Wall Street banks are pushing large law firms to reduce their fees, arguing that the business model that has enriched top lawyers for decades is no longer sustainable in an era of artificial intelligence. Morgan Stanley and Citigroup have told major law firms they want to establish new payment arrangements that would save them money, the banks' in-house lawyers told the Financial Times.

"If the number of hours they're working on a matter has come down because of AI . . . our expectation is for costs to come down significantly per transaction," Adam Meshel, global head of legal at Citigroup, told the FT.

Meshel said the bank had started asking law firms to bid for work, requiring them to explain during the bidding process how much they were saving through the use of AI. He added that the ability to complete tasks more quickly could mark "a fundamental altering of the revenue foundation for these mega firms."

The pressure comes at a time when the legal industry's dominant billing method — charging clients by the billable hour — is facing scrutiny as generative AI tools increasingly automate tasks such as document review, drafting, and due diligence, which have traditionally generated significant hours at top firms. Large financial institutions are among the biggest spenders on outside legal counsel, giving banks of this size considerable leverage in fee negotiations, and moves by Morgan Stanley and Citigroup to demand AI-related savings could signal broader pressure on the industry's pricing model if other major clients follow suit. A key question for law firms is whether they can shift toward alternative fee arrangements — such as flat or success-based pricing — while preserving profitability as AI reduces the hours required per matter.

The full FT piece is by Kaye Wiggins and Joshua Franklin: And it begins…(a good start…)

The author of the Marginal Revolution post noted having predicted exactly this development in many of their talks.