The emergence of artificial intelligence (AI) has the potential to revolutionise the financial industry, but it also raises concerns about unintended consequences. AI has been developing at a breakneck pace, and is being integrated into all areas of life. Personal finance seems to be one sphere that could benefit from the implementation of AI, but many experts are concerned.
A survey conducted by McKinsey in 2021 revealed that many firms were not adequately monitoring their AI-based programs after their launch, casting doubts on the responsible use of AI in the financial industry. While AI has the power to democratise certain financial tools, it also has the potential to do great damage. This guide explores the emergence of AI in personal finance, discussing both the potential benefits and risks.
Rise of AI in the Financial Industry
AI has already found applications in various areas of the financial industry, from fraud detection to high-speed trading. As AI systems become more advanced, financial markets could become the domain of competing AI systems that make complex investment decisions based on patterns that may elude human understanding.
Personalised AI assistants may become a popular tool. These chatbots would provide financial guidance tailored to individual users. Experts expect advancements like this to happen sooner rather than later.
Benefits of AI in Finance
Optimists argue that the deployment of large data models in finance could have averted crises like the 2008 mortgage lending debacle more quickly than human analysts. AI could also bridge the gap between under-resourced regulators and powerful corporations, enabling more effective analysis and regulation.
By democratising regulation, AI has the potential to address issues of inequality and discrimination. AI could offer consumers personalised financial advice and assistance, replicating the services of financial advisers at a fraction of the cost, making this kind of expertise accessible to everyone, not just the wealthy.
Risks and Challenges of AI in Finance
While there are potential benefits, experts advise caution when it comes to AI in finance. Machine learning models are limited by the data on which they are trained, and the scarcity of data on financial crises presents a challenge.
AI systems adapted to “normal times” may fail to handle unprecedented events, amplifying a level of randomness and potentially leading to widespread financial crises. Although this is a worst-case scenario, it is very possible due to the way machine learning responds to unexpected events.
For example, during Covid when customers were scrambling to stock up on essentials, this spike in activity was flagged by AI and many transactions were therefore blocked.
AI chatbots have also exhibited the tendency to generate false information, known as “hallucination.” The decision-making processes of AI models are often opaque, making it difficult to understand the reasoning behind their choices.
Implications for Personal Finance
“AI has the potential to revolutionise personal finance, providing consumers with access to sophisticated tools and guidance,” explains Dan Kettle of financial price comparison, ProperFinance.co.uk.
“AI-powered platforms could assist individuals in making informed decisions regarding purchases, insurance and loans. The competition among AI-driven services could benefit consumers by helping them secure better deals and navigate complex financial landscapes.”
“However, there are concerns that AI-based advice could be biassed or manipulated for commercial advantage, potentially leading individuals astray. AI is not detached from the interests of the institutions that create and deploy it. The training and shaping of AI models are influenced by these institutions.”
“Trust in AI to manage finances ultimately depends on the trust placed in existing corporations, financial markets, and the economic system itself.”
Regulation of AI in Personal Finance
To address the potential risks associated with AI in finance, experts propose the implementation of thorough regulations. The European Union’s proposed “EU AI Act” is seen as a step in the right direction, but more comprehensive measures may be necessary.
The financial industry, which is subject to significant regulation, is expected to be held accountable and prevented from behaving similarly to Big Tech companies. It is the responsibility of both policymakers and AI industry stakeholders to ensure that AI is developed with discipline and a focus on building a beneficial and ethical financial ecosystem.
