Machines. They are capable of inspiring both awe and fear. Especially when it comes to machines with a mind of their own, otherwise known as artificial intelligence. Nowhere is this more true than in the financial services sector. AI is a potential savior at a time of diminishing market returns; AI is a source of unknown and possibly unlimited risks.
Of course, artificial intelligence is nothing new. The term "machine learning" was coined back in 1959: it was defined as the ability of computers to learn without being specifically programmed. But AI has an exponentially greater impact on business and daily human life today than it did a few years ago. What is different is the amount of data available to artificial intelligence systems.
"The growth of social networks, mobile phones and wearable consumer devices has also led to an explosion in the amount and availability of data - all of which becomes fodder to optimise AI algorithms," write the authors of a recent report from Euromoney Institutional Investor Thought Leadership.
In that report, the authors explore both the potential benefits and risks of AI for financial services, relying in part upon a global survey of 424 senior executives in the industry.
Smarter Over Faster
The possible applications of AI for financial services can seem nearly limitless. Advances in AI and data analytics mean much greater quantities of data can be used to inform decision-making and asset price predictions, such as market events (product releases and recalls, regulatory approvals, acquisitions) and unstructured data (images, video footage and live streaming). AI tools are getting better at understanding context, too.
AI is already being used in investment advice through robo advising, which has taken wealth management by storm over the past half decade. It can also improve risk management, giving analysts much greater depth of insight into markets, leading to new trading and portfolio management strategies.
"Within trading and investment management, firms such as Aidiya and Sentient Technologies are pioneering AI trading programmes... to crunch huge amounts of data to recognize obscure patterns, which others have not identified," the authors of the Euromoney report write. This represents a significant shift away from high frequency trading strategies: AI can make better trades not because it's faster, but because it's smarter.
Some executives expect it will make financial markets more competitive and accessible to those with fewer benjamins to throw around. Given the open source nature of much of the software, barriers to entry are fairly low for companies that want to create new and innovative algorithms.
The Glitch Risk
Of course, just as humans are fallible, so are computers. The more data you plug into AI models, the more data is at risk for programming errors and privacy breaches. Especially given that there is a pretty big first mover advantage, firms may rush to get them out without really kicking the tires on their algorithms first.
The authors of the Euromoney report cite Nate Soares, a former Google engineer and current research fellow at the Machine Intelligence Research Institute, who told the The Financial Times, "there is only a 5% chance of programming sufficient safeguards into advanced AI."
Errors bring litigation risk. Some 37% of the executives surveyed said they are not confident that they are fully aware of the material legal risks associated with new AI technology. Only 30% said they are confident.
This all points to a great need for regulation. And that means collaborating with fintech adopters, executives said.
Regardless, a major shift in the industry is coming thanks to artificial intelligence. Two-thirds of the executives surveyed believe that AI will bring a complete or major change to their jobs in the next 15 years. Four out of ten fear AI will have a negative effect on the structure of the workforce within three years.
But robots need humans. AI can't function independently of human intuition and influence. AI is here to stay, but humans aren't going anywhere either.