By Aron Bohlig, Managing Partner and Fermin Caro, Managing Director, ComCap, a premier boutique investment bank focused on the intersection of commerce and capital
The emergence of generative AI could yield the largest transformation the financial services market has seen in decades. From Microsoft to Google to Amex, everyone seems to be betting big on AI. However, the question remains, should investors follow suit?
Fintech and Financial Services companies have been slow to adopt generative AI. Generative AI is revolutionizing many white-collar fields and repetitive tasks. But financial services companies have not prioritized investments in generative artificial intelligence (AI, Generative AI or Gen-AI), as it typically offers an accuracy rate of 90% – below industry expectations for 100% accuracy. However, Generative AI supporting human decision-making has the potential to significantly enhance the delivery of financial services and increase human productivity by a factor of 10, and it can be expected that this will represent a great opportunity for investors.
Looking ahead, investors can expect fintech’s leaning in as part of the second phase of generative AI – vertical applications. The major areas of opportunity for Gen-AI in fintech include: underwriting, regulatory checks such as anti-money laundering (AML), know your customer (KYC), Bank Secrecy Act/anti-money laundering (BSA/AML), and Office of Foreign Assets Control (OFAC) screening, as well as accounting and financial reporting. These will likely be the hottest areas over the next few years for AI-supported human processes.
In fact, a recent study from IBM explored the potential of generative AI in fraud detection. The study revealed that financial institutions could achieve a significant reduction (by up to 50%) in fraud losses by leveraging this technology. And a Deloitte study found that financial institutions can improve their risk management capabilities by utilizing generative AI, which could result in an improvement of up to 10% over traditional methods.
While investment activity is still at an early stage, a few promising activities will set the stage for a boom in Fintech Generative-AI include:
- Non-regulated industries (retail in particular) are seeing a boom in investments in “chat bots” and AI powered tools to shift human-based interactions (in person or by phone) to be handled wholly by machines. This will enhance the overall industry’s ability to interact with customers and set the stage for the more complex requirements in financial services.
- OpenAI’s latest GPT-4 has attracted the collaboration of a select number of organizations, including Stripe and Morgan Stanley. Klarna enhances personalized shopping by leveraging recommendations powered by ChatGPT. Brex and Alaan are actively providing businesses in the US and the Middle East with real-time insights on corporate spending. OnFinance, Plum, and Douugh are actively promoting financial literacy through the utilization of ChatGPT-powered chatbots.
- In March 2023, Bloomberg published a research paper that outlines the progress made in developing BloombergGPT, a novel large-scale generative AI model. The large language model (LLM) underwent specialized training on a diverse range of financial data to cater to various natural language processing (NLP) tasks in the financial industry.
- JPMorgan Chase is currently in the process of developing a software service similar to ChatGPT. This innovative solution harnesses the power of disruptive AI to actively select investments for its esteemed clientele.
- Kasisto, a leading conversational AI company, has recently unveiled KAI-GPT, a highly advanced large language model specifically designed to cater to the unique needs of the banking industry.
In the near-term, there are a few areas investors should focus in on. These near-term opportunities when considering Generative AI investments in Fintech include:
The outlook for RegTech is promising, with a particular focus on the adoption of AI and automation. Regtech companies have actively embraced these technologies to create more advanced, real-time compliance platforms. Furthermore, they are currently exploring the potential of generative AI to further improve their capabilities in monitoring, assessing, and responding to compliance issues in real time.
The cybersecurity outlook for the fintech industry in H1’23 witnessed a notable emphasis from investors on AI-driven solutions. These investors prioritized larger investments aimed at enhancing prominent platforms by integrating advanced AI-based cybersecurity tools and technologies. The trend of security automation has experienced significant acceleration since late 2022, capturing the attention of potential investors. The big tech giants have prioritized AI-based cybersecurity solutions within their own platforms. Microsoft actively launched Security Copilot, a generative AI-powered defense and response system, in H1’23. Additionally, Google made an announcement regarding its Security AI Workbench, a B2B-focused solution designed to empower security firms to harness the capabilities of generative AI.
The wealth tech industry is witnessing a growing emphasis on the utilization of generative AI to bolster decision-making processes for wealth managers, enhance robo-advisory capabilities, and provide personalized experiences to clients throughout the wealth management landscape.
In addition to these near-term opportunities, there will likely be additional investment potential to come in InsureTech, new personal finance research tools and compliance. The additional complexity in these areas will require additional hardening of AI before they become actionable.
Financial Services are always innovative, and Gen-AI is a huge opportunity for investors right now. While the timing of development of strong verticalized AI solutions is uncertain, it will certainly be happening over the next two to three years. Seed/Series-A investments will be most active for the first year or so quickly followed by growth and later stage rounds as selected companies find traction and develop takeoff velocity in the market.
Published at Nasdaq.com