When a technology is billed as something that will transform the entire global economy, the primary impulse of investors is often fear—specifically, fear of missing out (FOMO). And that’s exactly what we’ve seen so far in 2023, with regard to artificial intelligence (AI).
However, for investors, the most obvious play to profit from generative AI is already a very crowded trade. One of the best-known investing adages is to “invest in shovel-makers when there’s a gold rush,” and that’s just what investors have done so far in 2023.
Shares in Nvidia (NVDA), which makes the graphics processing units (GPUs) facilitating generative AI, have already more than tripled in value this year.
So if not Nvidia, or Microsoft (MSFT)—which has invested $13 billion into ChatGPT creator Open AI—then what? Microsoft stock is up over a third year-to-date.
There is no doubt that, when it comes to AI, the genie is out of the bottle. Artificial intelligence is a technological opportunity, as well as a risk for a wide range of industries, just as the internet was in the mid-1990s.
That brings us to the question for investors: should we just forget about the gold rush and shovel analogy? After all, companies are adopting AI at higher rates than they had in the past, with 50% of companies reporting using AI for at least one application in 2022 compared to just 20% in 2017, according to a report put together by Mastercard (MA).
The best investments may well be those companies that are well placed to actually utilize AI in their businesses—especially if they don’t have same lofty valuation as Nvidia does. Let’s look at one example…
AI Will Pay Its Way in Payments
We now have growing expectations of “soft landings” for major economies like the U.S., as well as markets pricing in the end of interest rate hiking cycles. This is ideal both for the valuations and earnings outlooks of companies for companies in growth businesses, such as payments.
Visa (V) shares have now recovered all the ground lost since the middle of 2021, and Mastercard has recently seen its share price at all-time record highs. These companies will benefit greatly from the use of AI. The opportunities in AI for payment businesses center around more robust fraud detection, personalized user experiences, and automated customer support.
Of these opportunities to improve their business, using AI in detecting fraud is the most important. Already, Mastercard estimates it has thwarted $35 billion worth of fraud in the last three years, primarily by utilizing AI technologies to spot authorized push payment (APP) scams. This is where criminals focus on conning consumers into sending them money by posing as legitimate entities. And the AI is getting more sophisticated, which is necessary to keep up with the criminals.
Given the vast quantities of data Visa and Mastercard have, there ought to be lots of opportunities to apply AI learning, with which they can drive user engagement.
Let’s look more specifically at what Mastercard is doing with AI.
Mastercard and AI
For one great example of what Mastercard is doing, we look across the pond to the U.K. and nine major British banks.
The payments giant has launched its Consumer Fraud Risk technology in the U.K., using large-scale payments data to help identify scams before funds leave a victim’s account. The project is happening at a time when players on both sides of the law are using AI.
The tool builds on insights from Mastercard’s work with U.K. banks to follow the flow of money mule accounts over the last few years. Overlaying this information with specific analysis factors—such as account names, payment values, payer and payee history, and the payee’s links to accounts associated with scams—helps provides banks with the intelligence necessary to intervene in real time and stop a payment before funds are lost.
Mastercard says that the system could have a significant impact on the aforementioned APP fraud, which has been rapidly rising in recent years and now accounts for 40% of U.K. bank fraud losses. The company estimates such fraud could cost $4.6 billion in just the U.S. and U.K. by 2026.
Mastercard decided to roll out Consumer Fraud Risk in the U.K. first because it has a lot of experience of tracing and stopping financial crime across the country’s real-time banking system and has helped to coordinate banks into sharing their fraud data. It is now assessing the next most appropriate markets to adopt the technology. So, there is a lot more to come on this front, with the U.S. being the biggest market.
With Mastercard being a leader in using AI in its industry, the company is one of the most prominent, but undiscovered, beneficiaries of AI.
The stock is still trading near its all-time high—up 15% year-to-date—and is a buy on any weakness, at around $400 a share.