SPXIN, which is up 0.2% on Wednesday. In a separate research note, BofA analysts, led by Joshua Shanker, described the bear case worry that AI insurance shopping tools create a "race to the bottom" by exposing the industry to greater competition. But Shanker argued that the opposite might be true as "greater transparency should benefit consumers and reward carriers with the best underwriting analytics, the fewest pricing mistakes and the greatest economies of scale." With that, Shanker argues that Progressive PGR.N is uniquely well placed in a world where "more business is allowed to find its way to the best price/value provider." However, its shares are down 0.3% on Wednesday after falling 2% on Tuesday. On the flip side, if investors are shopping for the best policy more often than before, it could mean that "commission revenue is likely to come under pressure." With that, Shanker pointed to personal insurance line distributors such as Goosehead GSHD.O as being most at risk. Goosehead shares are down 4.3% on Wednesday after tumbling 11.5% in the prior session. The stock has lost almost a third of its value since Muse was released on September 8. In contrast, Meta shares have risen about 25%, based on their peak level so far this session. The recent launch of Muse, a personal artificial intelligence agent from Meta Platforms META.O, was the latest AI development to provoke fears of disruption in industries such as financial services. Financial stocks were clobbered on Tuesday as investors woke up to the realization that Muse could force some changes in the industry with wealth management and insurance companies getting hit most and bigger banks also taking a step down. On Wednesday, the S&P 500 financial sector .SPSY is close to flat after falling 2% in the prior session. The S&P 500 banks index .SPXBK is down 0.6% after sinking 3% the day before.

Musing over the AI agent's impact on financials

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