Artificial Intelligence

The Future of The Financial System and AI

Artificial Intelligence has reached heights that were never envisioned even a decade ago. Google has already developed a chess engine that has learned the game all by itself and become better than all other previous engines. It’s no wonder AI will continue to get better, and have more impact in our lives.

The financial system is not alien to AI anymore. AI is yet to become as efficient as financial decision makers; but is that day too far away? I would like to doubt that. Technologies like machine learning, data science and data analytics are already questioning human efficiency in the finance sector.

According to Walter Wriston, former CEO of Citibank, information about money is almost as important as money itself. And in this era of digitalization of markets, this observation is as true as it can get. It’s no secret that if you have more information about money than your competitors, you will make more money than them as well.

For decades, the use, or attempted use of AI was limited to robotics and transportation only. Gradually we understood that we need to think outside those science fiction movies and develop AI in a much more engaging way.

Fortune 500 companies are using their own versions of data analysis techniques with the help of AI to make better business decisions. For now, this is contained in analyzing the available information, and using that information to develop better techniques for getting competitive edge. But there can be much more than this.

Crunching credit scores, finance advising and even preparing financial statements can be done through AI systems. Top hedge funds of the world are using AI technologies that can shape their trading strategies. In addition, banks are using similar technology to detect fraudulent activities and market manipulation practices.

But what is the main reason behind this growing trend? It’s the old thing, competition! Globalization and digitalization have made the world smaller, hence competition extended. Tech firms are becoming competitors of financial advisors, as their developed programs are now able to analyze information better than the advisors.

It’s just a matter of time before tech giants like Apple, Google or even Amazon start their go at banking. If that happens, then it is quite safe to say that the fortune of most of the financial advisors all over the world is simply doomed. Already marketing is taken over by its digital version and traditional marketing experts have become obsolete. The same is going to happen to finance as well.

Such paradigm shift has also raised some serious questions too. Firstly, what happens to all these people when they are actually replaced by AI? Isn’t it going to bring a catastrophe in the job market? The history says, yes it will. When automation took away so many labor jobs, an economic riot occurred. It is highly likely that the same will happen to the financing industry.

The other question is, is there any way to supervise AI in a proper manner? AI spreads really deep into finance, and humans are not capable of analyzing that deep. If AI makes errors, which is unlikely though, is there any probable way to detect that?

The firms are fully conscious about these concerns too. That’s why we are going to see a massive surge of data science and math PhD holders getting into the wave of machine learning. Whether it is going to be enough, is not yet forecasted.

One mistake while making financial reports or forecasting the market, becomes really heavy when it comes to big organizations. That’s why these companies always try to avoid human errors as much as possible. AI is not prone to human errors. AI doesn’t have to rest, focus attention nor do only one task at a time. It’s no surprise that AI will take over the finance sector quite soon.

Now the real challenge is to mitigate the pernicious impact of a probable AI takeover in the financial sector, that is to say leaving people jobless. A well-developed contingency plan is required to mitigate this burning issue. Although AI is already being implemented, quite some time is left before a hostile takeover occurs.

The first step would be to forecast the takeover in a proper manner. The approximate timeline needs to be developed so that measures can be taken. Then according to the timeline, the current workforce needs to be trained so that the adaptation process with the new technology can take place smoothly.

The city of Detroit was once the victim of such automation. This city’s economy depended heavily on the automobile industry. It had thousands of jobs. But when machines took over, the economy took a massive hit and many people lost their jobs.

It happened due to not being able to plan the change properly. The crew was never trained to adapt to the new found technology. As a result, their skill-sets became totally obsolete. That’s why the contingency plan is required in the finance sector as well.

The AI takeover in the finance sector is going to be more hostile compared to the auto industry. The auto industry was limited to a few areas or cities. But when it comes to the finance industry, the whole world is intertwined. This is a hit that is going to impact the entire global economy. That’s why proper forecasting and training is mandatory.

The real question is, ‘Are we too late?’ The answer to this question is yet to be identified, but we have to start the adaptation process as soon as possible if our human resources are to be saved.

In conclusion, the implementation of AI in the finance sector will increase efficiency, but that efficiency comes with a cost. Cost mitigation is a major part of finance itself. So the mitigation should start right now.

What do you think of the use of AI in the finance sector? Let us know in the comments.

  • Mike James - 3/12/2019