AI Shaping the Future of Finance

As econometric students, many of us find ourselves captivated by the possibilities of Artificial Intelligence (AI) and have aspirations to contribute to this dynamic field in the future. In the past year, a considerable buzz has surrounded ChatGPT, the emerging AI bot, sparking conversations and curiosity. Yet, have you ever wondered how AI is used in finance?

In the fast-paced world of finance, AI is quickly gaining attention, driving the industry into a phase of increased efficiency, risk mitigation, and improved customer experiences. It has become a key player in the financial sector. Powered by technologies like machine learning (ML), it is not just a tech term; it is a game-changer modernising traditional banking processes and transforming how institutions analyse, manage, and invest money.

Let's explore the impact of AI in the financial sector. AI is bringing forth an era of automation, eliminating manual processes that once slowed institutions. In fact, it accelerates tasks like market research, allowing financial institutions to thoroughly analyse vast data sets for deeper insights into market trends, and make well-informed investment decisions, encouraging growth and reducing risks. Moving from the examination of how AI speeds up market research, let's now focus on its significant role in risk management. In risk management, AI is crucial for ensuring security, following regulations, and detecting fraud. By doing real-time calculations and analysing data, financial organisations can forecast performance, identify irregularities, and comply with changing industry rules. 

AI's influence extends to the customer experience, automating everyday banking tasks like payments and transfers for faster, contactless interactions. The use of AI in real-time credit approvals and loan processes further improves the speed and efficiency of financial services. Moreover, AI plays an essential role in ensuring strong cybersecurity by continuously monitoring and identifying fraudulent transactions in real-time. Through the analysis of purchase behaviour and historical data, it acts as a guardian, detecting suspicious activities and ensuring quick action to prevent potential threats. 

Overall, AI enhances fraud protection and cybersecurity, contributing to a smooth and secure financial journey for customers. Hence, the use of AI into various aspects of the financial sector highlights its huge impact, creating a modern and customer-focused environment with advanced technology.

Illustrating this trend, ING, the Dutch multinational banking and financial services corporation, is actively incorporating AI into its banking operations to enhance safety and efficiency. In retail and SME (Small and Medium-sized Enterprises) banking, ING has developed a ML based credit analysis model following guidelines such as PSD2 (Second Payment Services Directive), allowing automated lending decisions. This ensures an instant, and personalized banking experience for customers. Moreover, in corporate banking, the initial stages of AI application have begun, with the introduction of a promising tool named Holmes. This tool helps front-office employees by simplifying background processes, facilitating quicker and more personalized services. Holmes functions as an internal search engine, structuring large datasets for easy employee access through keyword searches. However, as AI evolves, so do considerations for data and privacy. ING recognizes the changing attitudes towards these aspects and emphasizes the importance of maintaining customer trust by ensuring data security and privacy in AI-based applications.

Moreover, ING emphasizes the need for banks to strategically integrate various AI applications to create a smooth and partially automated banking process. The future involves closer integration of individual applications into an overall network to control banking processes. This integration, paired with an IT infrastructure, positions banks like ING to tackle future challenges and meet evolving customer demands in both retail and corporate banking.

The usage of AI has been growing in popularity in the whole financial sector. In 2020, PricewaterhouseCoopers (PwC), a globally renowned professional services firm specialising in audit, assurance, tax, and consulting, conducted a comprehensive study aimed at providing guidance to financial institutions within the German financial sector regarding the adoption of AI. The focus on the German financial services sector offers a deeper understanding into how a major European economy is adapting to the transformations of advanced technologies, offering valuable lessons for the wider financial industry. This study, which involved 151 executives, offers valuable insights into the current status and future potential of AI integration in the financial sector.   

The study reveals the industry's perception of AI as a vital innovation. In fact, 45% of decision-makers acknowledged the transformative role of AI in changing traditional practices. Despite this recognition, only 9% of surveyed executives felt that their companies were adequately prepared for the integration of AI, revealing a significant readiness gap.

One notable challenge emphasised in the study is the issue of data availability, marked by an impressive 69% of executives identifying it as a major obstacle. This highlights the necessity for strategic initiatives to fully support the potential of AI. Despite the eagerness to adopt AI, the complex nature of utilising data remains a critical obstacle that financial institutions must overcome to realise the true benefits of this technological innovation.

As AI adoption continues to gain attention in the finance sector, questions arise  regarding its potential to replace human roles. The study suggests that AI's increasing importance implies a potential takeover of many tasks currently performed by humans, leading to increased efficiency and productivity. However, it also uncovers additional challenges holding back AI adoption, such as a lack of data (69%), budget constraints (67%), and inadequate financing (67%). Furthermore, 64% of companies reported a shortage of employees possessing the expertise required to handle the complexities of AI implementations. This reveals a critical need for investment in developing internal talent and knowledge to realise the full potential of AI within the financial sector. The study not only emphasises the importance of recognizing AI as an innovative influence but also recognizes the urgency for a strategic, data-centric approach. Addressing challenges in budget allocation, expertise, and internal readiness becomes imperative for financial institutions seeking to integrate AI effectively.

In conclusion, acknowledging AI's significance is a crucial first step. Despite ongoing challenges, the benefits in terms of efficiency, risk management, and customer experience are undeniable. For those excited about making a big impact and bringing their skills into the ever-changing field of AI in finance, there is a world of opportunity awaiting. It is essential to stay up to date with the industry's changes and trends. As financial institutions adapt to these changes, the synergy between AI and human expertise is key to unlock the full potential of technological advancements in finance. 

About this article

Written by:
  • Celina Madaschi
| Published on: Mar 04, 2024