AI in Finance: Overcoming Hurdles for Transformation

October 09, 2023
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AI in Finance: Overcoming Hurdles for Transformation

Generative AI holds the potential to help financial services firms re-imagine their entire businesses around the needs and desires of their customers.

There are several areas where generative AI can help firms dramatically improve their operations.

First hurdle: Generative AI poses unique risks that traditional AI systems don’t have to contend with. One is defamation: programs inadvertently producing defamatory content. Another is hallucinations and opaque logic and processing. Generative AI also creates confidentiality concerns such as data leakage and copyright issues. To address these, financial institutions need to beef up their governance, data quality, talent functions and other dimensions.

Second hurdle: regulators. The potential perils of AI span the enterprise, including operations, technology, legal, compliance, process, data, technology and reputational risks. Banks need an enterprise-wide framework to holistically manage these risks. Government bodies have offered guidelines on best practices in the US, the EU, the UK and Hong Kong. When these guidelines turn into hard rules, we estimate fines for lack of governance could approach 6% of the industry’s global revenue.

Third hurdle: the technology itself. Today’s models lack desires and self-directed learning. They have extensive knowledge of the world, but don’t “know what they know,” and lack any sense of truth. As for reasoning, models’ abilities remain brittle and likely to fail unexpectedly, especially when asked to apply logic and knowledge in new contexts. And they don’t yet offer predictability, with unwanted outputs creeping into models frequently.

As a result, significant productivity improvements from generative AI will take time. Learning curves are steep, there is still insufficient scale of adoption, and model tweaks and redesigns have been slow. Firms must navigate a collision course: In one direction, ongoing advancements are likely to drive more widespread use as tools become integrated into our daily lives.

At Loquat we believe in the transformative power of AI in finance.

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