“Artificial intelligence and generative AI may be the most important technology of any lifetime.” — Marc Benioff, Chair, CEO, and Co-founder, Salesforce and a pioneer in cloud computing. Artificial intelligence has revolutionized various aspects of the world, impacting businesses, economies and even our daily lives. You go anywhere, you hear the word ‘AI’. The rise of AI as a buzzword in the recent years has made it quite interesting to witness how AI with its rich analytical ability, immense computing power, and impressive algorithms has reshaped numerous sectors across the globe in profound ways and financial sector is no exception here.
The influence of AI in financial sector is transformative and pervasive. Driving efficiency and innovation by automating the conventional manual processes, generating meaningful insights into financial markets and improving customer interactions, AI has significantly revolutionized the financial sector. Using machine learning (ML) algorithms, the artificial intelligence has improved the financial decision-making by redefining a good number of processes in financial organizations like data analytics, financial advice, fraud detection, risk management and customer experience, among others. The AI enabled data-driven decision making helps the users discover such valuable insights which they might not see otherwise.
This blog uncovers how AI is transforming the financial landscape by exerting its influence in some key areas like predictive analytics, financial advisory, risk management and detection of frauds, and enhanced customer experience. The big players in the financial world have leveraged AI as a dynamic force to transform the conventional decision-making paradigms.
Predictive Analytics: A crystal ball into the future
The predictive analytics powered by the artificial intelligence has emerged as a dominant force in forecasting the future market movements. Machine learning, a subset of artificial intelligence, trains algorithms to recognize and predict the future trends based on an in-depth analysis of historical patterns in data. These ML algorithms recognise the patterns and trends with unprecedented speed and accuracy which the human analysts are not be able to match. According to a McKinsey report, the firms that rely on the data processing ability of algorithms experience an improvement of 10-20% in the speed and accuracy of financial decision making.
JP Morgan, a global leader in financial services, is predominantly using predictive algorithms to analyse global news and assess its likely impact on the financial markets, thereby helping traders gain competitive edge in predicting the stock movements.
Financial Advisory: No to the One-size-fits-all approach
The AI-driven advisors assess the financial situation of individuals and other associated factors like risk appetite and financial goals to guide them in customizing a financial plan, specifically tailored to their needs.
Robo-advisors like Vanguard, Betterment and Wealthfront offer AI-driven investment advisory services to individuals based on their risk tolerance limits and financial goals. These tools are very robust and comprehensive that could compete with a human financial advisor.
Risk Management and Fraud Detection
Risk is inherent in financial decision making and it is crucial to mitigate risk for informed financial decisions. It is amazing to see how the AI models predict the creditworthiness of individuals to minimize the chances of defaults and ensure informed credit decisions. The online lending platforms like Kabbage use ML models for gauging the creditworthiness of businesses by assessing a wide range of data points from transaction to social media activity.
It doesn’t really stop here….The AI models have proven to be very accurate in predicting the instances of fraud, way better than the traditional systems. Mastercard using its AI-driven platform assesses each and every transaction, and reduces the number of false declines while detecting the fraudulent activities. Don’t take these false declines lightly, you know the cost to businesses and the economy of these declines is over $118 billion – which is about 13 times higher than the cost of actual fraud. Thanks to AI, Mastercard has cut this rate by 50%.
Improved Customer Experience
The chatbots driven by AI are central in transforming the customer service in finance, providing quick solutions to users and guiding them through the complex financial processes. Bank of America’s virtual assistant, Erica, has demonstrated success in providing customized financial guidance to a huge number of users having completed 330 million requests in the first half of 2023 at the enormous rate of 56 million engagements per month. So, you can imagine the transformative power of AI.
The Final Thoughts
AI has revolutionised the financial decision-making process by integrating its sophisticated data-driven models into the financial sector. However, it has its own challenges which might include data privacy concerns, ethical issues, and other complexities and biases. As put by Elon Musk, CEO of Tesla and SpaceX, “AI will be the best or worst thing ever for humanity. In finance, it has the potential to create unprecedented wealth but also to destabilize markets if not properly managed”. To handles these complexities in an effective manner, AI-driven models need to be employed with care, ensuring transparency, objectivity, and of course, the regulatory compliance.
