Should AI be regulated for financial services?
AI in financial services is clearly transformative. It has the potential to solve some of the world's most pressing problems, it also has the potential to create some new challenges.
AI is transforming the financial services industry. It is used to determine creditworthiness, fraud detection, identify money laundering, personalize services, and recommend offerings. In addition, chatbots and AI assistants have made it easier for clients to get answers 24/7.
Furthermore, AI enables banks, insurers, microfinance, money lenders, cooperatives, credit unions, and pension funds to manage data at record speed to derive valuable insights to customize financial products and services to improve customer engagement.
The global AI in the banking market size, valued at $3.88 billion in 2020, is projected to reach $64.03 billion by 2030, growing at a CAGR of 32.6%. About 32% of banks are already using AI technologies such as predictive analytics and voice recognition.
Although confidence in fintech is high, that's not necessarily the case with AI. Many have raised concerns about potential bias, discrimination, privacy issues, surveillance, lack of transparency, misuse, unintended consequences, and loss of jobs due to automation by AI.
Financial services are already one of the most heavily regulated industries. So it's not surprising that there is a debate on whether AI should be subject to the same level of regulation.
It also concerns that the majority of the AI research and leadership is down to primarily two countries (the US and China), and IP is concentrated with big tech (Google AI, Meta, Amazon, and OpenAI) already dominating the digital landscape. This could limit other countries, especially emerging markets and newer players.
In this blog post, we'll explore both sides of the argument.
Regulations are starting to take shape. In April 2022, the European Commission released the first legal framework called the AI Act.
The proposed EU regulations cover a variety of AI applications, including credit checks, chatbots, and social credit scoring, which assesses an individual's creditworthiness based on behavior.
The US Federal Trade Commission is working on a similar legal framework so AI can be used truthfully, fairly, and equitably regarding decisions about credit, insurance, and other services. But, unfortunately, it will be at least another year, or more, before it's ratified and a few more years before businesses must comply and potentially even longer before it is adopted by other countries and trickles down to emerging markets.
The case for regulation:
On one side of the argument, AI applications have little oversight or accountability. The technology is largely ‘a big black box’. AI systems can be inherently biased because of bias in the data itself or in how the algorithm processes it or in the way its model is trained, which may result in unintended actions.
Regulation is necessary to prevent harm. Some experts believe that AI will be used for nefarious purposes if left unregulated.
Secondly, regulation is necessary to ensure fairness. There are instances where AI has been used to advantage some people at the huge expense of others. One is to prevent market manipulation.
AI-enabled trading chatbots could trade on insider information, engage in illegal activities, and spread false information about a company's earnings or products to manipulate stock prices and generate profits for a few while leaving most everyday investors out in the cold.
Regulating AI could protect consumers from being taken advantage of. An AI-enabled financial advisor could give misleading or inaccurate advice if it is not correctly programmed or intentionally programmed with erroneous information. Regulating AI could ensure that financial advice is accurate, neutral, and trustworthy.
Conversely, some believe that AI can discriminate against borrowers (for example, women, minorities, senior citizens, disabled people, certain religions, and LGBTQ) charge them higher interest, and not offer specific products.
It could further exclude the unbanked or underbanked by assigning lower credit scores or as high-risk due to the unavailability of data or weak historical data.
Lastly, regulation is necessary to protect and ensure that consumers know how their personal data is used by businesses.
To ensure the financial industry addresses such issues, IEEE launched a guide to ensure that those involved in developing the technologies are not neglecting human well-being and ethics. To safeguard against such outcomes, organizations and governments must scrutinize the use of AI and create independent third-party audits teams that oversee ethics, governance, fair use, and conduct.
The case against regulation:
It could stifle innovation. Many experts believe AI will help identify and prevent fraud, reduce loan defaults, and make better investment decisions. If regulations are too stringent, it could prevent them from taking full advantage of AI's potential and limit the ability of businesses to compete in a global economy.
They argue that regulation will increase costs and make it difficult for small businesses, delaying its adoption by companies due to the costs and burdens associated with compliance.
Another critical point is that many of the problems associated with AI can be addressed without resorting to heavy-handed government intervention.
They argue that fraud can be prevented by mandating transparency and audibility. Likewise, they say discrimination cases can be addressed by prohibiting personal data in automated decision-making. Lastly, cases of unfairness can be remedied by ensuring that algorithms are tested for bias before deployment.
There is no easy answer. The debate is likely to rage on for years, with no end in sight. Ultimately, the decision will come down to weighing risks and benefits by policymakers and lawmakers.
In the meantime, businesses can still take advantage of the numerous benefits such as implementing chatbot solutions. To find out how our chatbot can help streamline your customer interactions and improve your bottom line, get in touch!