US Treasury report highlights AI opportunities and risks in financial services

On December 19, 2023, the U.S. Department of Treasury unveiled a comprehensive report that summarises the findings from its 2024 Request for Information (RFI) regarding the utilisation, opportunities, and risks associated with Artificial Intelligence (AI) in the financial services sector. The report provides a detailed examination of how AI, especially generative AI technologies, is increasingly becoming integral to various operations within financial institutions, as well as the accompanying challenges that need to be addressed.

The report highlights a notable shift towards the integration of AI technologies in financial services, pointing to their transformative potential. Financial institutions are utilising AI for a variety of critical tasks, which include credit underwriting, fraud detection, customer service, and ensuring regulatory compliance. A significant emphasis is placed on how these technologies facilitate the use of alternative data sources—such as rent and utility payments—to broaden credit access to underserved communities. In addition, generative AI models, adept at processing unstructured data like customer interactions, are reported to enhance operational efficiency and elevate client engagement practices. The Treasury report asserts that the capabilities of AI in automating processes, reducing costs, and improving access to financial products can be particularly advantageous for segments of the population that have historically faced barriers in financial engagement.

However, as the Treasury’s report makes clear, the adoption of AI technologies in financial services is not without its risks. The document reiterates points highlighted in the Treasury’s previous March 2024 AI Cybersecurity report, detailing several concerns. These include issues of data privacy and bias, where ensuring the quality, security, and fairness of the data used to train AI models is paramount. The possibility of poorly trained AI models reinforcing historical biases could lead to discriminatory practices in credit and lending decisions.

Another critical concern raised is the explainability and transparency of AI systems. The complexity inherent in many AI models, particularly generative AI, often results in what is termed “black box” situations, where firms struggle to elucidate the decision-making processes employed by these systems. Such lack of transparency could potentially attract heightened regulatory scrutiny and damage consumer trust, complicating compliance efforts for financial institutions.

Moreover, the report touches on the reliance on third-party AI providers by many financial institutions. This dependence can potentially amplify concentration risks within the market, as a small number of firms emerge as dominant players in the sphere of advanced AI models. The report also warns of the illicit uses of AI, noting that these technologies could be leveraged for fraudulent activities, including the creation of deepfake content or enhancements to phishing tactics.

In light of these findings, the report outlines several policy recommendations for consideration by the Treasury, government bodies, and the financial services sector. These recommendations call for improved collaboration among governments, regulators, and financial entities to establish coherent AI standards. The report advocates for the development of robust regulatory frameworks, the establishment of industry-wide data standards and best practices, and enhanced compliance oversight.

As federal agencies continue to evaluate the risks posed by AI in the financial domain, this report is indicative of the Treasury’s dual focus on promoting innovation driven by AI while simultaneously addressing associated risks. In response, it is advised that financial institutions rigorously assess their current AI usages to ensure adherence to consumer protection laws, principles of fair lending, and standards of data privacy.

Source: Noah Wire Services