How AI is going to re-write the rulebook for financial services
By Ivo Gueorguiev, co-founder and executive chairman of Paynetics UK
Artificial intelligence (AI) is poised to revolutionise the financial services industry. Just ask Google, who recently launched Anti-Money Laundering AI after trialling the tech with HSBC. Or Morgan Stanley and Stripe, who are exploring the capabilities of OpenAI. A recent report from McKinsey suggests generative AI could add annual value to the banking sector to around $200-340 billion.
The applications of AI within finance are endless. The unparalleled ability of AI to process vast amounts of data, personalise customer relationships, combat fraud and expedite operational processes will reshape the sector.
As the finance industry pursues AI, it must remember to balance innovation with ethics and data privacy. As with any tech, considered deployment is essential to see the sustainable transformation and ensure fairness, transparency and accountability.
Enhancing Product Development: The Role of AI
Artificial intelligence has been used in the financial industry longer than one might think. James Simons’ quantitative investment firm Renaissance Technologies was founded in 1982 and developed systems to solve problems and answer questions in a set context. With the increase in computer processing power and the birth of Deep Learning, we now have AI use cases ranging from insurance underwriting to loan decisions and fraud prevention.
AI enables insurance providers to create bespoke customer pricing based on travel data analysis. The customer provides details about their family, health and plans and can secure a lower premium as a result. In the future, the financial services industry will see a similar application in mortgage or life insurance eligibility assessments, which will streamline service operations and speed up application processing for the consumer.
These new products and services are powered by the ability of AI to analyse vast datasets and extract actionable insights, in addition to automating traditionally manual processes and improving overall efficiency. Its ability to take over repetitive and even slightly generative tasks substantially reduces cost. It’s no wonder that all major players in the financial services space are launching initiatives to that effect.
Transforming Customer Communication and Product Design
Another way AI is transforming financial services is through customer engagement. With the FCA’s consumer duty rules coming into force in the UK at the end of July, exploring these applications is more important than ever.
AI-powered chatbots, virtual assistants, and voice recognition technologies provide instant, more accessible customer support and allow financial institutions to connect with them across multiple channels. The growth of sophisticated customer service tools may help drive growth in other areas. For example, customers may be more willing to embrace new technology, such as open banking, if adoption friction reduces and they know they have immediate access to complete guidance.
For example, AI has upgraded robotic advisors. Although these have been around for a while, AI has opened new opportunities for customer engagement. For example, personalised investment recommendations illustrate the ability of AI to analyse data from cards, bank accounts and payment systems to deliver a superior user experience.
Evolving Fraud Management: Predictive Fraud Prevention
As illustrated by Google and HSBC, AI has significant potential in combating financial crime and fraud. In the UK, more than £1.2 billion of fraud was stolen in 2022, and next year rules will require UK banks to reimburse fraud victims.
AI in fraud detection was explored as far back as the 1990s when the FinCEN Artificial Intelligence System (FAIS) reviewed and identified potential money laundering incidents. Over two years, it reviewed over 200,000 weekly transactions and flagged 400 potential incidents worth approximately $1 billion. Nowadays, the tech that can detect and even predict financial crime is of serious interest to banks.
Modern AI works on the same principle, using algorithms to analyse vast amounts of data in real time, identify patterns, detect suspicious anomalies and predict fraud. Its ability to create more sophisticated rules and look for patterns instead of a simple rule-based system increases accuracy and reduces false positives. During their trial with Google, HSBC saw a 60% reduction in false positives and increased positive alerts by two to four times.
Impacts of Wide-Scale AI Adoption on the Financial Services Industry
AI adoption within finance is quickly gathering momentum. Wide-scale adoption will be the future. So what does this mean for the sector as a whole?
The financial services will experience a paradigm shift in learning, development and re-skilling. Talent will be able to enhance their existing skills by capitalising on the efficiencies AI makes in day-to-day operations.
More widely, legislation will need to evolve, which has started to happen as regulatory bodies rush to keep pace with AI’s new capabilities and impact. There is a balance of power between traditional banks and fintechs, which could swing or solidify based on AI adoption. If traditional banks leverage their legacy, they could win back market share. If they’re slow on the uptake, they risk falling further behind fintechs in customer experience and their position in the future.
Ethical and Data Privacy Considerations
One of the crucial conversations around AI for the financial services industry is its ethical application. The ability of AI to introduce bias due to the data it’s trained on is a big risk and has the power to enhance discrimination, not eliminate it. Leaving AI discrimination to go unchecked is not only immoral but also non-compliant.
It’s not just regulation around bias that the finance industry needs to watch out for. It’s not unusual for companies to use data for a different purpose for which it was collected.The industry needs to ensure that AI does not muddy the waters of data protection and privacy. As it embraces AI and its lightning ability to run through data, institutions must comply with the latest regulations to safeguard customers.
Embracing AI in Financial Services
Artificial intelligence is poised to revolutionise the financial services industry and rewrite the rulebook governing its operations. By harnessing the power of AI in product development, customer communication, fraud management, and more, financial institutions can unlock unprecedented opportunities for growth and customer satisfaction.
As AI reshapes the sector, it is vital to prioritise ethical considerations and data privacy safeguards to ensure a responsible and accountable deployment of this transformative technology. Embracing AI while upholding ethical standards will pave the way for a future where financial services thrive in a digitally enabled world.