One of the statements made in the Davos Forum of 2018 stated – “AI is the new electricity…the role of Artificial Intelligence in Finance and other sectors of the economy is gradually intensifying…AI will now change every major industry…”
Back in 1950, when Alan Turing questioned – “Can machines think?” – since then, the role of artificial intelligence (hereafter known as AI) saw an intensified boom. It has been capable of streamlining procedures, improving the experience of customers (the chatboxes have answers to your financial queries), and using alternative analytics and data sources to improve performance and predictability. Therefore, rest assured – one can state that it is revolutionizing the finance management of both companies and consumers.
This post will outline the strategies that AI uses to enhance the trading aspects of any organization, as well as its current and upcoming roles in multiple domains.
Know the target areas first
For those who observed the trend before the pandemic – AI was already intensifying the digitalization aspects. However, in the post-Covid-19 scenario – the acceleration has been massive. Financial institutions are using AI to gain a competitive edge –
- To make precise ‘data-driven’ decision
- Efficient targeting and on-spot recommendations – improve their profit range
- Identifying ‘hesitating’ customers and reducing customer churn
With this as the basic idea – now you can comprehend the facets in which Artificial Intelligence in Finance has developed the current economic domains.
Role of Artificial Intelligence in Finance
In the words of the honcho of one of the globally notable fintech companies – “The Covid-19 scenario has forced financial institutions to respond to client’s demands at an enhanced pace – and AI technology has been driving it!” Speaking at a very basic level – AI not only frees up personnel who may be enabled in other jobs but also enhance the security features and direct the financial institutions’ movement in an innovative direction.
However, you may reflect on this as one of the very basic roles of Artificial Intelligence in Finance. To concentrate on other domains –
#1. The deployment of AI in the finance domain is supposed to enhance the competitive advantage of a financial firm via the avenues such as – enhancement of productivity as well as reduction of costs – leading to higher profitability and improving the standard of the financial services and products that are offered to the clients
#2. The application of AI in finance can not only create but also enhance the range of financial and non-financial risks – which gives rise to – considerations associated with investor and consumer protection. Therefore – it is a natural improvement towards looking for protection with better security layers.
#3. A common area where AI is applied in finance is – risk assessment as well as both asset and risk management. With the use of AI techniques – there will be chances that you will identify the signals and finally capture the underlying signals of the big data well enough to make calculated decisions before a loss. Along with that, the precise role of Artificial Intelligence in Finance is to optimize risk management and operational workflows.
#4. Another very important area where AI’s role is prime regarding finance is the advisory services and extension into the management of the same. The algorithms of AI can analyze the portfolios placed against the latest market trends – thereby providing you with personalized assistance at your behest.
#5. If something has evolved drastically with AI’s intervention – it is the trading system. When used in this domain – the AI adds a certain level of complexity to the conventional algorithm of the trading aspect. Since – algorithms learn from the inputs provided by the data – the need for human intervention in this activity is negated – making it precise and error-free.
What you also need to understand is that these algorithms improve liquidity management and optimize the orders in terms of both size and duration without negatively impacting the markets.
#6. The usage of AI in the lending process – drastically reduces the cost of the underwriting of credit, thereby extending the same to the ‘thin-file’ base of clients – which improves financial inclusion.
#7. When talking of finance – in current times, blockchain has a very important role to play. Therefore – with the usage of AI in financial aspects – the efficiency and gains from the DLT-based system will enhance drastically, and the concept of smart contracts will expand.
Some direct application formats of AI in finance
When talking of Artificial Intelligence in Finance – it is important to check those facets wherein its usage is primary. The arenas being –
Role of AI in personal finance
– With financial independence being the keyword these days – AI can assist in personalizing the insights in wealth management solutions
Role of AI in consumer finance
– Whether it is the ability to prevent fraudulence (losses are supposed to climb up to $48 billion per year by 2024) or the ability to single out the issues which would remain unnoticed by the masses.
Role of AI in corporate finance
– From assessing loan risks correctly to reducing financial crimes – AI in this domain has a wide range to cover.
The risks – challenges – mitigating strategies
Without a doubt – the role of Artificial Intelligence in Finance has been extremely productive. However, there are certain risks associated with this – starting with: it could augment the risks already present in the financial domains, there are times it makes predictions based on inadequate data, and finally, the exact comprehension of the AI model and its functioning.
However, even with these risks, there are certain mitigating strategies that Artificial Intelligence in Finance brings to the forefront. For starters – the AI models do have a resilient way of cross-checking and analyzing the data that minimizes the chances of errors. Also, one has to accept the role of the human brain here – where even after the prediction of certain trends and numbers – the policies are stringent enough not to follow those completely and rather go in for past economic analysis before making a decision.
The future of AI in the financial domain
Even in the pre-pandemic era – the migration from traditional financial channels to online and AI-powered transactions was already underway. A report prepared by Business Insider states that using Artificial Intelligence in Finance will save financial institutions about $450 billion by 2023. What’s your take on that? Well, do leave your thoughts and experiences below. Hope you invest well.