The finance sector has often struggled in the 21st Century to fully embrace digital transformation. However, the ongoing generative AI boom has all the necessary components to deliver an Open Finance revolution that can bring widespread modernization to industry processes.
Although it’s been relatively slow in the uptake of digital transformation, the impressive growth of Open Banking has shown that there’s plenty of room for innovation throughout finance.
While Open Banking refers to the exchange of services and data across financial institutions, Open Finance represents the next step in digital transformation and empowers trusted third parties to utilize customer data to deliver more transformative access to services such as banking, credit, alternative payments, financial advisors, insurance, investment tools, spending insights, mortgages, pensions, and a wide array of other fintech tools.
This next generation of finance can be leveraged by artificial intelligence, and the ongoing AI boom is already providing us with insights into how it can drive the growth of Open Finance.
Uniting AI and Open Finance
At its core, AI helps to harness the power of data effectively throughout the financial landscape. This bodes well for Open Finance, which is dependent on rich, structured data that artificial intelligence algorithms can deliver for effective decision-making.
This can help to enhance and automate processes that customers have long grown accustomed to in traditional finance. From personalized experiences at local branches to bespoke financial advice, AI helps to maintain the local aspect of finance in a world that’s attempting to replicate physical connections in a digital landscape.
The post-pandemic era has seen many traditional financial institutions abandon their brick-and-mortar stores in a bid to tap into the cost-effectiveness and efficiency of Open Banking. While this can be a jarring shift, the ability of AI to accelerate Open Banking into a more functional Open Finance model could be a timely upgrade.
But how exactly will the artificial intelligence revolution support the growth of Open Finance? Let’s take a look at five ways the innovative technology will transform the industry:
Embracing Predictive Analytics
One vital reason why AI is an excellent driver for Open Finance is because of its ability to algorithmically analyze historical data to anticipate future outcomes and trends.
In terms of Open Finance, this means that artificial intelligence has the power to anticipate customer behavior, identify risks before they emerge, and tap into its wealth of insights to optimize business processes in ways that human staff may be unable to recognize on such a rapid basis.
For instance, an integrated AI algorithm can utilize available customer data to create a bespoke analysis of a customer’s risk of defaulting on a loan based on a multitude of behavioral, historical, and external factors. This paves the way for a better understanding of risk and allows institutions to adapt offers to mitigate the risk involved.
The emergence of generative AI can also enhance predictive analytics further by allowing firms to utilize synthetic data in understanding customer behavior. In the age of GDPR, synthetic data can be an excellent solution for bridging analytical gaps due to the unavailability of data.
The Age of Rapid Decision-Making
The ability of AI to get to grips with big data and drive actionable insights for decision-makers means that more institutions will be capable of reacting faster to the bespoke needs of customers.
Here, the technology can aid the reaction times of just about every player in Open Finance, from underwriters to customer service agents, in automating routine tasks to help employees allocate far more attention to any cases that are too complex to be handled by the AI.
In practice, this means that artificial intelligence can actively enhance decision-making in a cost-effective and efficient manner while humans can tap into actionable insights for more responsiveness when it comes to outlying cases.
The use cases for AI-driven decision-making in Open Finance are already growing. According to Suzanne Homewood, Decisioning Managing Director at Moneyhub, one lender saw a 15% dropout rate in loan applicants that AI flagged as fraudulent, while in Open Banking, loans made with better-informed decisions have been found to perform 50% better than others.
Personalization for Life After Branches
One of the biggest issues that digital transformation in finance poses is the loss of those personal connections that customers are accustomed to with brick-and-mortar banking. For many individuals who have long expected to be able to visit their local branch to speak to advisors who they’re familiar with, the post-pandemic closure of banks has been jarring.
Artificial intelligence can help to restore this highly sought-after personable feeling among customers and recapture trust that may have been tested during the financial sector’s push towards digital transformation.
“An example is AI-powered personalized conversational interfaces and biometric profiles that have shown promise in helping vulnerable consumers avoid debt traps fueled by late fees and inflexible payment schedules,” notes Charlene Coleman, Senior Managing Partner at Launch Consulting Group.
Additionally, big data analytics can help Open Finance services to understand their customers on a far more comprehensive level. In practice, this would mean that entire interfaces and fintech platforms could adapt directly to the customer’s perceived requirements. Is a customer using a platform to invest in tech stocks? Then their portfolio will be displayed on their home screen. Has a customer been saving for a mortgage? The portfolio can load their cash ISA on launch.
It’s through this comprehensive behavioral understanding that AI can help Open Finance deliver personalization on a level that can be even more convenient than before.
Live Compliance Monitoring
At this stage, it’s crucial to highlight that Open Finance certainly carries a greater level of risk for customers and institutions alike. At its core, Open Finance services would be built on the widespread sharing of highly personal financial data for a multitude of customers. This means that the risk of data breaches could cause damage on an unprecedented scale to users.
With this in mind, we’re likely to see the regulatory landscape surrounding Open Finance become increasingly stringent as the ecosystem grows. When backed by a sufficient AI framework, the challenge of compliance among challenger banks and fintechs can be simplified.
Let’s look at the European Union’s regulatory outlook for open finance as an example. The EU recently updated its Payment Services Directive (PSD) to better accommodate the emerging technological landscape and ensure that data is shared safely throughout the bloc’s financial institutions.
As these directives are continually updated to ensure the safe flow of information throughout the financial landscape, artificial intelligence and generative AI tools can help to actively monitor compliance throughout the flow of Open Finance services, and could even make adjustments on the fly should incidents or possible inefficiencies threaten the legality of certain services.
Open-All-Hours Support
Generative AI is already making a significant impact on the quality of support offered to customers. As finance becomes increasingly digitalized, it’s been a challenge for many institutions to replicate the quality of service that customers have lost in the closure of many local branches.
However, large-language models (LLMs) and virtual assistants are actively revolutionizing support systems in Open Finance.
With 24/7 coverage, these chatbots can respond immediately to queries, answer FAQs, and guide users through complex processes in an adaptable way. With the ability of LLMs to generate bespoke responses for more difficult issues, this support can become a reliable way of maintaining customer satisfaction while actively supporting tasks like loan applications, account management, and transactions to ensure no business is lost along the way.
AI to Drive the Digital Transformation Revolution
Given the necessity of access to financial services for everybody at all times, the digital transformation revolution in finance is nothing short of essential.
While the post-pandemic landscape has been a challenging one for traditional finance, the arrival of Open Finance powered by artificial intelligence is set to recapture the essence of personalization and adaptability lost with the closure of local branches.
With powerful insights and the ability to offer more bespoke services instantaneously, AI has the potential to take the financial sector to unprecedented heights. While this will bring new regulatory challenges, it’s shaping up to be a key stepping stone in the Open Finance revolution.
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