Will AI disrupt the finance industry as we become a more financially literate nation?

Financial institutions understand that innovation during tough times isn’t just about survival, but about positioning for future success – and artificial intelligence (AI) plays an integral part in helping us achieve that. From customer chatbots to more in-depth spending analytics, AI has given consumers more insight and control into how they can manage their finances.

AI’s impact on financial decision-making is likely to drive efficiency, expand access to financial services and reshape labour markets. As such, it should also, in essence, help with financial literacy, closing the gap between those who can afford expert financial advice and those who can’t. But how much will our economy change if everyone is financially literate, and will this overhaul the finance industry in a way it hasn’t considered? Dr Hassaan Khan, Head of School Management and Executive Education, at Arden University explains.

What can AI do for the finance industry?

Dr Hassaan Khan

The use of AI in the finance industry can be categorised into three main areas: risk assessment and management, customer service and experience, and fraud prevention.

  1. Risk assessment and management: There’s a massive potential for AI to positively impact evaluation and risk monitoring in the financial sector. Analysing past events and detecting impending dangers in credit and investment portfolios requires machine learning. Machine learning models can now be employed on vast volumes of data pertaining to credit application information. This can help to ascertain better predictive models to assist financial institutions in the identification of credit risk and formulation of credit policies. Additionally, AI can be used in cross-border trade transactions to mitigate operational risks. For example, it can be used to ensure the standardisation of transactional activities like trade surveillance and enable real time compliance monitoring.

  2. Customer service and experience: Many of the finance industry applications of AI technologies, such as chatbots and virtual customer assistants, are already at play. Using these AI-based tools enables financial institutions to immediately respond to customer concerns and enhance satisfaction levels even more. Additionally, since AI obtains data relating to customer spending patterns, investment styles, investment preferences and goals, it can also assist in providing customers with a bespoke financial advisory service.

  3. Fraud detection and prevention: AI can also help to combat fraud by applying deep learning techniques that not only know how fraudulent activities are conducted but are also able to identify them in a timely fashion. AI models can now be trained to learn from data sets, which allows these models to flag transactions that are considered to be fraudulent. This capability saves the institution and the customer money and shields both from any form of fraud activity.

What would a financial literate nation look like?

In an ideal world, the above adoption of AI would help towards creating a financially literate population, and that would reap many benefits – not just for individuals but also for the UK economy. Better financial literacy would result in people saving more for contingencies and retirement, reducing reliance on government support and allowing government spending to be focused elsewhere to enhance the overall economy. While the slowdown of spending could cause instability in certain industries, such as retail, it would eventually ease as households build savings and avoid unsustainable debt.

With more in the bank, people may feel more motivated to shift from short-term speculation to long-term investment strategies, further stabilising financial markets. A better understanding of credit could also reduce high debt-to-income ratios – improving the credit scores of people who have borrowed money. This would entice lower interest rates, which in turn, would reduce the cost of borrowing, allowing the Government to further invest or spend more effectively elsewhere in the economy.

As a result of being able to manage money better, financial literacy would also allow consumers to be more deliberate when spending. This could have a profound, positive impact on sectors that are more sensitive to consumer behaviour, like retail and hospitality.

There are even potential benefits for the environment. By making better financial investments, consumers may adopt a more ‘long-term value’ mindset, where they prefer picking high-quality goods and services. This could shift demand towards sectors that offer durable, sustainable products, rather than fast fashion or high-turnover consumer goods.

There are further structural inequalities that play a huge role in financial literacy, however. Other broader structural inequalities impact our financial system, such as access to education, healthcare, housing and jobs. These factors contribute to income and wealth disparity, which financial literacy alone cannot fully resolve.

Is the financial industry prepared?

As mentioned, there are many other factors, alongside adopting AI, that will affect the nation’s financial literacy, but all-in-all, financial institutions would need to be prepared for increased competition if AI adoption gives more power to customers. Stronger financial literacy could drive down interest rates and fees, and banks may need to tailor products like loans, savings accounts and credit cards to better meet the specific financial goals of its customers.

The industry will also need to begin thinking about investing more in transparent, competitively priced products that appeal to a knowledgeable customer base. We’re beginning to see some of this now, with the increase in demand for budgeting tools and savvier apps that detail where customers are spending their money. But with AI, banks can remain competitive by utilising the technology to give strong investment and debt management advice.

Even though our financial system doesn’t rely on income disparities to function, it is structured in a way that allows the wealthy to benefit more from financial tools and opportunities, while lower earners often face higher costs and limited access to them. Even in a financially literate society, wealthier individuals would still have more capital to invest, take greater risks and benefit from economies of scale in investing. Wealth tends to compound, and simply knowing how to invest doesn’t equalise access to capital – an aspect banks can remain to capitalise on. If the wealthiest portion of the population engages in more aggressive investing, it could further concentrate wealth among the top earners.

With consumers using FinTech and its AI insights to help make financial decisions, a big question that remains is whether or not the financial industry is ready for such an overhaul. While we don’t know the direction such technology will take us, we still wonder: what will the long-term impact of this be and how much will need to change?

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