Artificial Intelligence: The new backbone for Fintech innovations

Innovations in AI are now thoroughly interwoven into most fintech operations. AI and Fintech share a common element of innovation, which means Fintech and AI are in a multifaceted, complex relationship which impacts various aspects of financial services delivery and drives efficiencies for Fintech operators.

According to htfmarketintelligence.com, the Artificial Intelligence (AI) in Banking market size is estimated to reach USD 66.24 Billion at a CAGR of 33.61% by 2030.

The accelerated growth in the uptake of AI applications by the Fintech sector is partly driven by the lowering costs of AI tools, rapid advances in AI technology, and the growing demand for operational efficiency, cost-effectiveness and data-driven decision-making. Also, the Fintech space is fiercely competitive, and AI-First Fintech operators use AI as a differentiator.

The history of AI applications in Fintech can be traced from the 1980s to the early 2000s, when the foundations were laid for AI applications in Fintech innovations, including expert systems to help automate credit scoring and loan underwriting, among other use cases. Fast forward to the 1990s, when financial institutions began using machine learning and natural language processing (NLP) to automate essential functions such as fraud detection and customer service.

AI application by the fintech sector accelerated in the early 2000s with more Fintech actors leveraging AI, including enhanced risk management, enhanced products and services development, fraud detection, mitigation and financial forecasting based on the increasing availability of big data.

Recent years saw the emergence of Robo-advisors powered by AI, AI-powered chatbots and virtual assistants for real-time credit scoring as well as AI in cybersecurity and fraud detection in digital payments. More recently, Generative AI has started influencing fintech sectors; developing predictive models and offering personalised financial products.

AI’s ability to improve a variety of Fintech tasks, operations, processes and systems.is due to the application of a variety of tech innovations, such as Machine Learning (ML), Natural Language Processing (NLP), Large Language Model (LLM), Robotic Process Automation (RPA), and predictive analytics. These tools enhance Fintech's operational effectiveness, automation and complex decision-making processes and impact tasks such as customer onboarding, risk assessment, and data analysis and streamline workflow forecasting and customer-facing processes.

Fintech is increasingly showing evidence of AI applications, enabling services like algorithmic trading, Loan Underwriting, automating accounting processes, Peer to Peer(P2P) lending, crowdfunding, regulatory technology (REGTECH), digital and mobile payments, digital assets management and delivery of personalised services to customers. AI is now key to managing and analysing data, enabling fintech companies to generate action insights to improve digital payment processing.

Overall, the benefits of AI in Fintech could include enhanced client experience, improved fraud detection capabilities, improved efficiency, the ability to undertake data-driven complex decision-making, cost savings, and cost-effectiveness.

In spite of Fintech experiencing growing pains, the race is on; some leading fintech are moving beyond the experimentation stage and quickly moving to scale up AI across their operations with a view to disrupt existing traditional financial systems and introduce cutting-edge fintech solutions which satisfy the complex demands of consumers.

Given the rise of AI applications in the financial sector, several central banks worldwide have started introducing regulations, guidelines, and directives to govern the use of Artificial Intelligence (AI) in the financial system. For example, the European Central Bank (ECB) and the European Union proposed that the AI Act contain provisions on finance.

Also, the European Central Bank (ECB) provides specific guidance on using AI in financial institutions under its supervision, especially on algorithmic transparency and fairness in AI applications in credit assessments and trading.

The Monetary Authority of Singapore (MAS) – introduced Fairness, Ethics, Accountability, and Transparency (FEAT) Principles in AI Applications. Other central banks, such as the Canadian Office of the Superintendent of Financial Institutions (OSFI), the Bank of England, the U.S. Federal Reserve, the People's Bank of China and the Hong Kong Monetary Authority have similar guidance or directives on using AI in Banking.

Looking into the future, AI in Fintech will be characterised by advancements in Natural Language Processing, growing reliance on blockchain technologies, emphasis on Deep Learning, voice-activated financial services, increased services automation, improved predictive analysis powered by big data, AI-driven personalisation, AI-powered financial inclusion and enhanced collaboration based on seamless system interoperability. Citi Group estimates that AI could displace 54% of banking jobs as well as impact capital markets, insurance, and energy sectors.

In conclusion, a myriad of AI applications in Fintech are now fully established and future trend points to a complex AI and Fintech relationship that will lead to unparalleled innovations driving groundbreaking applications that enhance consumer experience, help balance risks, and improve the bottom line of Fintech while transforming our society.

A caution may be that although AI adoptions can come with many opportunities and advantages, it is imperative for Fintech firms to consider serious issues of privacy, security, and ethical implications when re-engineering their operations and systems to integrate AI.