For financial firms looking to promote digital transformation, identifying areas that need to be transformed is crucial. According to Teddy Flo, general counsel at Zest AI, the financial services industry lags behind other consumer-centric industries in many ways. The ultimate goal of any transformation should be delivering value to the customer, enriching their relationships with both banks and nonbanks. Flo emphasizes the importance of equitable access to capital in driving positive change, stating that credit decisions should be fair, inclusive, and consider a holistic view of individuals.
AI has the potential to enable more personalized experiences in the absence of in-person branches. Charlene Coleman, senior managing partner and head of the modern finance sector of Launch Consulting Group, explains that AI-powered personalized conversational interfaces and biometric profiles can help vulnerable consumers avoid debt traps caused by late fees and inflexible payment schedules. AI can also assist in making informed decisions about risk and capital allocation, reducing the likelihood of financial disasters. Dr. Lewis Z. Liu, CEO and co-founder of Eigen Technologies, highlights that leveraging AI enables financial institutions to transform decision-making processes to be more accurate, efficient, and successful. Many financial institutions currently make decisions based on a small fraction of available data, but with AI, they can access and utilize previously untapped data, leading to more informed and better decisions.
Another area where AI can make a significant impact is in reducing or preventing fraud. Liu explains that AI can be used to tackle and reduce fraudulent activities such as money laundering, enabling institutions to validate transactions, enhance security, and respond to threats. For example, companies are leveraging AI to monitor credit card and e-payment transactions, detect changes in purchase behavior, and streamline the process of dealing with fraudulent activities, as highlighted by Vrinda Khurjekar, senior director at Searce.
AI also has the potential to shift the dynamics between traditional banks and FinTechs. Coleman warns that big banks and financial corporations should be cautious about ceding ground to AI-first institutions, neo-banks, and big tech companies eyeing the banking sector. While traditional finance has the advantage of sector expertise and deep capital, there is often a reluctance to fully embrace advanced technology. As a result, AI-first companies and FinTechs are gaining ground and disrupting traditional financial services. Liu notes that many FinTechs are raising the bar for digital service in existing concepts, rather than inventing entirely new ones. For example, Venmo transformed the mobile payments space, and Klarna changed the game for short-term financing by changing the way it was done.
AI can also speed up financial services by automating manual processes. Khurjekar points out that many institutions still have processes that are done manually due to challenges in seamless automation with new-age technologies. For instance, loan processing, customer onboarding, and check deposit processes are not well-integrated in many banking systems, resulting in delays for customers. Adopting new-age cloud solutions faster and reducing technical debt could drastically reduce the time taken to complete these processes, enhancing the speed of services.
While AI offers solutions to many challenges faced by financial institutions, successful banks understand the importance of human-AI partnerships. Coleman emphasizes that deploying AI to democratize the financial system requires human-centered leadership that is willing to invest in technology and talent. Credit underwriting decisions made solely by algorithms without human intervention can carry risks of prioritizing profit over social impact and may result in unfair decisions that discriminate against certain population segments.Therefore, striking a balance between AI and human involvement is crucial for responsible and ethical use of AI in financial services.
The rise of AI in financial services is driving significant changes in how banks and FinTechs approach their technology investments.