How AI will accelerate financial democratisation

Since the pandemic fintech has boomed with World Bank data showing that digital financial services, such as peer-to-peer lending and mobile payments, now cover more than 80 countries. 

It means people borrowing, lending, investing and saving themselves, without having to go through intermediaries like banks and financial services companies. 

It’s already happening, and AI will speed it up, but most leaders don’t fully understand the implications.  

Meanwhile, traditional financial institutions don’t much like it, because it robs them of their power as intermediaries and hands it to the people making transactions. Yet their attempts to get in the way could stymie its growth. 

The revolution against traditional banking has been driven by a combination of mobile phones that put high levels of computing power in the hands of individuals, the invention of cryptocurrencies, and the job losses among young techies, who became keen to create an alternative to traditional financial institutions after the 2008 financial crisis. 

It is also one of several potential solutions that has been developed to help scale blockchain, although there is a trade-off between lower gas fees and increased speed on the one hand and security on the other, as there are fewer validators on Polygon. 

We’ve seen huge strides in financial democratisation, including financial services designed for the unbanked or underbanked, delivered by mobile phone. The great example is M-PESA, which is used by more than 51 million customers across seven countries in Africa, allowing users to send and receive money, make payments, receive salaries, and get short-term loans.  

Then there is peer-to-peer lending, which facilitates lending between individuals on platforms like Funding Circle and Lending Club. While cryptocurrencies are hugely popular in Africa and South America, where there is less access to traditional banking services. 

Investment bots are helping people make investment decisions, while the use of social media, such as Twitter, has swung markets, with conversations or electronic word of mouth (e-WOM) a form of democratisation, pushing company prices sky high, such as Reddit’s WallStreetBets forum driving GameStop’s price irrationally high.  

None of this can be put back in the box. We’ve got semi-democratisation now, and it will grow in the future. 

Will regulation put a stop to financial democratisation? 

Unsurprisingly, there are scams out there, but that’s always the case with new markets and products. They are cited by government, banks and regulators as an excuse to disadvantage democratisation, to rein in the power of individuals and companies that want to do their banking for themselves.  

However, you can no more regulate away financial democratisation such as peer-to-peer lending or crypto than you can regulate away risk. At present it’s the traditional financial institutions and governments who are raising concerns. They often cite consumer protection, when in fact their real motive is to curb the financial activities of individuals, which are increasingly outside of their control. 

I worry that democratisation will be held up by this, so everybody will miss out on the potential benefits. 

Democratised finance does require some regulation, but the focus should be on:  

• How draconian it should be. Overly stringent regulation could reduce the potential of democratised finance. 

• Giving customers of democratised services a voice. At present financial institutions are the main group lobbying politicians about regulation. Regulators and user groups can be a way for users to be heard. 

• Extending regulation to all jurisdictions in which transactions take place. The collapse of cryptocurrency exchange FTX in late 2022 meant customers lost billions. Crypto exchanges take fiat currency, convert it into crypto, manage the investment on the crypto market and then return it to the investor converted back into dollars, pounds or euros. In the US and the UK existing regulations apply to these exchanges, but crypto is a global market. We need regulation and consumer protection everywhere that transactions take place  

The future of democratised finance 

Some enthusiasts look forward to the day when all transactions are outside the established banking system, but in the next decade I expect to see a system where traditional financial institutions work alongside new players, offering wider opportunities. 

There will be attempts to combine them. The Bank of England is just one of many central banks looking at offering a digital currency, but I foresee problems. All crypto transactions rely for security on blockchain technology, where no one institution or person has the key. With government digital currencies, however, the key will be held by the central bank. 

That puts all an investors' information in the hands of the government. I doubt a digital currency along these lines will work in countries like the UK, unless investors are given full control of the access to their data. 

Becoming a financial advisor with AI  

AI makes huge amounts of information and analysis accessible. At present big companies dominate AI services, but soon individuals and SMEs could have AI assistants on their own computers, able to analyse their financial preferences, budget constraints and revenues and to suggest tailored financial recommendations.  

This will probably make the service much cheaper and more individualised than consulting financial advisors. 

All leaders need a working knowledge of AI and what it can do. It should be part of the managerial toolkit.  

Companies could introduce regular briefings from experts to update management on advances in AI, how it could help them make investment decisions quicker and cheaper, and help boost efficiency and profits.  

It could be like the annual updates many companies offer management, just as they do with EDI (Equality, Diversity and Inclusion), and could be part of workers’ continuous professional development (CPD).    

CEOs should have firm policies about what generative AI such as ChatGPT is used for, because information entered via ChatGPT is stored in the cloud for 30 days. There needs to be better security and regulation around server-held information.  

In the meantime, don’t use AI for creating content about anything confidential, financial, or sensitive, such as company strategy or intellectual property. 

Business leaders need to watch for prejudice. Current AI systems are trained on the information available on the internet so AI generated content could lead to accusations of discrimination or even costly lawsuits. Leaders need to appoint somebody to oversee all communications generated by AI to ensure against this. 

AI is rapidly changing every part of business, but it is the world of finance where it could have the biggest impact and bring true democratisation to financial services – leaders need to understand this just as quickly. 

Ram Gopal is Professor of Information Systems Management and Director of the Gillmore Centre for Financial Technology. He lectures on Digital Transformation on the Executive MBA and Global Online MBA plus Digital Finance, Blockchain & Cryptocurrencies on the MSc Management of Information Systems & Digital Innovation. He also teaches Text Analysis on MSc Business Analytics.

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