Unleashing AI’s potential in financial services
Luis Rodriguez, Chief Product & Innovation Officer at Strands explores how financial institutions can overcome the barriers in AI deployment and capitalise on its true potential
The idea that machines have the potential to make better decisions than us humans is nothing new. The recent explosion of available data, coupled with advances in technology has elevated AI’s commercial credibility, which, unsurprisingly, the financial services industry is keen to take advantage of.
Many banks have already begun their AI journey, albeit with relatively narrow applications. At the front-end, chatbots have started to replace humans in digital customer interactions, for example. Internally, the industry is investing heavily in AI-enabled solutions to enhance automated threat intelligence and prevention, and fraud analysis and mitigation.
Despite these steps, however, considerable challenges remain before AI’s real potential can be unleashed.
Data, data everywhere
Much of this potential lies in unlocking the value hidden in the vast amounts of data, by translating it into individualized products and services for consumers. To do so requires financial institutions to break-down silos, strategically evaluate existing and new data sources, and create a world-class governance model to prevent ‘black box’ AI.
The ‘black box’ problem is a key challenge. This describes the instance when no one can explain how data has been processed to achieve a specific outcome. This is particularly pertinent to financial services, when such outcomes impact the lives of customers. As AI is deployed in credit scoring, mortgage applications and lending practices, for example, banks and other lenders must be able to evidence the rationale behind their decision making.
They must also avoid the pitfalls of data bias and discrimination. Data sets can harbour hidden biases, just like the humans whose algorithms create them. If banks lose even partial sight of how their AI solutions are arriving at decisions, how can they guarantee impartiality in the process?
Should such instances occur, accountability will remain with the bank’s people, so the development of ethical policies that can steer the implementation of decision-making AI solutions is becoming increasingly important. Banks that champion transparency here will be the first to succeed.
Outside of financial services, AI has been powering increasingly seamless and customised consumer experiences for years, raising the stakes for what consumers expect from other services. Historically, banks have enjoyed the uncontested loyalty of their customers, thanks to their reputations for trust and security. But the drivers of loyalty are changing quickly. The new generation of digital challengers continue to gather momentum and are luring customers to their ranks by delivering new user experiences that are powered, at least in part, by AI. Banks now need to think carefully about how they respond. Leveraging behavioural economics to enable the deep personalisation of their banking services is one avenue under widespread consideration.
Despite concerns around the data privacy, a study by Accenture* found that 60% of consumers would be willing to share personal data, such as location data and lifestyle information, with financial service providers if it resulted in lower pricing on products, or delivered other benefits, such as faster turnaround on loan approvals.
But just because consumers are willing to hand over data, doesn’t mean it’s right for the bank to use it. Where should the line be drawn? As data converges, it will be easier to create individual consumer profiles and assemble a tailored offering, dependent on each consumers’ circumstances. But should FIs really have this level of access into a consumer’s personal life? And, what about those who dont want to share these details? Will they be penalised?
Digital transformation has not yet changed the fact that businesses are still built, managed and kept alive by people and, reassuringly, the true potential of AI cannot (yet) be realised without us. That said, serious investment in AI skills at banks is needed if they are to make proper use of its commercial potential. Many banks, particularly resource stretched tier two and tier three institutions may need to look to collaborative partnerships with specialist fintechs if they are to keep pace with AI’s development.
What about the regulators?
Right now, there is no specific regulation or legislation to govern the use of AI. As with any emerging technology, regulators apply existing frameworks to ensure that any firm engaging with technology has the right risk controls in place. It’s likely that regulation will adapt to address the new issues surrounding AI, but no-one can be sure exactly how that will play out, or at what speed. Financial institutions should think ahead here, and try to forecast how future regulation may impact their AI services. Collaborating with other institutions to create a general framework and set of guidelines could elevate future regulatory impact. Firms should also look at implementing AI processes internally to remain compliant throughout their operations.
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Making sense of AI for FIs requires a collaborative industry effort. To explore this topic further, Strands, in collaboration with global industry association, Mobey Forum and ESADE, is hosting an event from 27 – 29 November to bring together players from across the ecosystem. Titled, AI In Financial Services: Unleashing the Potential, it will cover five key themes related to AI: ethics; infrastructure; personalisation; regulations and legislation, and the challenges with data. Speakers include Elena Alfaro, Global Head of Data and Open Innovation, BBVA, Jason Mars, CEO, Clinc, and Oriol Pujol, Vice President, University of Barcelona.
FIVE things fintechs must do to keep investors onboard
New investors flocked to the stock market during the COVID-19 pandemic. Thirty-eight percent of investors said they had never had a brokerage or similar account before opening one in 2020.
Low or no-fee trading options have helped accelerate the trend – nearly half of new investors said they accessed their account primarily through a mobile app. As FinTechs, how do we create the trust needed to keep new investors in the market and create a fruitful customer experience for them?
The financial industry does a disservice to individual investors if we merely offer tools that focus on making money quickly, an approach that usually backfires. Instead, the surge of interest presents an enormous opportunity for those who want to help more consumers use financial technology to educate them on responsible spending, saving, and investing in order to achieve financial wellness current fintech tools have welcomed individual investors in the door.
Now, it’s time to focus on education and improving their experience going forward. There are several ways those of us in fintech can step up to shape the future of retail investing so that it works better for everyone, starting with the following areas.
Equal access to financial wellness education
Financial health should be available to everyone — but today, not everyone has the educational resources to achieve it. One study shows that only 3.9% of students from low-income schools were required to take a personal finance class. What they aren’t learning in school or from family members, fintech companies can provide on their platforms.
The companies should move from solely offering financial services to a more responsible model of education, advice, and prescriptive choices to help consumers develop better habits and make wiser financial decisions. Not only can they empower consumers and bridge historical wealth divides, but they can also stimulate growth by opening up new consumer segments.
Just as we’ve come to expect that our fitness routines are tailored to our individual bodies, we’re also ready for finance tools that go beyond one-size-fits-all solutions. But only six percent of financial institutions say they’re using the kind of technology that allows them to deliver a deeply personalized experience. Fintech tools need to reflect that financial success looks different for each of us.
For one consumer, it may mean providing guidance on how to pay off student loans early; for another, it may mean prescriptive actions that enable them to stick to a budget for the first time; for a third, it could look like prioritizing environmental, social and governance (ESG) investments, so that her portfolio aligns with her political beliefs.
Now, we are seeing financial technology beginning to meet the demands of personalized finance in a substantial and meaningful way.
The rise of AI-Powered Advice
Big-picture advice and predictive guidance used to be a feature of high-end financial advisory firms — a perk only available to those who could afford it. But thanks to rapid advancements in data analytics and artificial intelligence (AI), that kind of holistic advice is now more accessible than ever. AI-driven robo-advisors can parse many different streams of financial information, delivering customized answers to key questions: Is it time to buy a home, or is it smarter to keep renting? Can I afford to take out another student loan?
Intelligent connectivity powered by AI can anticipate consumers’ needs and next steps, making proactive suggestions that guide them along the path to financial wellbeing. Fintech companies can also help consumers identify when their financial picture becomes too complex for a robo-advisor, and help them find a human financial advisor to meet their needs.
Focus on financial mental health
New investors are quickly finding that the market can be overwhelming. That’s not surprising, financial anxiety is common and studies show that financial stress can have an impact on mental health for some.
It’s not enough for fintech companies to give retail investors access; they also must provide the guidance and support that help consumers manage their financial well-being. Educational tools can ensure that consumers are well informed about their options.
Predictive analytics can anticipate consumers’ questions, serving them key information and insights before they ask. Features that emphasize a comprehensive notion of financial well-being, rather than short-term wins and losses, can also help ensure that consumers are keeping their eyes on the bigger picture.
Gamification for good
The surge of gamification apps has done an impressive job making investing as engaging as playing a video game or joining a social media platform.
Much of the current use of gamification emphasizes short-term thinking, but there’s also an opportunity to help consumers think more broadly about their overall financial picture. One example is peer benchmarking, a feature that enables help consumers to see how their financial habits compare to those of friends and fellow consumers.
Gamification can also be used to incentivize making smaller, smarter choices — for example, rewarding saving over making an impulse buy.
The future of fintech is about more than just broadening access to the markets. It’s about making sure more individuals have access to the tools that can help improve their financial well-being—in the ways that suit their own circumstances and needs. The potential to act within their own set of individual priorities, with their long-term financial wellness in mind is much more empowering to a consumer than simply relying on short-term, high-risk investments.