Michel Kilzi, serial entrepreneur, data intelligence expert with a vision to redefine the role of data as an asset in today’s new economy.
The recent meltdown of banks like SVB further highlighted the present risks and fragile nature of our financial system. In today’s economy, and more specifically in the digital and online landscape, the consumer has gained a central stage position by imposing and dictating their terms—in many ways surpassing the power of brands, products and retail platforms.
However, I don’t think the same cannot be said for the banking system, which still enjoys a dominant position, putting, at times, the wealth of its customers in jeopardy. But that is where the opportunity arises. Is it fair that the banks know everything about consumers while they remain in the dark?
Recent events have eroded the trust of consumers in banks, particularly in regard to their financial stability and business sustainability. Thus, using new technology and AI as a barometer and predictor, I think entrepreneurs have an opportunity to help establish a more balanced approach where the consumers are empowered to have greater control over their financial well-being.
Creating A Know-Your-Bank Apparatus
I think AI and machine learning can be the solution. To reassure customers about a bank’s stability and real exposure to risk, AI and machine learning can play a central role by analyzing data from various sources, including the past turmoil and collapse of previous banks. This will enable the algorithms to identify patterns and indicators that may signal potential risks and provide consumers with insights that can help them make informed decisions.
While I don’t yet see this employed on a large scale, I predict that the use of AI as a barometer available to their customers will soon be a practice that banks and other financial institutions can take advantage of.
Currently, credit rating agencies often function as lagging indicators, appearing optimistic until an unexpected crisis emerges. They have frequently fallen short in recognizing risks that would have alerted investors to avoid certain types of debt. These agencies can also have potential conflicts of interest with securities issuers they themselves evaluate.
An AI Barometer As A Preventive Agent
Financial leaders can use AI could to help restore trust in the financial market by reestablishing a balanced dynamic of power to the advantage of consumers. Such an AI barometer could detect anomalies, risks and fragility in banks and the financial market using predictive analytics to forecast potential market shakes and market volatility.
In order to aid an AI barometer, leaders will need to create systems so that the AI can accurately monitor available data. Areas it will need to analyze include financial statements, transactions and historical data. Using this data, it should take into account macroeconomic changes, financial fluctuations and changes from regulators. Overall, this barometer can act as a VUCA (volatility, uncertainty, complexity and ambiguity) preventer by providing real-time information and sound analysis. It could also help spot:
• Bonds loses.
• Interest rate hikes to curb inflation.
• Scandals and management controversies.
• Sudden deposits outflows.
• Concentration of banks portfolios that may lead to idiosyncratic risks.
As well, it should have the capabilities of detecting data that has no direct coloration with the said subject, identifying more complex and less obvious things like:
• Hidden losses, whether in derivatives books or loan books.
• Poor risk control practices.
• Non obvious risk concentrations.
• Non-core banking activities that may have a negative impact on commercial banking.
• Vulnerabilities of corporates with respect to their debt service coverage ratios.
Natural Language Processing
Furthermore, natural language processing (NLP) algorithms could be used as a part of this system to analyze news articles, social media, data leaks and other sources of unstructured data to help identify sentiment analysis and determine potential issues that could lead to reputational damage or customer churn. Supported by robotic process automation (RPA) an AI barometer can ensure compliance with regulatory requirements by creating an audit trail to monitor specific activities and identify potential risks or anomalies in financial data.
Such predictive capabilities of an AI barometer could empower financial institutions to accurately scrutinize financial markets and alert them to early signals for potential financial crises or bank failures. With such advanced capability, the AI-Barometer would have the ability to not only withstand stressors but to recommend appropriate rectifications and actions to thrive and upswing market anti-fragility.
By incorporating machine learning algorithms that learn from past events, financial models can become more sophisticated and better able to predict market behavior and asset prices. In addition, institutions could use AI barometers to provide contextualized and personalized recommendations to customers based on their individual financial goals and risk tolerances, alerting them to potential risks or opportunities. It could also provide educational resources to consumers to help them better understand the financial market.
An Entrepreneurial Opportunity
The real opportunity for entrepreneurs resides in developing such an AI-driven barometer as widgets or an app that can be easily incorporated into a consumer’s personalized banking dashboard, providing them with instant access to real-time financial health indicators.
The AI-driven barometer should first be connected to the concerned banks and include the specific exposures of individual users to ensure a personalized experience. I believe users should be empowered with their own control cockpit to customize and prioritize the information relevant to their banking utilization. Look to ways that they can set their tolerance parameters for risks and establish alerts for potential risks. These barometers can provide early warning signals, allowing the user to take proactive measures. This goes in line with giving customers want they want: more transparency and control.
Final Thoughts
It is important to note that such AI technology is not a panacea by itself but can act in conjunction with strict regulatory oversight to help empower the sustained stability of the banking system.
It will be interesting to see how new services that leverage AI-powered barometer technology can provide consumers with insights into their personal financial health. I predict customers flocking to institutions that can alert consumers to potential risks, such as market fluctuations or changes in interest rates, and that allow transparency and control of their financial well-being.
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