The technologies of artificial intelligence are becoming an integral piece of the world in which we live. These technologies are being deployed across a plethora of fields ranging from simple devices such as cell phones to more complex technologies such as autonomous vehicles or the diagnosing of diseases. Artificial intelligence is even rearing its technological head into the field of banking. It is a constantly evolving technology that many industries are jumping into while others are slowly being pushed into it in their efforts to thrive. For banks, it’s critical to embrace the advancements of the future, but also to consider the security and regulatory requirements and overall risk to the organization and its customers.
The benefits of AI
Artificial intelligence is used in various fields and applications ranging from online shopping, advertising and machine translation enabling cross-language communication, to improving the overall operations and cost efficiency of financial institutions.
With its broad range of uses, AI can potentially aid financial institutions in reducing costs associated with products and services while enhancing the overall customer experience as it bridges the gap between customer convenience and relationship. AI can benefit your lending process by expanding credit access, assisting in financing decisions, decreasing underwriting times and costs, and enhancing both the borrower and lender experience. AI can help other departments in the bank with identity validation and real-time anti-fraud monitoring.
AI challenges
Like any other enhancing technologies, AI comes with its own set of risks including system integration and a skills gap. For system integration, the data behind AI is just as critical as the technology itself. To be beneficial and effective, the data quality and quantity need to be accurate. This involves organizing data and preparing for integration, so banks with a core processor will have to coordinate between their core system and their AI technologies. This can often be a complex and costly undertaking, especially for community banks. It can get even more complicated if your core processors and AI solutions vendor are competitors, often leading to increased fees and costs for integration.
Even if you can work out all the kinks related to system integration, there is always the challenge of obtaining expertly trained staff who are knowledgeable in building and deploying AI solutions. With the rapid advancement and use of AI technologies, there is a shortage of skilled AI experts in the broader labor force. This is expected to improve, but for now banks are left competing with large tech companies such as Apple or IBM when recruiting AI talent.
Smaller banks may struggle to meet compliance expectations when these technologies are still surrounded by regulatory uncertainty. Banks are expected to identify and manage all risk related to artificial intelligence and how it is used within the organization, including ensuring all data used within the various branches of AI align with regulatory compliance requirements. For example, if the machine learning branch of AI is used in decision making for credit, the bank should understand – and be prepared to explain – what contributing factors the AI system used to reach its decision (i.e., What data was input to receive the outcome/decision). That means both the process and the raw data itself must meet regulatory requirements, which involves ensuring the AI system isn’t using information that may violate consumer or fair lending laws.
Banks utilizing AI should have processes in place that allow for the identification of risk, both new and emerging, as well as controls for managing that risk. Because of the rapidly evolving technologies of AI, there is always the challenge of changes in risk level or even unidentified risk developing. You need to be prepared to rise to the occasion when it comes to meeting those regulatory and risk challenges, whether through an increased frequency in monitoring and reviewing established controls or contracting with external vendors to conduct robust third-party risk management.
The use of AI technologies within financial institutions has captured the interest of regulators and policymakers alike. A couple of key concerns are always the safety and soundness of financial institutions and consumer protections. While AI constantly grows and advances, many banking laws and regulations currently on the books are still behind the times, leaving some areas of regulatory uncertainty. Nevertheless, regulators acknowledge the benefits of AI and support responsible innovation.
In 2021, the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and Federal Reserve Board issued requests for information regarding the use of artificial intelligence by financial institutions. In 2022, the OCC issued supervisory expectations for how banks should manage risks associated with AI. Most recently, an April 2023 joint statement1bit.ly/AIJointStatement was issued by the agencies on enforcement efforts against discrimination and bias in automated systems. The statement outlines some of the challenges of AI and serves as a reminder that banks must embrace responsible innovation.
Conclusion
For banks to thrive and remain relevant, they must continue to be forward-thinking and responsible in their innovation efforts. Artificial intelligence is an ever-evolving technology and convenience of our world. Financial institutions must engage in the balancing act of supporting new and innovative technologies for their consumers, while also acknowledging the managing of risks and challenges of such growth.
It is imperative to fully understand the technologies that our institutions rely on for their operation and that we remain abreast of any issues arising in the regulatory world. Artificial intelligence is the future and it’s filled with risks and rewards
