The Coming Democratization Of Financial Services, Thanks To Artificial Intelligence
The financial revolution is here. Here, we take a deep dive with one of the world’s top FinTech venture capitalists, Spiros Margaris, founder of Margaris Ventures, into the way AI and related technologies are transforming a key industry. Spiros, a senior advisor to, and investor in, several fintech, insurtech, cybersecurity, health care, and AI sector companies, including two FinTech start-ups with valuations of over $1 billion.
Q: What issues, shortcomings, or inequities with financial systems are potential areas for transformation?
Margaris: The financial technology industry — FinTech — seems to originate from the need to provide for a democratized financial system, at least, the FinTech companies that interest me. The long-term impact of those companies will be our industry’s true legacy. By democratization of the financial system, I mean an industry that provides for the unbanked or underbanked — people with disabilities, minorities, or marginalized groups — by providing them with access to basic and fair financial services. Many financial services that most of us take for granted are inaccessible to low-income and rural populations due to a lack of physical infrastructure, internet, smartphones, and computer access.
Additionally, financial products are often too expensive for less privileged individuals and lack transparency and easily understood terms. This makes understanding the actual costs and risks of those products difficult. Technology such as artificial intelligence is the great enabler, helping the financial industry transform faster and in a more differentiated and democratizing way that allows for overcoming or mitigating those shortcomings. Thus, AI can reduce financial service access disparities between the rich and the poor.
Q: What kind of work is underway, and what success is being seen?
Margaris: AI is already widely used in the financial industry and expanding to additional sectors like banking, trading, and lending, such as in more nuanced and accurate credit scoring systems deployed through AI and big data. AI allows companies to make more informed decisions and improve fraud detection and risk management systems, as well as to provide more personalized and tailored offers for individual customers.
AI chatbots are also being used to provide customers with more efficient and personalized customer service. Automation enabled by AI can streamline processes and improve financial service efficiency, further reducing costs and improving customer experience. In addition, AI and big data can help to identify and combat systemic financial market issues, such as money laundering and terrorist funding, which could potentially undermine financial market stability as we know it. Through constant and fast-improving possibilities, AI is successfully reducing financial service costs and accessibility for those who have been left out or had limited access to traditional banking options.
Q: Are banks and financial institutions ready—or are new tech-savvy players gaining ground?
Margaris: With financial institutions and fintech companies already deploying AI to improve services and stay competitive, the more tech-savvy players in the industry are likely better positioned to take full advantage of the vast possibilities and become more successful. As we know, though, the competition does not stop with traditional financial players but instead is enriched by others, such as tech giants, who also want a piece of the pie.
Tech giants such as Amazon, Apple, and Google have the technical expertise, vast resources, and customer base to gain ground in the financial sector. In a technology-driven world, the financial industry’s problem is that tech companies have business DNA built on deploying cutting-edge technology and driving innovation to achieve their growth strategies. That said, as much as the financial industry is at a technological disadvantage compared with the tech giants, what speaks for them is the inherent and deep trust customers have for banks and established financial institutions.
Nevertheless, the financial industry’s DNA must be enhanced quickly with cutting-edge technology and innovation to remain competitive in the future. We must remember that tech giants will never want to be banks; they want to serve their customer base and make their solutions more effective. For financial institutions, tech giants have the potential to take a big piece of the business pie, often a quite tasty and profitable piece.
The future competitive landscape will be defined by how much each player wants to invest in technology and drive innovation to provide better offerings for customers. Fintech companies have understood this far better than most banks, but increasingly, everyone understands that pushing technological advancement is the only game in town, at least for those who want to stay in it.
Q: What challenges are ahead in deploying AI to democratize the financial system?
Margaris: As great as the current and potential future AI solutions seem, challenges must be addressed to ensure continued success. AI models require vast data — both accurate and up-to-date — which must be diverse and unbiased to avoid inaccurate outcomes. We must be able to explain AI models so that they can be corrected if necessary, as well as to ensure fairness, privacy, and security. Another challenge for the deployment of AI models is data storage and, in Europe — as well as similar global forms and initiatives— access because of General Data Protection Regulation, GDPR.
Effective security measures are necessary to ensure the safety and integrity of AI-based models. Furthermore, the implementation, maintenance, and scaling of AI solutions are costly, and many companies are bold in genuinely transforming their business models to full technology. Developing the necessary technology and training employees to use the system is an investment that companies must make.
Additionally, AI-based systems may lack design for integrating with existing processes, thus potentially requiring significant customization before deployment. The financial industry is also rightfully very regulated and an environment of ever-changing regulations meant to protect consumers, which poses another challenge for AI. Therefore, all of us, regulators included, must understand how deployed AI models work and their implications.
Thus, AI models must be proven trustworthy for use in the financial system. The better everyone understands AI models, the more we can trust in fair deployment, protection of privacy, and avoidance of discrimination. Much work remains to keep educating people and customers about the vast benefits of such complex technology. We must ensure that people believe and understand that AI will benefit them as it reaches its fullest potential, and we must remember that trust is still the core DNA of any business model, including that of banks.
Q: What advice do you provide to the companies you fund about the future ahead?
Margaris: I remind my companies that even previously known companies with a strong focus on technology can have offerings that feel old compared with current innovations and technological advancements. The race never stops, and every player can become nothing more than a memory if they rest on the laurels of their past initiatives.
Finally, AI that can be explained must be deployed to drive down costs and provide greater transparency and access. Everyone will benefit and, most importantly, truly advance from the democratization of the financial sector, which should be of interest to us all.