How AI is Transforming FinTech

As the world continues to experience digital transformation, one of the technologies driving the rapid evolution in the financial sector is artificial intelligence (AI). One may not realize it, but AI is already present in various aspects of our lives. 

The rise in financial technologies has grown in recent years, with the global AI market in FinTech estimated at $8 billion as of 2020. But it is believed that the market will reach over $26.67 billion by 2026. 

With such opportunities available, it is no surprise that there’s staggering growth in FinTech startups, as most financial executives are beginning to realize the value of AI in FinTech, and about 85% intend to invest in AI technology. 

Let’s look at how artificial intelligence is causing a revolutionary change in the financial sector as well as the various opportunities that AI is providing for the growing FinTech space. 

The Rise of FinTech

FinTech (financial technology) refers to cutting-edge digital technology that improves financial services and banking. 

In the 1970s and 1980s, banks incurred service costs for customers visiting the banks. To recoup this cost, banks needed to charge transaction fees. With the advent of personal computers in the 1980s, customers realized that they could handle most of the transactions on their computers without having to go to the bank.

The rise of FinTech dates back to the invention of the machine that can interact directly with customers, the ATM. The need for non-contact processes and procedures eventually led to revolutionary changes in the financial sector. 

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Innovative technologies like blockchain and AI are causing a shift in the way companies do business. Sectors including banking, e-payments, insurance, and wealth management are all experiencing a digital transformation. Blockchain even helps fight climate change.

AI and FinTech

Interest in financial technology has grown in recent years, giving customers several ways to manage their cash that weren’t possible many years ago. 

According to Dr. Yasin Rosowsky, a co-CEO of Arabesque, AI is rapidly changing the management of global assets, and investors are keen on harnessing the power of AI technology to deliver market-leading services. Most FinTech companies, for example, use AI-powered chatbots to handle aspects such as customer care representatives, salespeople, and more. 

Over the past few years, the financial industry has been buzzing about the disruptive power of FinTechs, which offer consumers alternatives to traditional options.Established businesses are more aware now than ever before of the potential and importance of artificial intelligence.

While AI technology may be a threat to traditional banking, the financial industries are gradually accepting the idea that, in order to stay afloat, they must provide a seamless digital experience, which is why there have been increased  mergers and partnership deals between existing businesses and FinTech startups.

Most financial sectors are beginning to introduce technologies that will utilize artificial intelligence and reduce service costs, delivering unique value for their customers and clients. 

Early adopters of this evolving technology will most likely gain a significant advantage over those businesses that fail to embrace these new technologies, which risk falling behind their competitors in the long run as a result.

Benefits of Artificial Intelligence in FinTech

The finance industry is continuing to improve various businesses with artificial intelligence, and we will likely witness a shift toward automated systems that will provide a valuable customer experience. The merging of AI and FinTech is becoming the center of the debate as AI is poised to deliver a range of value-added benefits features.

Some of these benefits include: 

• Improved Security

Fraud has been one of the major and costly problems in the financial sector. In 2020, identity theft alone cost about $26 billion, with each victim recording an average loss of $1100, according to the Javelin Strategy and Research.

Most FinTech companies are utilizing AI-based solutions to boost security. However, there is a need for more upgrades as criminals are also becoming more sophisticated in their cybercrimes. 

AI can analyze large volumes of data through machine learning and provide an opportunity for FinTech companies to offer unique solutions. Being able to detect suspicious behaviors, AI is used to identify fraudulent activities and process financial documentation. 

• Better Customer Service

Previously, customers had to build a relationship with the staff at their local bank, who would get to know them personally and understand their needs. However, while this customer service method might still work locally, it’s becoming difficult to maintain in today’s more globalized market. 

This is where AI has proven to be more effective by creating online chatbots. These chatbots can interact with customers, giving them highly-personalized assistance around the clock. 

With the global savings from chatbots expected to hit $7 billion by 2023, financial institutions have good reason to continue using virtual helpers and artificial intelligence to interact with customers.

• Advanced Payment Systems

Historically, from barter to various exchange methods, there’s been a demand for a more robust payment system, and AI has the potential to cause a remarkable shift in payment gateways. We might witness a new world of seamless payments that could even replace point of sale (POS). 

FinTech payment systems perform two functions, storing and transferring payments. You can use these applications on your mobile phones to pay directly for goods and services and make peer-to-peer transactions.

Zelle, a platform created by banks in the US, links payments directly to the customer’s account, and in 2020, the payment volume generated was almost twice that of Venmo and Paypal’s payment app. This model allows big banks to be part of the digital marketplace.

Another good example is Amazon’s Go Stores, which allows customers to scan a QR code, walk in, shop, and walk out without stopping to scan any item, making the process as frictionless and seamless as possible.

• Reliable Credit Scores 

It can be difficult to apply for a loan without a credit score, and most potential customers are often not considered by traditional financial institutions. However, many FinTech companies provide alternative ways to apply for a loan without a credit history for a conventional banking or credit bureau to review. 

Some of these Fintech companies use artificial intelligence to look into the creditworthiness of a potential borrower by extracting data, such as job profiles, web history, and social media activities, to create a soft credit score.

• Effective Contract Management Solutions 

Contracts are an integral part of the finance industry, and a lot of time is required to keep track of these contractual agreements.

AI can streamline the contract process by using optical character recognition (OCR), machine language (ML), and natural language processing (NLP). The COIN project is a significant example of this. Launched in 2017 by JP Morgan, COIN, also known as Contract Intelligence, executed about 360,000 work hours within a few seconds.

• Financial Market Predictions 

Over the past few years, the results of data-driven investing have been undeniable. In 2018, the quantitative hedge fund industry closed in on $1 trillion of assets arising from computer-based trading strategies. People have gone from being skeptical to being interested in algorithmic, quantitative investment approaches.  

AI provides more accurate predictions for the financial markets, and many investors are beginning to embrace it in financial trading. Wall Street, for example, has embraced AI when making market analyses and cutting-edge research in AI is even being used to power automated crypto trading. 

Algo and quant trading is more accurate since the algorithm can be back-tested before going live. AI is also faster and can help eliminate trading decisions based on emotions.

Use Cases of AI in FinTech

According to the FinTech Five by Five report, 65% of FinTech companies believe that AI technology will impact the sector in the coming years. Businesses that ignore the tremendous opportunities that artificial intelligence provides in the financial industry might deny their company from experiencing remarkable growth in the future.

Companies like ZestFinance are leveraging artificial intelligence technology to create platforms that allow FinTech companies to evaluate the creditworthiness of a potential borrower. 

Payoneer and Skrill, two online payment platforms, also use AI to analyze data, which can recognize free text in uploaded documents. 

Some banks are using AI-powered chatbots to answer questions and provide directives on how to use different banking services.

The use of AI increases the productivity of FinTech companies and reduces the dependence on human resources.

Challenges of AI in FinTech

While technology is revolutionizing the financial sector, the use of AI in FinTech is not infallible. Therefore, financial institutions must ensure that they know the inherent risks when using AI systems in order to develop measures to manage those risks. 

Some of the challenges of AI in FinTech include:

• Security

Hackers might decide to take advantage of the complexity of AI systems to access a company’s private data and deposit bad data. This process is known as bad poisoning, and hackers can use it to influence the decisions of AI technology to their benefit and to the detriment of the company.

Therefore, before contacting an AI provider, review your company’s security policies and ensure that it aligns with the service provider’s.

• Regulatory Compliance

Most financial services are subject to rules and guidance from regulatory bodies. For example, the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) regulate financial services in the UK. It can be very difficult for FinTech companies to comply with these regulatory policies while delivering efficient services.

• Loss of Jobs

Automation can lead to job losses. For example, the COIN program mentioned earlier is a good example of effective AI-powered automation, but, what happens to those previously doing the work? According to JP Morgan’s CIO, it freed employees to work on “higher-value things.” However, it remains to be seen how this type of automation will affect job security.

• Data Protection

Due to the enormous amount of data accessible to AI algorithms, both the institution and service provider are susceptible to data breaches. In addition, AI can generate personal data that was previously created for marketing purposes only. 

We can say, then, that AI is a blessing, but it also comes with a greater risk, namely a threat to privacy.

The Future of Fintech

The FinTech industry has exploded recently, with countless startups producing scalable products with AI at their core. As the ability to execute financial transactions without the typical banking process increases, technology will no longer center on monolithic databases to process transactions. 

While this technology is intriguing as a tool for streamlining processes and bringing innovative solutions, it still poses certain challenges since it’s in its early stages. 

By giving customers and employees the ability to work smarter and more productively as well as invest more wisely through AI-enabled investing such as copy trading, artificial intelligence technologies hold great potential not only in finance and insurance, but in virtually all spheres of life. From financial planning and management to budgeting your spending, no area of the financial sector is likely to be untouched by artificial intelligence in the future.

Conclusion

AI offers several opportunities in FinTech. Analysts believe that the use of artificial intelligence in the finance industry will increase over the next few years. While banks might consider these as threats, there are several ways in which banks can partner with FinTech companies to create a seamless user experience. 

A variety of factors are drivers of innovation when we look at the future of Fintech. FinTech companies are creating a wide variety of products and services to make money management easier and more effective as an enabler of better financial services.

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