The AI-Fintech connection: Transforming the financial ecosystem

The financial ecosystem is experiencing a massive shift brought about by the rapid development of Artificial Intelligence (AI) and its integration into financial technology (fintech). At the threshold of this new era, one should know how AI is transforming the landscape, improving efficiency and creating new opportunities in finance especially in India.

AI in fintech is the most revolutionary thing because it can process and analyse a lot of data very quickly and with perfect accuracy. It has been transforming the way decisions are made in this field. For example, credit scoring had been relying on limited information sets that often failed to correctly evaluate the creditworthiness of individuals or businesses. Nevertheless, algorithms powered by artificial intelligence can examine various types of information including alternative evidence from social media account activities, online behaviours or transaction history among others. Consequently, such broad examination leads to a more accurate evaluation of creditworthiness lowering lenders’ risk while offering more borrowing opportunities.

The AI for calculating credit scores in India has implications for the unbanked population as well. A report from TransUnion CIBIL states that by 2020, over 160 million Indians were part of the credit system while many others were still unaccounted for by it. These gaps have been filled through credit appraisal tools integrated with AI which enables inclusive financing by extending loans to marginalised communities.

Furthermore, AI technologies play an important role in improving customer experience. In today’s world where instant gratification and personalised services are demanded by people, Chatbots and virtual assistants powered by AI have become indispensable. Such tools offer real-time updates, answer questions as well as perform other transactional requirements with each interaction being a learning opportunity to better respond next time. From estimates given by Juniper Research, banks will globally save $7.3 billion through the use of chatbots as compared to an estimated $209 million in 2019. This also streamlines activities while allowing human employees to engage in more complicated tasks thus enhancing productivity levels universally. In India, there is an increase in the usage of chatbots.

The National Payments Corporation of India (NPCI) has deployed AI-based solutions to address millions of customers’ complaints about Unified Payments Interface (UPI) and other digital payment services. They have significantly reduced response times leading to improved customer satisfaction and wider adoption of e-payment systems. In the field of fraud detection and prevention AI has made strides. Financial institutions have been vulnerable to fraudulent activities but most of the traditional methods are reactive than proactive. AI has emerged as a strong solution, capable of analysing patterns and detecting real time anomalies. Machine learning models can detect suspicious activities for subsequent investigation well in advance before any damage is done to anyone. This would then see an increase in the use of AI tech in fraud detection market from $2.1 billion (2019) to $6.5 billion by 2024 on growing reliance on AI systems to secure financial transactions as per MarketsandMarkets. The incorporation of AI in fintech is not without hurdles.

Privacy and security concerns are also more important than ever as AI systems require huge amounts of data to work efficiently. The collection, storage and use of information in line with privacy laws need to be ensured at any time. A different problem lies with algorithmic bias where AI systems may inadvertently foster data already biased in such direction. For trust building purposes and fair usage of AI technologies these ethical questions must be answered. This is an issue that is being addressed by Indian government and its regulators. To grow the Indian fintech ecosystem and establish transparency, RBI has decided to create the EmTech repository for all RBI-regulated entities including banks, non-banking financial companies (NBFCs), etc. During an event held recently, there were two other products that Governor Shaktikanta Das launched. The PRAVAAH portal is expected to simplify regulations whereas Retail Direct Mobile App aims at providing retail investors with more access to securities issued by the Government of India. These initiatives confirm Indian regulatory bodies’ commitment towards innovation as well as creating a stable and safe financial system.

RBI has been proactively promoting the adoption of AI for combating fraud within Indian borders. The way Indian banks monitor transactions through AI systems-based approach and identify fraudulent cases have increased enormously. It should be remembered that the employment of artificial intelligence has led to a major decrease in losses resulting from fraud. AI also changes investment management field. Robo-advisors are increasing access to investment services through democratisation while using algorithms to offer financial advice and manage portfolios. These advisors that utilise artificial intelligence study market data, measure risk tolerance and execute trades presenting personalised investment strategies at a mere fraction of what traditional financial advisors would charge.

According to Statista, robo-advisors held around $987 billion in assets under management by 2020 with an anticipated increase up to $2.4 trillion by 2024. Therefore this shift makes investing more accessible and improves portfolio management efficiency and accuracy as well. The millennial generation have experienced a surge in investment culture, which expands with robo-advisers. The accessibility and affordability of investment platforms are also advocating for increased participations in equity markets as well as other investment avenues by Indians. Furthermore, this is important aspects concerning regulation and compliance within finance industry such as artificial intelligence (AI). AI-powered regtech automates compliance processes in some cases replacing manual reporting thus ensuring conformity with continually changing legislations. This can assist to minimise human errors and guarantee prompt obedience especially when dealing with AI algorithms for scrutinising transactions like compliance data analysis as well as report writing. According to this study conducted by Grand View Research, it is projected that the regtech market will grow at a CAGR of 52.8% from 2019 to hit $55.28 billion by 2025. This rapid growth demonstrates why AI should be deployed for effective navigation on complex regulatory terrain. Nevertheless, the integration of fintech with AI also comes with problems. This is due to privacy issues plus data security that continue to be serious concerns as far as AI models require vast amounts of data to function properly. It is imperative that data gathering, storage, and usage should be guided by privacy laws. There is also a question about algorithmic orientation which means that artificial intelligence may unknowingly uphold prejudiced created through inclusion of such bias within data.

Addressing these ethical problems will build trust and ensure impartial implementation of AI tools. Notwithstanding, employing financial technology is beneficial. It democratises accessibility and encourages innovation in addition to improving accuracy and efficiency of financial services. Moreover, with time, we anticipate other disruptive applications related to this technology that will go further into transforming the finance landscape. The relationship between AI and fintech is an influential force that modifies financial ecosystem. From enhancing credit scoring and customer experience to strengthening fraud detection, investment management, regulatory compliance with or without human intervention – through efficiency and innovation on all fronts this technology is driven by these forces. It is imperative to acknowledge problems and reflect on ethics as we venture into this path so that eventually a future can be made where AI plays its role in finance for the good of all. We are now starting but there are numerous possibilities ahead.

This article is authored by Eklavya Gupta, co-founder and CEO, Recur Club.