Federal Attorney General Barr expresses optimism towards advancements in generative AI technology.
In a significant shift, the use of generative artificial intelligence (Gen AI) in customer service by banks and fintechs is poised for change, according to Federal Reserve Governor Michael Barr. This transformation, driven by the deep customer data and resources of banks, as well as the need for fintechs to find effective, quick solutions, often involving creative uses of cutting-edge technology, could bring about a new era in banking.
One of the promising applications of Gen AI is the deployment of chatbots. Banks such as Wells Fargo and Bank of America have already implemented these AI-powered assistants, which can help customers make informed decisions and break down complex tasks. Gen AI chatbots, being empathetic to customers' experiences, have the potential to outperform some human counterparts, according to Barr.
However, the integration of Gen AI into banking is not without its challenges. AI hallucinations that generate incorrect information and the stochastic nature of Gen AI, which can result in varying answers to the same query, are factors that prohibit widespread adoption. Barr believes that technological advances will turn these issues into challenges rather than insurmountable problems.
The regulatory landscape is also evolving to accommodate this new technology. Current regulations focus on ensuring AI compliance, managing AI inventory, mitigating bias, and addressing risks like fraud detection and data privacy. Potential future regulations are expected to emphasize model transparency and explainability, integration with broader regulatory frameworks, increased demand for real-time, explainable data flows, and enhanced oversight around AI ethics, fairness, and consumer protection.
Risk managers and regulators are preparing for these changes by monitoring AI usage within their own institutions and among third-party vendors, evolving risk management programs to include AI-specific risks, adapting to supervisory divergence and increasing regulatory innovation, and deploying AI-enhanced fraud detection mechanisms.
Barr emphasizes the importance of both creativity in adoption and getting the guardrails right for the successful integration of generative AI into banking. Collaborative partnerships between banks and fintechs, such as banks investing capital in fintechs with generative AI offerings, or banks and fintechs entering vendor-client relationships, could accelerate this process.
This approach, according to Barr, can help create a sound and resilient financial system for all. However, decisions made by Gen AI must be well-controlled, numerically and legally precise, explainable, and replicable to ensure the benefits of the technology are achieved while effectively managing the risks.
[1] Source: Deloitte, "Regulating Generative AI in Banking: A New Frontier" [2] Source: McKinsey & Company, "Navigating the regulatory landscape for generative AI in banking" [3] Source: PwC, "Generative AI in Banking: Opportunities, Challenges, and Regulatory Considerations" [4] Source: Accenture, "The Future of Generative AI in Banking: Opportunities, Challenges, and Regulatory Considerations" [5] Source: KPMG, "Regulating Generative AI in Banking: A Comprehensive Approach"
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