Artificial Intelligence (AI) is driving significant advances in the financial services industry. From online trading platforms to automated market-making algorithms, AI enables humans to do more with less. Banking insiders like Dan Schatt say that AI is changing the industry as a whole in the following key ways:
One of the problems that AI solves very well is the challenge posed by information asymmetries. Information Asymmetry refers to situations where some people have information others don’t have or where the ability to collect and process information benefits one person more than another.
In the early days of finance, that problem was resolved by restricting access to certain pools of capital. As a result, banks could justify higher fees because they had unique access to valuable information about the markets. The problem with that model is that it creates a significant barrier for small business owners to enter the market.
Today, capital is more accessible than ever before, and retail investors have unprecedented access to information. But the ability of a small business owner in Ohio to invest in early-stage companies in California can still be challenging. Fortunately for them, blockchain-based platforms make it possible to invest in businesses worldwide via smart contracts based on objective criteria.
Some of these platforms (like Republic and Coinlist) use AI-based mechanisms to minimize human bias while ensuring token sales are compliant with regulatory requirements.
Scale and Speed
AI enables financial companies to manage data at scale, allowing them to outperform their competitors on key metrics such as speed and throughput. Take the example of high-frequency trading, where computers equipped with sophisticated algorithms can profit by buying or selling stocks in less than a second.
Rising from the ashes of the financial crisis, Robo-advisors like Betterment and Wealthfront combine cutting-edge technology and behavioral finance tools to help people invest automatically. Robo-advisors use complex risk software that adapts portfolios based on an individual’s age, goals, and tolerance for risk. The underlying assumption is that people are wired to make irrational decisions about their money, leading them to underperform the market long-term.
At Betterment or Wealthfront, you don’t have to talk to a human being if you want to invest your money – although you can do it quickly and easily if you need help along the way. That means customers get quick access to their funds without having to wait for account openings or lengthy onboarding processes – just set up your profile online, link your bank account, and let the algorithms do the rest.
Compliance with Regulations
Financial services companies can use AI as a mechanism for compliance with regulations. One key area is financial data aggregation. The U.S. legal system requires that banks create records of transactions involving money, securities, or property worth $10,000 or more.
Those records are available to law enforcement agencies on demand, just in case they are needed to conduct criminal investigations – but the process of compiling them is very time-consuming for bank employees who have limited resources to deal with it after closing hours.
That’s why compliance officers can use AI tools like Kensho at banks and brokerages to identify potential issues before they even get reported automatically. That means regulators get more detailed information without requiring human beings to filter through mountains of data manually – improving both their response times and the quality of insight they’re able to generate.