AI in Fintech: Major Challenges and Solutions in 2023

Fintech has great potential to become a major disruptor in financial services. The influence of AI in fintech is growing rapidly and has shown no signs of slowing. As artificial intelligence and its subsets advance, we’ll see it applied to a wider range of finance and banking functions. 

There are many examples of banks, investment firms, and financial enterprises making investments in AI-powered fintech solutions. Companies can automate repetitive tasks, improve predictions, manage risks, and perform real-time calculations to forecast performance with AI. Despite its many benefits, AI faces a number of challenges related to its implementation in fintech.

This article is for c-suite executives of financial enterprises curious about fintech trends, applications of AI in fintech, its challenges and some intelligent solutions. Let’s get started. 

What are the key trends in fintech 2023?

Fintech is a relatively new industry, and like any growing sector, it will be affected by a number of changes in the coming years. Fintech’s growth and industry disruption are here to stay, as consumers look for faster, more convenient ways to make purchases and payments. The fintech sector is not only focused on financial transactions but also provides other services such as cybersecurity and e-commerce.

Embedded finance and ease of cross-border payments has been hot topics in finance for some time now and continue to be so with new apps like Liink by JP Morgan and RippleNet. Similarly, the crypto space is maturing at a rapid pace and now more countries are recognizing cryptocurrency as legal currency. Fintech AI investments have also skyrocketed with the market size growing to $11.59 billion from just $9.15 billion from the past year in 2023 at a compound annual growth rate (CAGR) of 26.8%. 

Click here to listen our FuseBytes podcast episode discussing in detail about latest fintech trends, importance of financial literacy and more with Joel Brown-Christenson, co-founder of ViableEdu.

Benefits of using AI in Fintech 

AI has the potential to improve the way we do business. It can be used to automate processes, streamline communication and increase efficiency across entire organizations. The results of AI technology in finance are no different.

AI can help banks with risk management, compliance and fraud detection efforts by using deep learning algorithms that identify patterns in financial data indicating illicit activity. In addition, AI can help banks develop strategies through the application of big data analytics tools such as machine learning and artificial intelligence.

Applications of AI in Fintech 

One of the primary uses of AI in finance is to make more accurate predictions. For example, a company may use AI software to predict how many sales it will have next quarter based on data about previous quarters’ sales numbers. The company could use this information to optimize operations by deciding which products to sell and when.

An AI-powered trading strategy can be more profitable than a human-driven one because it uses more data to make predictions and find patterns that humans might not see. This can help investors make better investment decisions.

AI can be used to help banks better manage risks in the financial market. For example, AI can be used to detect unusual trading patterns that indicate fraudulent behavior. This enables banks to prevent money laundering and other illegal activities by identifying suspicious trading patterns. Credit risk assessment is another area where AI has made a huge difference due to its ability to predict behavior.

AI can also help banks better understand the correlations between various markets such as stocks and bonds and make more informed decisions on how much capital they should allocate to different assets.

Major AI in fintech challenges 

Scalability and data sensitivity

Scaling AI technologies for the financial industry poses a challenge due to the sheer amount of data that needs to be managed. When it comes to managing financial information, data sensitivity is also a major factor, making robust security measures essential. This can be difficult to achieve, as financial institutions must strike a delicate balance between protecting confidential customer data and ensuring AI algorithms are able to access enough information to make accurate predictions.

To overcome this challenge, financial institutions may need to invest in comprehensive security systems that include advanced authentication methods, encryption technologies and fraud-detection software. Additionally, engineers may need to implement machine learning techniques such as supervised learning, unsupervised learning and reinforcement learning in order to ensure that the AI algorithms are able to accurately identify any anomalies or risks in real-time. In this way, financial institutions can minimize risk exposure while leveraging AI.

Compliance and security

The financial industry is highly regulated and held to strict compliance standards. When it comes to implementing AI, there are several challenges that need to be addressed. 

The primary challenge is meeting compliance regulations. Companies must be sure that their AI systems adhere to all relevant laws and regulations, or they could face significant penalties. This means AI teams must not only understand how current regulations affect their systems, but also must stay abreast of any changes in regulations that may impact their systems.

Another key challenge is data security. Financial institutions process and store sensitive information, and they need to make sure that their AI systems are secure and reliable enough to protect this data against potential attackers. This means introducing robust measures such as encryption protocols, authentication processes, and secure data storage procedures.

AI talent shortage

It’s not enough just to create AI solutions for the financial industry – enterprises also need to have the right talent to make those solutions work. Unfortunately, there is a severe global shortage of AI talent, and financial institutions are feeling the pinch.

The shortage of AI professionals is due to a number of factors, including:

• Lack of professionals and graduates with capable AI skillset
• Competition from larger tech companies with more resources
• Skill gap between the current crop of AI professionals and what the industry needs

Businesses in the financial services industry must be strategic when it comes to recruiting and retaining AI experts. They must offer competitive salaries and benefits for top talent as well as provide ongoing education and training to stay ahead of the curve. In addition, businesses can look outside their sector to hire employees from tech companies or other industries.

Cybersecurity

The use of AI in financial services brings with it a heightened risk of cyber attacks, so the importance of cybersecurity cannot be understated. In order to protect customers from fraud and data theft, organizations must invest in robust security measures and build defenses against malicious actors.

AI can be used for authentication purposes, with facial recognition and voice recognition systems providing an additional level of security. However, these systems must be optimized to ensure accuracy and protect against misuse by hackers.

Organizations must also ensure they are protected against data breaches and implement measures such as encryption to safeguard sensitive customer information. Regular security audits should also be carried out to identify potential vulnerabilities in a company’s IT infrastructure.

Transparency, explainability, and trust

In an industry that relies heavily on trust, it can be difficult to build customer confidence when AI is involved. Since AI models are often complex, customers may not be able to easily trace how decisions were made or how their information was used. This lack of visibility can make customers wary of trusting the AI-driven financial systems.

Another challenge with AI in fintech is its explainability. While it’s possible to provide a list of inputs and outputs, it’s much harder for customers to understand why a decision was made or why their data was used in a particular way. Without explainability, there’s a risk customers feel that their decisions are being made without their input.

How to overcome the challenges of AI in fintech?

Developing an understanding of AI

One of the first steps companies need to take when exploring AI is gaining an understanding of its capabilities. Many organizations don’t have a good grasp on how AI can be successfully utilized and its limitations. Therefore, organizations should invest in educating their employees on the nuances of AI and how to apply it.

Investment in Infrastructure

Another important step is investing in infrastructure that can support the implementation of AI. This may include hardware, software and personnel who can manage and operate the system properly. If organizational resources are lacking, hiring external consultants may also ensure that AI solutions can be deployed efficiently.

Data security

The financial industry is one of the most heavily regulated industries, and for good reason; data security is essential for customer trust and long-term success. As such, companies must not overlook data security when incorporating AI solutions into their operational procedures. Adopting stringent security protocols such as encryption, access control, authentication and data masking will help keep customer information safe from threats or security breaches.

The role of ethics and trust in AI-driven financial services

AI promises to revolutionize financial services, but it is important to consider the role of ethics. Trust is a key element in any financial service, and while AI advancements can improve the accuracy and speed of decision-making processes, it can also bring challenges.

The development of artificial intelligence must also take into account ethical considerations. In particular, it should be designed in such a way that it does not discriminate against certain groups or individuals.

AI systems should remain accountable for their decisions and explain why certain actions were taken when necessary. This will help increase trust in AI-driven financial services and make sure no one is unfairly treated.

The potential of AI in fintech for the future

The potential for AI in fintech is immense. AI can automate routine and mundane tasks, allowing financial professionals to focus on more complex endeavors. It can also help to increase accuracy and efficiency in financial services, reducing costs and increasing profits.

AI also has the potential to open channels of communication with customers, including chatbots and virtual assistants. This could lead to a more personalized customer experience, which can help companies better understand customers’ needs and preferences.

Finally, AI has the potential to revolutionize fraud detection by analyzing vast amounts of data quickly and accurately. By doing so, it can detect suspicious activities or transactions that might otherwise go unnoticed. AI can also be used for risk assessment, predictive modeling, and other sophisticated analysis that can reduce the risk of fraud or other financial crimes.

Bottom line

The challenges arising with the development of AI for the fintech industry should not be ignored. With the potential for higher efficiency, improved accuracy and cost savings, it is clear AI has a lot to offer the industry. However, to implement AI successfully it’s essential that financial organizations ensure proper measures are taken to ensure privacy, accuracy and compliance. A focus on customer experience is crucial.