Communities and businesses play a crucial role in shaping the Federal Reserve’s monetary policy. To inform our decision-making, the San Francisco Fed hosts discussions with the people we serve so we can hear their stories and perspectives on how economic data translates into real impacts in the Twelfth District. Our “Beyond the Numbers” series shares some of those insights with you.
How is the spread of generative artificial intelligence (GenAI) tools through the economy affecting small businesses? Does GenAI open new avenues of opportunity for small businesses to compete with their larger peers, or will larger firms use the technology to strengthen their positions?
To address these and other questions facing small businesses, we recently convened a roundtable of executives from across the Twelfth District. Representing the hospitality, restaurant, recruiting, and payment processing industries, the roundtable participants all lead small-scale enterprises currently integrating GenAI technologies into their business practices. They sat down with Mary C. Daly, President and CEO of the San Francisco Fed, Sunayna Tuteja, Senior Vice President and System Chief Innovation Officer for the Federal Reserve System, and Kevin Ortiz, co-head of the EmergingTech Economic Research Network (EERN).
Roundtable discussions like these are a centerpiece of the EERN initiative. A partnership between the SF Fed and the Federal Reserve System Innovation Office, EERN supports a better understanding of how new technologies like GenAI are shaping the economy of the future.
Early GenAI Use Cases
In previous roundtables focused on artificial intelligence (AI), participants noted that they were using AI tools predominantly for back-office tasks such as data management and generating marketing materials. The small business leaders participating in this discussion echoed these sentiments. An executive from the payments processing industry reported that they have deployed GenAI-powered machines to more accurately read payment slips and determine the appropriate action based on historical data, while a representative of the hospitality industry emphasized GenAI’s usefulness in inventory management and room occupancy demand forecasting.
Looking ahead, the small business leaders felt that more tools will be coming on-line that will support customer-facing tasks. An executive from the recruiting industry highlighted GenAI’s potential to ease the task of making initial sales and recruiting calls. They shared that these so-called “cold calls” are repetitive and have a low success rate, which makes it difficult to retain people for these positions (this person reported a turnover rate of nearly 90 percent for this specific role). In the hospitality industry, a participant felt that GenAI allows hotels to offer a more personalized guest experience, including concierge services and improved self-check-in and check-out. This executive also reported that AI generally can help with cost reductions through amplifying the use of Internet of Things (IoT) technologies tied to hotel rooms, including light and air conditioning automatic shut-off sensors and identifying water leakage problems.
Productivity and Employment Impacts
President Daly noted that one of the biggest open questions about GenAI concerns its effect on productivity, and she asked the leaders about their experiences in this area. The business leaders cited a number of examples where AI tools had already made a positive contribution to productivity, including significantly reducing the time it took to complete routine operations like document processing.
As part of the productivity discussion, the participants pointed out that there is not always a clear divide between traditional forms of process automation, which typically require a detailed set of rules on how to address each prompt or scenario, and new GenAI tools, which can identify the best course of action when confronted with novel scenarios. The executive representing the payment processing industry noted that they had integrated advanced automation into their operations for decades. Instead of considering GenAI as an alternative to such automation, the participant felt it was better to view AI as a supplement to make existing automation more efficient and effective. Several roundtable participants reported that they had created new positions focused on integrating AI into their existing automated processes.
Two of the participants noted the potential for GenAI to reduce employee headcount at their firms. However, they also noted that by freeing employees up from routine tasks, they could spend more time on higher-value and more engaging face-to-face interactions with clients and customers. The participants also mentioned the power of GenAI to improve the employee training and upskilling process. Finally, one noted that as more and more college students use GenAI in their courses, familiarity and experience with the technology will become more ingrained. This will increase the number of GenAI-literate individuals in the labor force every year.
The Potential and Pitfalls of AI for Small Businesses
Top of mind for several of the roundtable participants was whether the trend toward adopting GenAI technologies made small businesses more competitive with larger companies in their industry. They emphasized that building and training custom GenAI models for their specific business needs was cost prohibitive. This meant that small businesses would likely need several third-party applications, many of which do not communicate and cannot be integrated with one another, to meet their needs. This puts them at a potential disadvantage relative to bigger businesses with the capital to invest in their own, custom-built GenAI models.
President Daly noted that she had heard a similar question about GenAI’s impact on competitiveness from leaders of large enterprises. From the perspective of leaders of large businesses, GenAI would allow smaller businesses to level the playing field with greater access to information and expertise and thus allowing them to offer new products and services at much lower costs.
President Daly and the small business leaders concluded that at this initial stage of GenAI’s integration into the economy, it was still too early to tell whether the technology will favor more competition or lead to consolidation across industries.
Understanding New Technology and the Fed’s Mission
The SF Fed supports a strong economy for all Americans by advancing our country’s monetary, financial, and payment systems. Because new technologies like GenAI can be catalysts of fundamental changes to the economy, it is vital that we understand their early impacts on our businesses and workplaces. For this reason and as part of EERN, we will continue to survey our business and community leaders about their experiences with GenAI and share what we have learned with our wider Twelfth District community.
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The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.