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 how AI and related technologies are transforming a key industry. Spiros, a senior advisor to and investor in several fintech, insurtech, cybersecurity, healthcare and AI companies, including two FinTech startups valued at over $1 billion.

Question: What problems, deficiencies or inequities with financial systems are potential areas for transformation?

Margaris: The financial technology industry – FinTech – seems to stem from the need to provide a democratized financial system, at least the FinTech companies that interest me. The long-term impact of these companies will be our industry’s true legacy. By democratizing the financial system, I mean an industry that caters to the unbanked or underbanked – people with disabilities, minorities or marginalized groups – by giving them 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 data access.

In addition, financial products are often too expensive for less privileged people and lack transparency and easy-to-understand terms. This makes it difficult to understand the actual costs and risks of these products. Technology such as artificial intelligence is the major enabler, helping the financial industry to transform faster and in a more differentiated and democratizing way that allows these shortcomings to be overcome or reduced. Thus, AI can reduce the differences in access to financial services between rich and poor.

Q: What kind of work is being done and what success is being seen?

Margaris: AI is already widely used in the financial industry and is being extended to several sectors such as banking, trade and lending, for example in more nuanced and accurate credit scoring systems implemented through AI and big data. AI allows businesses to make more informed decisions and improve fraud detection and risk management systems, as well as provide more personalized and tailored offers to individual customers.

AI chatbots are also used to provide customers with more efficient and personalized customer service. Automation enabled by AI can streamline processes and improve the efficiency of financial services, further reduce costs and improve the customer experience. In addition, AI and big data can help identify and combat systemic financial market problems, such as money laundering and terrorist financing, which can potentially undermine financial market stability as we know it. Through constant and rapidly improving capabilities, AI is successfully reducing the cost of financial services and accessibility for those who have been left out or had limited access to traditional banking options.

Question: Are banks and financial institutions ready – or are new technology-savvy players gaining ground?

Margaris: With financial institutions and fintech companies already implementing AI to improve services and remain competitive, the more tech-savvy players in the industry are likely better positioned to take full advantage of the huge opportunities and become more successful. As we know, the competition does not stop with traditional financial players, but instead is enriched by others, such as technology 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 technology companies have business DNA built on implementing cutting-edge technology and driving innovation to achieve their growth strategies. That said, as much as the financial services industry has a technological disadvantage compared to the tech giants, what speaks for them is the inherent and deep trust customers have in banks and established financial institutions.

Nevertheless, the financial industry’s DNA must be rapidly strengthened 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 efficient. For financial institutions, the tech giants have the potential to take a big slice of the business pie, often a pretty tasty and profitable slice.

The future competitive landscape will be defined by how much each individual player wants to invest in technology and drive innovation to provide better offers to customers. Fintech companies have understood this far better than most banks, but increasingly everyone understands that driving technological progress is the only game in town, at least for those who want to stay in it.

Q: What challenges lie ahead in deploying AI to democratize the financial system?

Margaris: As good as 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 – that 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 ensure fairness, privacy and security. Another challenge for the deployment of AI models is data storage and, in Europe – in addition to similar global forms and initiatives – access due to the General Data Protection Regulation, GDPR.

Effective security measures are necessary to ensure the safety and integrity of AI-based models. Furthermore, implementing, maintaining and scaling AI solutions is costly, and many companies are hesitant to truly transform their business models into full technology. Development of the necessary technology and training of employees to use the system is an investment companies must make.

In addition, AI-based systems may lack design for integration with existing processes, thus potentially requiring significant customization before deployment. The financial industry is also rightfully highly regulated and an environment of ever-changing regulations meant to protect consumers, which presents another challenge for AI. Therefore, we all, regulators included, need to understand how deployed AI models work and their implications.

Thus, AI models must be proven reliable for use in the financial system. The better everyone understands AI models, the more we can rely on fair distribution, protection of privacy and avoidance of discrimination. Much work remains to continue to educate people and customers about the enormous benefits of such complex technology. We need to make sure people believe and understand that AI will benefit them when it reaches its full potential, and we need to remember that trust remains the core DNA of any business model, including banks.

Q: What advice do you give the companies you fund about the future?

Margaris: I remind my companies that even well-known companies with a strong focus on technology can have offerings that feel old compared to today’s innovations and technological advances. The race never stops and each player can become nothing more than a memory if they rest on the laurels of previous initiatives.

Finally, explainable AI must be deployed to reduce costs and provide greater transparency and access. Everyone will benefit and, most importantly, truly benefit from the democratization of the financial sector, which should be of interest to us all.