The Great Fintech Makeover
Exploring how AI is driving efficiency, personalization, and inclusivity in financial services.
By Michael Lisovetsky, Adegoke Olubusi, & Ajibola Okungbaye
Pioneering moments of innovation in modern human history tend to go one of two ways. Either there is an open acceptance of impending change and the opportunity it brings, or there is a Luddite-like resistance to the new ‘system’ and the big changes it predicts. The Industrial Age introduced a world of machinery that changed how goods were manufactured; the microchip helped to make computers smaller and more suitable for personal use; the internet allowed computers to connect to each other; email made written communication instant, and Google search allowed access to endless information. Each of these defining moments in history produced the same two reactions: excitement and fear.
We are living through a defining moment in history and witnessing that impact first-hand. The technology will redefine how value is created, although not in a loud bang as is mostly feared, but by gently becoming the new normal. Like email or Google search, where it’s impossible to imagine life without it, the rise of Generative AI is that defining moment. With each benchmark that we cross, the pace of acceptance becomes more rapid. For instance, ChatGPT was released a little more than a year ago, but its acceptance as the new normal has been remarkable. The initial buzz surrounding it has quietened down as its use has become more widespread. To put that in numbers, ChatGPT has over 180 million users currently, of which the first hundred million users were onboarded in the first two months of its launch.
Why are we excited about Fintech and Generative AI?
I could go out on a limb here and suggest that the greatest value-gain from generative AI in the coming years will be seen in finance technology. This shift has been influenced by changes in consumer behaviors, evolving business ecosystems, and post-crisis regulatory reforms. We anticipate a significant improvement across key areas in Fintech, driven by the pace of innovation in the generative AI space and even faster adoption. This transformation is set to improve aspects such as decision-making, cost and resource efficiencies, security and compliance, and customer experience.
Enhanced Decision Making
Innovative startups in the investment and advisory sector are combining the capabilities of AI and big data to offer real-time, tailored financial solutions. Take, for example, CARL — a quantitative investment platform leveraging big data and artificial intelligence to provide retail users with access to alternative investment strategies. The upshot? The platform is democratizing access to investment opportunities typically dominated by traditional financial institutions.
Additionally, generative AI can enrich existing datasets, giving machine learning models a boost in making accurate financial predictions. It’s a similar picture for algorithmic trading, where AI can sift through a trove of market data, uncover hidden trends, and make lightning-fast trading decisions. For instance, Proof Trading, a New York-based FinTech startup, is empowering institutional investors by harnessing its specialized algorithms to aid price discovery and ensure ethical trading practices.
Likewise with the use case of credit scoring, where AI can dive deep into transaction histories and spending habits to arrive at credit assessments with pinpoint accuracy. Plus, it’s not just about numbers: AI can also offer personalized portfolio recommendations based on individual market strategies and risk profiles, making the process of investing less daunting and onerous.
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Improved Cost and Resource Efficiencies
The volume of data generation presents a natural use case for Gen AI in FinTech. Healthcare, telecom, e-commerce, manufacturing, and finance are the most intensive data-generating industries. But finance stands out as the biggest — for obvious reasons. A large volume of personal and financial data is generated here: transactions and usage patterns with endless analytic possibilities. This includes analyzing behavior and anomalies to create efficiencies at a scale that would have seemed impossible as recently as 2023.
That, indeed, is the other key takeaway for players in the fintech ecosystem. Generative AI brings monumental opportunities for efficiency gains. Cost efficiencies empower mass deployment of capital towards providing better customer services, better compliance with regulation, better fraud detection, and much more.
Security and Compliance
It is no exaggeration to suggest that cyber threats could meet their match through AI’s potential to recognize patterns within DNS data, beefing up defenses in financial systems. Advanced analytics also allows generative AI models to be on the lookout for malicious threats, tighten bank security and nip fraud in the bud.
The generative capacity of AI to model new information based on available data is a critical method for bolstering security. This is precisely what Operant AI, a cloud security startup, is accomplishing. By leveraging AI’s predictive power, Operant AI enhances defenses by automatically modeling and blocking AI-based attack vectors in real-time, ensuring the seamless and secure integration of AI technologies into cloud-native applications
Malicious individuals are already using generative AI capabilities to target companies and consumers with increasingly sophisticated scams, from fraudulent data generation to social engineering and phishing. Therefore, it would seem natural to deploy AI-powered security solutions like to address the problem of AI-powered cybercrime.
There are similar solutions for compliance headaches. AI can sift through legal jargon with ease, ensuring financial institutions stay on the right side of regulations.
Improved Customer Experience
Customer experience is a core aspect of financial service offerings and a major touchpoint in the entire user-experience journey. The increasing prominence of AI-powered solutions such as chatbots and LLMs developed on proprietary data is transforming how the evolving needs of customers are met.
In emerging economies, mobile money plays a crucial role in financial inclusion. AI solutions like ybot, a voice AI-powered automation platform, simplify critical tasks with simple commands. This unlocks efficiency and empowers frontline staff, such as mobile money merchants and agents, to deliver improved customer experiences while on the move.
Furthermore, mobile money service providers can leverage access to real-time structured data and the speed of execution. They can also utilize the time-saving efficiencies of voice prompts to offer a wider range of personalized micro-financial services such as micro-pension and micro-insurance. This contributes to the development of more resilient economies.
Here are some specific fintech verticals to keep your eyes on:
Not All Sunshine and Rainbows
All of this is not without inherent challenges. Perhaps the biggest is the highly regulated nature of the industry. Organizations are cautious about taking off the training wheels and giving up control. Regulatory compliance will require addressing issues such as bias, transparency, and accountability. Much like autonomous cars, the question is — who bears the responsibility in case of an accident?
We can also see several inherent barriers to adoption among financial enterprises. In a Generative AI Survey for Financial Services by KPMG, 15% of financial service executives expect decreased creativity and innovation among the workforce once generative AI solutions are implemented. 32% predict increased mental health issues. 22% see the creation of difficult-to-fill roles as a barrier, and 34% expect reduced opportunity for advancement. Meanwhile, 40% of financial service leaders rank the state of current technology and data systems as one of their top concerns, rating IT and digital infrastructure at a low or medium level of development. This presents an opportunity for FinTech startups to leverage their agility to drive positive change in the financial industry.
Despite these headwinds, there is little doubt that generative AI will dominate the fintech sector in the coming years. There is simply too much untapped value for the situation to play out differently. When something changes the world, it becomes very valuable. The question now is, who can get ahead of the pack to capture that value?
At MAGIC, our outlook remains bullish on the transformative potential of generative AI in FinTech. We back mission-driven founders who are revolutionizing financial services through technology and aiming to solve key challenges like financial inclusion for the underbanked in emerging economies. These are founders who deeply understand their markets and have the ability to adapt. Their companies have the potential for exponential growth as well as the ability to democratize finance. We believe in investing in areas that may seem niche at the outset but hold significant long-term value. The future lies in reimagining and expanding what financial institutions can achieve through innovative technologies like generative AI.
Building something amazing in the Fintech space, we’d love to chat with you. Shoot us an email at hat@magic.fund
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