Artificial

Intelligence in
Finance
“AI is the ‘new electricity’ … just as electricity transformed
many industries roughly one hundred years ago; AI will also
now change every major industry.”

Andrew Ng, 2007

 Table of contents

AI AI Evolution in
01 Development 02
Financial Industry

03 Use of AI in 04 Effects of AI on
Finance Financial Markets
 AI
01 Development
AI as the theory and development of computer Machine learning may be defined as a method
systems able to perform tasks that traditionally of designing algorithms, which optimise
have required human intelligence automatically through experience and with
limited or no human intervention.

A schematic view
on AI, ML, and
Big Data analytics
Suppply and demand factors of financial adoption
of AI and ML
Technology Financial Profitability Competition Regulation
sector
Improvements factors Potential for “Arms race”, Prudential
in computing cost reduction, with other regulations,
power, data Availability of revenue gains, financial data reporting,
availability, infrastructure improved risk institutions and best execution,
algorithms, and data to management. firms. AML, etc.
costs, etc. apply new
techniques

Supply Factors Demand Factors

 AI Evolution
02 in Financial
Industry
 How artificial intelligence is changing the financial
service industry?

1980 1993 2001 Nowdays

Expert Systmes in The FinCen Robots win in Using predective

the sector of Finance Artificial financial trading analytics in all
Intelligence System competition sectors of financial
field
 Use of AI in
03 Finance
 Fraud Detection and Compliance

Benford’s Law – simples way

to detect fraud.

Analyzing millions of data

points.

Reducing the number of false

rejections.

Credit card fraud detection

“False Positive” – a big threat to

the financial industry
 Banking Chatbots and Robo-advisory Services

A robo-advisor is an algorithm based digital platform that offers

automated financial advice or investment management services.

Example: The Bank of America AI chatbot Erica, available through

voice or message chat on the bank’s mobile app. It also leverages
analytics to assist managing personal finance.

Robo-advisory services:
- Access to and rebalancing of passive and rule-based
investment strategies;
- Cost-efficient implementation of a diversified asset allocation;
- Behavioural biases
 Algorithmic Trading

“Algorithmic trading is about implementing trading rules into a

program and using the program to trade, [and AI trading] can be
defined as an approach to machine learning that learns the structure of
the data, and then tries to predict what will happen”.
-Chakravorty (2016)

You can The benefits of AT include:

 The ability of trades to be executed at the best possible prices;
 Increased accuracy and a reduced likelihood of mistakes;
 The ability to automatically and simultaneously check multiple
market conditions;
 Human errors caused by psychological or emotional conditions are
likely to be reduced.
 Portfolio Allocation & Asset Management

Ai is used by financial
advisors to ‘humanise’ and
simplify data analysis and
reporting to clients.

It reduces back-office costs of investment It provides asset managers with

managers, replace manually intensive recommendations that influence
reconciliations with automated ones, decision-making around portfolio
and increase speed. allocation and/or stock selection
 Credit Intermediation and
Assessment of Creditworthiness

AI models are used to predict borrowers’ defaults with

superior forecasting accuracy compared to standard
statistical models.

It can enable the extension of credit to viable

companies that cannot prove their viability through
historical performance data, potentially enhancing
access to credit and supporting the growth of the real
economy.

AI-based credit scoring models remain untested over longer

credit cycles or in case of a market downturn, and there is limited
conclusive empirical support as to the benefits of ML-driven
techniques for financial inclusion
 Other Application of AI

Corporate
Governance

Using AI algorithms to
Real Estate select company
directors based on Loan and Insurance
Business
performance. business

Leverton -AI platform ML algorithms can be

extract key information out of trained on millions of
documents such as rental consumer data items and
leases, break options and financial lending or
overall clauses. insurance results
 Effects of AI
04 on Financial
Markets
 Possible Effects of AI and ML on Financial
Markets

Information Trading Costs

Understanding the relationship between the

formulation of market prices and various
factors, such as in sentiment analysis.

 improve price discovery

 reduce information asymmetries

AI and machine learning may enable to

adjust trading and investment strategies in
accordance with a changing environment.
Financial Market Risks

1. Financial Stability Risks

2. Amplified Financial Shocks

3. Manipulation of Market Prices

 Possible Effects of AI and ML on Financial Institutions

Increasing revenues Risk Management Collaboration

and Reducing Costs

AI and machine learning AI and machine learning Encourage collaboration between

help to identify customers’ enable decision-making financial institutions and
needs and better target or based on past correlations other industries, such as
tailor products to profitable among prices of various ecommerce and sharing
customers assets economy businesses.
 Financial Insitutions
Risks
• “Black Boxes”

• Appropriate circuit-breakers

• Lack of clarity around responsibility

• Weak Governance
Possible Effects of AI and ML on Consumers and Investors

Lower fees and

01 Borrowing Costs

Wider Access to
02 Financial Services

Customised Financial
03 servies
 Macro-Financial Analysis

Enhancing AI help process information on the fundamental value

Efficiency of assets, thus allocating funds to investors and
projects more effectively.

Economies of Customer analysis based on transaction data attached to

payment and settlement activities would encourage
Scope cooperation between e-commerce and financial services.

The growth in investments in AI and machine

Stimulating learning-related R&D can directly contribute to
Investments economy-wide investment and thus stimulate
economic growth.
“AI is likely to be either
the best or the worst
thing to happen to
humanity.”

-Stephen Hawking
Resources
1. Buchanan, B. G. (2019). Artificial intelligence in finance
2. OECD (2021), Artificial Intelligence, Machine Learning and Big Data in Finance: Opportunities, Challenges, and
Implications for Policy Makers, https://www.oecd.org/finance/artificial-intelligence-machine-learningbig-data-in-
finance.htm.
3. Kunwar, M. (2019). ARTIFICIAL INTELLIGENCE IN FINANCE, Understanding how automation and machine learning is
transforming the financial industry
4. FSB (2017), Artificial intelligence and machine learning in financial services, Market developments and financial stability
implications
5. Weber, P. & Carl, V. K. & Hinz, O. (2023). Applications of Explainable Artificial Intelligence in Finance—a systematic
review of Finance, Information Systems, and Computer Science literature