The financial world stands on the edge of a technological revolution that will fundamentally alter the way people use financial services.

The explosion of data in the financial sector is so vast and overwhelming that it has become impossible to understand it without automated support to drive better, data-driven decisions and leveraging automations to fast and convenient service.

It is in this context that artificial intelligence (AI) is poised to transform business in ways we have not seen since the impact of computer technology in the late 20th century and, as a center that is immersed in the global financial services landscape, the Cayman Islands needs to be right at the forefront of the AI revolution.

New normal

Industry analysts today opine that artificial intelligence is the new normal, and will rise to become the core of any technology-centered financial organization, fostering improved operational efficiency and data analytics, enhanced client services and cost reductions.

Imagine a scenario where data coming from the real economy could be used to discern price, predict performance, understand risk and make better investment decisions through the use of computing power to understand data correlation and causation, and deduce rapidly enough how to respond: artificial intelligence has now advanced to the stage where this is possible.

AI will reinforce the business model of financial institutions: since they need access to vast amounts of data to efficiently train an AI system, banks have a clear advantage over potential new entrants because they can leverage their huge internal data sets.

Not surprisingly, interest in AI is evident from increasing investments by major financial institutions, as well as technology and fintech companies. For example, fund managers such as BlackRock, Two-Sigma and Renaissance Technologies are now competing and collaborating with a growing batch of emerging technology companies including Sentient Technologies and Kensho, as well as established players such as Google, Facebook and Microsoft. According to Venture Scanner, a technology powered start-up research firm based in San Francisco, there are now 1907 artificial intelligence (AI) start-ups that have raised $21.2 billion in venture capital funds.

As AI will decrease the value of traditional services, data and technology providers such as exchanges will have to accelerate build up and acquire services in the unstructured data space as the value of traditional market data will quickly diminish.

Compelling technology

The rise in innovation is slowly letting automation replace mundane tasks that businesses nowadays face, and is gradually replacing human decision making with more compelling technology. These algorithms can determine and predict decisions, and can also be integrated into business-models to recognize patterns to save time for repetition.

AI technology has a broad array of potential applications in the financial services space, a number of which have clear resonance in terms of the services offered by the Cayman Islands, including:

  • Personalization of financial services through analytics-driven recommendation engines;
    Automation of traditional retail functions through the deployment of smart assistants and voice recognition technology;
  • Robo-advisory services in the wealth management space;
  • Automated fraud detection, as well as anti-money laundering and anti-terrorist financing compliance monitoring; and
  • Predictive cybersecurity monitoring and response systems.

In short, the consumer revolution set off by AI opens the way for massive disruption as both established businesses and new entrants drive innovation and develop new business models grounded on the potential to understand customer behavior and anticipate and respond to their individual needs with unprecedented foresight.

In fields such as customer profiling and cyber protection that lie at the heart of commercial interactions, the economic impact of AI will be mainly driven by productivity gains from businesses automating processes and increased consumer demand resulting from the availability of personalized and/or higher-quality AI-enhanced products and services.

According to general industry analysis, global GDP will be up to 14 percent higher in 2030 as a result of the accelerating development and take-up of AI – the equivalent of an additional $15.7 trillion, more than the current output of China and India combined.

Risk

Many see AI as a tool that will help improve financial institutions’ risk management by virtue of its breadth and depth of insight, for example through more in-depth assessment of risk in portfolios and more incisive, comprehensive and informed credit-risk assessment.

However, many experts also acknowledge a degree of risk surrounding the use of AI. As a result, the risk of malfunctioning algorithms and concerns surrounding the security, privacy and quality of data, has led to calls for new regulation. Indeed, there is a great deal of uncertainty as to whether organizations understand the risks associated with new financial technologies.

One risk is corporate liability. Flawed investment decisions could be made as a result of poor data, erroneous analysis about company performance, or malfunctioning algorithms, which could cause investors significant losses. Liability could also arise should machine learning models make flawed decisions about credit risk: financial losses could occur to lenders, or alternatively borrowers’ reputations could be damaged.

Secondly, data and privacy risks will increase by virtue of the much larger volumes of data that AI-driven models will collect and analyze. Intellectual property disputes are also likely to increase, as the ownership of algorithms causes friction between companies and regulators. Contract and litigation risk may also emerge, in the likely event of AI malfunction and programming errors.

Another area of concern is around the lack of a suitable regulatory framework to provide adequate oversight to this emerging technology, in large part stemming from the absence of skills and knowledge amongst regulators to respond to the challenges brought by the implementation of AI.

Lastly, from a human capital perspective, given its disruptive force AI will undoubtedly alter both the headcount and the nature of skills required in the industry, with potentially negative effects within the next few years. The adoption of ‘no-human-in-the-loop’ technologies will mean that some posts will inevitably become redundant, but others will be created by the shifts in productivity and consumer demand emanating from AI, and through the value chain of AI itself.

Research shows that in AI specifically the jobs we create will be centered on machine learning initially, and the creative application of AI contextually in the world around us. Even in trading, where automation is already widespread, human roles will remain critical in areas such as algorithm validation and monitoring, as well as compliance. All of this will facilitate the creation of new jobs that would not have existed in a world without AI.

What is clear is that advances in AI and data analytics are leading to a great expansion in the quantity and type of data being used to inform decision making. Whereas before investment decisions were being made on traditional metrics such as market prices, interest rates or earning figures, AI can factor events and sentiments into the asset price prediction process. This suggests that AI could change the parameters by which financial institutions make investment decisions.

Traditional metrics will decline in importance as the subject of analysis, as financial institutions gather huge amounts of unstructured data. As AI technology matures and gains broader traction across industries, there is no doubt that regulators, technology companies and entrepreneurs will need to engage to identify the proper role of regulation in addressing concerns with respect to AI-enabled products with a focus on lowering the costs and barriers to innovation without adversely impacting safety and market fairness.

The advancement of digital technologies, data, advanced analytics, computing power combined with changing consumer preferences and new competition is creating a new technology-induced tipping point. As other industries move forward with artificial reality, the finance industry – and specialist financial services jurisdictions like Cayman – will need to determine if they will move forward as well.