The rapid advancement of Artificial Intelligence (AI) technologies is already transforming financial services and business operations across the globe. From customer service chatbots to adaptive cybersecurity, the applications of AI are nearly limitless. When properly designed, AI can help minimize paperwork, reduce costs, and drive better business decisions. This is achieved by increasing the predictive accuracy of future outcomes and mitigating the cognitive biases inherent in human decision-making.
In the financial services industry, AI has the potential to expand access to affordable credit for consumers and small businesses. It can also combat fraud and financial crimes. However, many financial institutions remain reluctant to deploy AI to its maximum potential without clear regulatory guidance from US agencies.
Key Takeaways
- AI technologies are transforming financial services by minimizing paperwork and enhancing decision-making.
- Financial institutions hesitate to utilize AI fully due to a lack of clear regulatory guidance and fear of the unknown.
- AI can expand access to affordable credit and combat fraud, particularly in consumer lending for underbanked populations.
- Regulators are beginning to acknowledge the need for a clear framework to ensure AI compliance with fair lending laws.
- Without proper regulatory guidance, financial institutions struggle to adopt AI, limiting innovation and consumer choices.
AI is misunderstood
Like many new technologies, the current AI landscape lacks a depth of established legal and regulatory precedent to rely on. Mistrust in AI technologies is largely born out of their novelty and a general lack of understanding. In fact, a recent survey from Gartner research found that 79% of finance executives attributed “fear of the unknown” to their reticence to adopt AI.
To date, financial institutions are mostly employing AI to mitigate fraudulent transactions, know-your-customer (KYC) risks, and cybersecurity risks. In cybersecurity, AI is used to monitor the mountains of data that would be impractical or impossible to do manually. Some cutting-edge systems can even “learn” from previous cyberattacks. This enables them to predict and prevent future breaches and adhere to regulatory guidance. This so-called “machine learning” is becoming an increasingly critical tool in protecting consumers’ financial data.
AI and FinTech
But the greatest potential for AI in financial services remains in transforming consumer and small business lending. While empirical underwriting models have been deployed in lending for decades, the predictive power of traditional techniques pales in comparison to the predictive powers offered by AI and machine learning. Confidently deploying AI will lower borrowing costs for consumers and small businesses. It will also bring more ‘underbanked’ customers into the traditional banking system, thus bringing them under the purview of federal regulators and consumer protections.
AI-driven lending is most impactful when it is trained on the widest set of relevant datasets. By incorporating data beyond what is currently available in credit bureau reports, lenders can extend credit to borrowers with little to no conventional credit history. This greatly expands access to affordable credit. Therefore, not only should the regulatory community get behind AI in lending, but it should also encourage the use of so-called “alternative data.” This includes information such as bank account transactions, payroll data, spending habits, or utility bill payments.
Regulatory help
While the consumer benefits from AI are clear, the current regulatory framework did not envision these types of technology-driven underwriting models. Understandably, a major source of concern with AI lending applications is compliance with fair lending laws and a perceived lack of transparency on how decisions are made. Despite recent and significant advances in the transparency and explainability of AI lending algorithms, policymakers remain concerned about the potential for bias and discrimination. Accordingly, a clear regulatory framework that directly addresses how AI can remain compliant with these important protections is needed.
Thankfully, regulators are beginning to focus on this space. Earlier this year, the five federal banking agencies jointly requested input on how AI is currently used in financial services. This is a welcome sign that regulators clearly understand the potential of AI. They also share the urgency to build an AI regulatory regime that balances innovation with consumer protection. While this is a significant step, regulators must press forward to issue binding guidance and, eventually, formal regulations.
Financial institutions have been operating under a regulatory regime designed well before the development of AI. This is hindering greater adoption, innovation, and consumer choices. Clear regulatory guidance would pave the way for broader access to affordable credit. It would also expand financial inclusion, and significantly reduce fraud and other financial crimes. As you can see, AI is transforming financial services.
