The EU AI Act is the world’s first-ever comprehensive legal framework on AI — and it’s sort of like marmite.
Some people love it, as they say it’ll end the ‘wild west’ era of AI, while others hate it, as they say it could stifle innovation. What’s for sure is it’s happening and it’ll impact a huge range of businesses and the 500m people in the European single market that those companies serve.
“It has been on top of mind for everyone as the big horizontal legislation that we see in Europe,” says Kirsten Rulf, BCG partner and associate director. “It’s a consumer protection law designed to safeguard consumers from potential AI risks before they materialise.”
Rulf describes the law as a “real holistic system” which looks at the whole value chain of AI and sorts it into different risk categories. Some will be prohibited in the EU as of February, others will have to meet strict requirements and others will just need to satisfy transparency rules so customers and employees know they are interacting with AI.
One sector which will be strictly regulated is banking, due to the risks AI poses on the financial system. According to an IMF report, risks in applying AI to the financial sector include, but are not limited to, embedded bias, privacy concerns, outcome opaqueness and unique cyber threats.
“Biases in AI models can lead to discriminatory outcomes, posing compliance risks, especially in highly regulated industries like banking,” says Kåre Kjelstrøm, CTO of Lunar, a digital bank based in Denmark which prioritises “responsible AI adoption”.
“Rapid adoption without proper oversight can expose organisations to operational risks, including fraud or system failures,” Kjelstrøm adds.
This opens up the question of whether less heavily regulated fintechs will swoop in and take advantage.
Less regulation, more opportunity?
Even though banks could potentially profit from utilising AI — by some studies up to an additional $1tn a year — adopting the technology into legacy systems is not so easy. Add in strict regulation, and adopting AI as a bank can become a real challenge. An IMF report from October says this will open up a gap for new players, namely fintechs, to enter the market.
Big banks are paralysed by the risk of massive fines
“There are quite a lot of hurdles for banks, even though they’re so prone to actually adopt this technology and really make business with it,” says Rulf. “They have a disadvantage to players that are starting up, and those that are already in the financial market as fintechs, but maybe have better foundations, get the better talent and really leverage the technology a lot more.”
Fintechs could theoretically, then, take advantage of this situation — but in reality they may not want to. Barney Hussey-Yeo, founder and CEO of London-founded AI fintech Cleo, says the EU AI Act can be off-putting to fintechs too.
“Big banks are paralysed by the risk of massive fines, while fintechs are looking to the US or other markets with fewer regulatory hurdles,” he says. Cleo has been one of the few European consumer fintechs which has managed to break into the US market.
Kjelstrøm, however, says fintechs should instead embrace working within regulatory frameworks because it can make customers more satisfied in the long run.
“While some fintech companies may exploit regulatory gaps for short-term gains, responsible players understand that long-term success relies on compliance and trust,” he says. “Rather than exploit regulations, fintech companies should focus on using technology to enhance efficiency, streamline compliance processes and provide added value to customers.”
Rulf adds that the banks she’s talked to or worked with — totalling upwards of 60 — are also happy to work within a framework and positively invite regulation, even though they are “not quite there yet” when it comes to implementing it.
“They really appreciate the AI Act because it is such a clear system and is such a good blueprint for a risk management system that you would want to actually have anyways, when you’re dealing with AI,” she says.
Partnership potential?
According to Rulf, as the EU AI Act is a developing law there’s lots for banks to be done to mitigate against agile fintechs.
This is something where, in the next two years, industry standards will be set
She advises banks: “First of all, focus on getting the foundations right, work on cloudification, data and data governance and freeing up data. Then build the AI Act governance as soon as possible, because banks can really shape the regulations.
“This is not a set it and forget it law. This is something where, in the next two years, industry standards will be set.”
Another mitigation tactic is for banks to work with fintechs.
“Traditional banks may not be as agile as they have to be to fully embrace that. But together with fintechs, or maybe acquiring or founding fintechs could really be something,” says Rulf. “Also the other way around. Big fintechs could let banks know about their experiences with the technology, given that they can move a lot faster, that they will see a lot more, that there’s not as much regulation for them.
“A knowledge exchange here could open and widen the playing field in the market for both sides.”
Read the orginal article: https://sifted.eu/articles/banks-ai-regulation-fintechs-brnd/
