Artificial Intelligence in Finance
Imagine you are going to a bank to ask for a loan of Rs 5,00,000. As soon as you reach the bank counter there is a Robot. It greets you with your full name and immediately tells you whether you will be granted the loan or not, giving reasons for the same! And it will tell you exactly what you have to do for getting the loan! That too in just a matter of few minutes, without you speaking a word! Is this even possible? Yes, with ARTIFICIAL INTELLIGENCE (AI), anything is possible. AI is now being used in many industries, such as the Finance industry in particular.
What is Artificial intelligence?
This is what AI does. We live in a data driven world today. There is data everywhere either present or is going to be present or is in works. Finance industry is a data driven industry. AI works on the hows, whys and whats of this data. How the finance industry can use AI to run an effective business is where the question lies.
AI uses different types of algorithms and these algorithms define a strong or a weak AI. Weak AI performs only specific tasks. For example: SIRI and OK GOOGLE. Strong AI is human 2.0. The above-mentioned example about a robot deciding to give a loan is what Strong AI is. The robot there, used facial recognition and retrieves details about the customer i.e. you.
AI is where fiction meets reality. It has a system designed in such a way that works like a human brain. AI includes technologies like machine learning, and natural language processing. These technologies use algorithms that work on data.
With AI in stock markets, every second investor will have effective trades. For example: Trading in stock markets will be a whole different game altogether. AI based softwares identify bullish/bearish trends in the stock market and then builds a trading strategy based on the appearance of these trends. Other market sentiments will also be incorporated by AI in real time. This will make trading much more effective. For example, The I know First Algorithm is an AI based technology that uses historical data. It has computer algorithms which constantly propose models, test them on years of market data and help in making effective trades.
It is important for financial institutions to look for best effective systems to assess the credit risk. It is because of credit risk that most of the financial institutions have failed to survive. Credit risk is a major concern. With the help of AI this, crucial assessment can be made in the most effective manner. For example: ZestFinance is an AI software provider that helps companies assess the credit risk of borrowers with little to no credit information or history.
Cybercrime and frauds have been increasing at an increasing rate as digitization has become the new norm. Financial institutions with the help of AI can help detect frauds and cybercrimes taking place in their name in real time. This will save the time taken for investigating the whodunits as well as the reputation cost of the firm. AI uses models which have different inputs of variables that help identify and track data. It works with these inputs and looks for any suspicious activity in money transactions.
Millennials have a different approach when it comes to managing their finances.AI will understand their finances and manage them in real time. For example: Chatbots and Robo Advisors are already introduced by companies. These technologies provide a platform which answers queries related to expenses and savings among others. Visiting a bank, taking care of personal finances will be a different experience altogether. For example: Bank of America has introduced a chatbot named Erica, which alerts customers if their bank balance is likely to become zero because of their monthly spending habits.
Hedge Fund Industry
AI is gaining popularity in the Hedge Fund industry. Hedge funds are using AI models based on predictive and sentiment analysis. For example: Hedge funds such as Project One is using an algorithm designed with an alpha-learning AI model. Research suggests that hedge funds using AI have generated better returns with limited downside risk.
We have just explored AI as a tip of the iceberg. There is so much more to it. We are gradually moving towards a future that is dynamic in every possible way. The traditional systems of banking and other financial services is still largely prominent in India. Countries like Japan and Singapore are way ahead of India in terms of technological advancements. The current pandemic has pressed the need for Going digital. This is the change which will slowly progress towards AI. This pandemic has laid the foundation for the IT industry to think about AI in the long run.
Understanding the problem
It is not feasible to have full-fledged AI based technology in a short span of time. It is important for the government and the industry experts to take the necessary steps to ensure that a sustainable system is developed for AI. Weak AI has already become a part of our daily lives but the demand for Strong AI is seen across various industries especially the finance industry. However, major challenges lie ahead to bring Strong AI into the picture.
For AI to become a reality, education is to be given the utmost importance. It is widely seen that scarcity of the AI talent is one of the major hurdles before organizations. Also, existing employees and customers should be educated. Proper planning and execution in educating the concerned parties will make AI work.
AI will replace humans in most jobs. Trading firms will no more employ human traders. One such example is algorithmic trading. Algorithmic trading is an automated trading system that places buy and sell orders, monitors the trading activity and identifies the right trading opportunity much faster than human traders. AI will replace bank jobs involving paperwork formalities with digital documents without human assistance. Some banks have already started doing it.
New kind of communication
Interaction with humans will be eliminated at financial institutions especially banks. The customers have to interact with robots and machines that will cater to them. Eg- Robo assistants. The customers might not be able to feel the human connect while interacting with these Robots. In times of uncertainty such as the pandemic, it is human nature to become cautious while taking finance related decisions. A robot acting as a financial advisor to a customer is not a good idea.
Privacy and potential cybercrime concerns
It is rightly said that trust is earned. Almost 90% of the finance industry is a B2C business and AI based technologies will have a considerable impact on the customer experience. Financial institutions need to find some effective ways to build the trust with their customers. A customer’s personal information must be protected online. The increasing number of cybercrimes and cases of privacy breach has raised a major concern among the customers.
Technologies like AI will require a huge capital expenditure as it is highly expensive to build such a dynamic technology. Banks and financial institutions must allocate a considerable amount of funds into this investment avenue. The regulatory framework also needs to be sound for the development of AI. Only big financial institutions can afford to implement AI based technology in their business because of the huge capital expenditure involved.
AI could be a game changer for the finance industry. The talented pool of data scientists and IT professionals create algorithms and various models for working on data. Artificial intelligence will revolutionize finance industry like never before. Analysis of huge amounts of data will be done within a few seconds. Some international banks and institutions have already started taking steps towards the same. At the same time, it completely eliminates the role of humans. AI should coexist with humans and should not overpower them, after all it is the humans who have the superintelligence to bring a technology like AI into the picture.