How to Get Banks, and Regulators, to Embrace AI

Like it or not, the future of banking — like the future of many industries — is an AI future. Artificial intelligence already plays a central role in medical treatment and research, security (cyber and physical), manufacturing, transportation, and much more. But the uptake in banking has been slower, especially for consumer-facing investment applications.

That doesn’t mean that AI is absent from finance entirely. There are plenty of firms, many of them fintech startups, that are using AI to help investors find the best vehicles for their money, provide assistance in managing financial risk, assist investors in diversifying their portfolios, provide vehicles for payments and many other tasks.

But most of these efforts and initiatives aren’t coming from the major banks, which most people use to seek out investments, deal with financial risk, and build a diversified portfolio.

AI at Most Banks is Limited to Security and Customer Service

As of now, most banks only use AI for security, to protect assets and information from hackers, and for chatbots and other customer service and marketing functions. That has to change — but change won’t take place until investors take matters into their own hands, and pressure legislators to convince regulators — and banks – to start working seriously with AI.

Banks face two main challenges in bringing AI to actual banking and finance activities. First, banks are generally very limited regarding the services and products they can offer — and those limitations are due to regulatory issues.

It’s not that banks don’t want to use AI for customer-facing purposes — it’s that they can’t, unless regulators step up and update rules that would allow for convenient and efficient integration of AI. Banks are under a great deal of regulatory scrutiny, which makes deploying AI more complicated.

In addition, many banks are comfortable with the current situation, where their investment advisors provide a relatively limited offering of products. It’s worked for centuries; why change now? But there are encouraging signs of change; for example, several institutional banks, including Morgan Stanley and JP Morgan, are opposed to new SEC proposals that would limit how AI can be used to deliver investment advice to consumers.

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Regulations Hampering AI Investing at Banks

In this era of advanced data analysis, banks need to change — because they are in essence doing a disservice for their customers. In a world with so many diverse investment opportunities, there is no way an advisor is able to parse through the myriad of available options to find the best one for customers, instead relying on a very limited basket of offerings that they are familiar with.

These offerings may be useful, but wouldn’t customers be better served by being presented with a much larger basket of offerings — with a full AI-based analysis of their assets, life situation, risk aversion level, and more?

At the same time, banks are limited in what they can offer. As accredited institutions whose every move is scrutinized by agencies like the SEC, banks can only provide investment advice using approved methods implemented in certain ways, and a new SEC proposal would put even stricter limits on using technology, including AI, to share investment advice.

For example, the SEC requires banks to provide customers with an approved printed prospectus which lays out full details of investment offerings. Not that there’s anything wrong with that; investors should, and must, understand the risks of whatever investment they are presented with.

But that’s a slow and limiting requirement in an investment world that is moving very quickly – and AI could move things along far more quickly, efficiently, and effectively. For example, AI could be used to develop individualized customer prospectuses that describe risk and reward for hundreds of investment options at one time, with advanced data systems narrowing down the options that are best for an investor.

Electronic submission of that individualized prospectus to the SEC and quick approval would enable banks to provide the kind of assistance that customers are looking for today — and ensure that customers stay with the bank, instead of migrating to the fintechs that offer many more investment options.

We Need Regulators to Accelerate Investing AI Adoption

Why won’t regulators approve a process like that? After all, the SEC accepts electronic signatures attached to digital documents, a sea change for bankers who have to file documentation with the agency.

Why not go further?

The simple answer is that both banks and the SEC operate under mandates authorized by legislators – so until legislators authorize banks to offer AI-based services, the SEC will not draw up rules or offer guidance to banks seeking to do so. And without that guidance, banks will not offer those services.

The key, then, is to convince legislators to adopt those mandates — and convincing them to do so is the job of the people. Individual investors, lobby groups, and fraternal organizations need to pressure local, state, and national legislators to move into the modern era — thus enabling them to expand their investment horizons and take advantage of a wider range of options that will help them prosper.

What Regulators Should Learn from the Crypto Fumble

AI isn’t the only area where new approaches are needed. The SEC has also so far refused not only to approve Bitcoin ETFs , such as those proposed by investment giant Grayscale. But it has also refused to provide its reasoning for doing so, to the extent that, on appeal, a court overturned the SEC ban.

In response, the agency not only refused to comply with the court order — but even suspended discussion on all other crypto ETF applications. The SEC won’t even publish guidance on what criteria would be acceptable for such ETFs, and last May it was sued by Coinbase over the issue. In response, the Court ordered the SEC to inform it when those rules are ready; so far, no rules have been issued.

And no rules will be issued unless the agency is prompted to do so. In the crypto realm, it’s likely that prompting, like numerous lawsuits, will eventually cause the agency to relent. But don’t expect that kind of activity from banks, which for their own reasons – including being unprepared for the AI era, and because of their “natural” conservatism on implementing new things – are satisfied with the current system, even if their customers are not.

As customers start finding new ways to invest — with different institutions — banks will begin to notice. The current situation cannot continue; fintechs have already taken a “substantial bite” out of banks’ customer bases, and the latter even see them as an “existential threat.”

Regulators Need to Lead Financial Markets with Clear AI Investment Guidance

But without regulatory guidance and rules, banks’ hands will be tied. And highly regulated banks are very unlikely to argue with, much less sue, the SEC. That leaves the people and their legislative representatives to act. In theory, banks could start offering more AI services immediately; there are plenty of fintechs ready to offer their services as white-label products for banks to market under their own brands.

But without pressure from below, regulators are unlikely to make those changes to allow this. Thus it’s up to investors to make their voices heard – and to convince those in charge to make the necessary changes to usher in an era of modern AI-driven investing and financial services at banks

About the author:

Anna Becker is the co-founder and chief executive of EndoTech.io, where she leads the artificial intelligence and machine learning teams. Her deep-learning algorithms have been deployed in managing institutional money for more than a decade. She received a PhD in AI from the Technion Institute of Technology in Israel, and has founded and sold several AI companies in the fintech space, including Strategy Runner.