AI technology has always been the foundation of the Fintech industry. A report by BlueWeave Consulting and Research shows that Fintech companies are projected to spend $28.11 billion on AI technology by 2028.
The growth in demand for AI among Fintech companies has accelerated in recent years. Eighteen months ago, a joint partnership between Qualcomm Technologies, Inc. and Foxconn Industrial Internet helped Fintech companies make better use of smart technology to grow their business operations. One survey from Business Insider found that 80% of banks feel AI is integral to their future.
While most of the announcements about the merits of AI in Fintech have come from the private sector, a number of regulators have made similar announcements. Former SEC Commissioner Allison Herren Lee recently made some statements that allude to the importance of using AI technology to address some of the more pressing challenges in the financial sector.
Allison Lee Details the Importance of AI in the Fintech Industry
The US Securities and Exchange Commission (‘SEC’) has always been at the forefront of investor protection and maintaining fair, orderly, and efficient markets. This often means that its proposed rules and regulations come under scrutiny from public and private actors.
Before her departure, SEC Commissioner Allison Herren Lee, sat down on the Fintech Beat podcast to discuss her future plans, and what the Environmental, Social, and Governance criteria (‘ESG’) and public company reforms may mean for FinTech and the broader industry. The podcast is hosted by Dr. Chris Brummer, a Georgetown law professor and director of the Institute for International Economic Law. He has spent over a decade researching the development of financial and regulatory policy and the impact of technology on how authorities operationalize supervision and regulatory oversight.
Although Ms. Lee didn’t specifically reference the merits of artificial intelligence, her statement did touch on issues related to its benefits. AI technology is invaluable for improving the security of financial applications.
Bernard Brode has previously written a blog post on the reasons AI is important in fortifying Fintech security. Brode cites a number of case studies on the benefits of using AI to make banks more secure. Leading financial institutions like Barclays have used AI to do real-time risk assessments and stop fraudulent financial transactions before they can be completed. Cutting-edge fintech companies are employing similar applications.
Many of these AI applications can be underscored in Lee’s speech, even if they were not directly cited. Commissioner Lee, for her part, has offered her voice to a range of issues from private company disclosures to heightening environmental, social, and governance reporting of public companies. But now her short-term plans involve a visiting lecturer role at a law school in Rome.
The fascinating episode began with the two discussing the recent SEC proposal on rules to enhance and standardize climate-related disclosures for investors. This new rule, now put forward as a proposal, would require public companies to provide detailed reporting of their climate-related risks, emissions, and net-zero transition plans. The objective of the noteworthy, but highly controversial proposal, is the prevent greenwashing in markets, especially among actors touting environmentally friendly practices. More companies can use AI to better govern themselves and hold other companies accountable.
The SEC rule would require three categories of disclosure: material climate impacts, greenhouse-gas emissions, and any targets or transition plans.
“It’s a disclosure proposal that builds off existing market-driven solutions like TCFD (Task Force on Climate-related Financial Disclosures) and the GHG (Green House Gas) protocol”, said Lee. “So it establishes a standardized framework for disclosing climate-related risks and opportunities, so investors can price that risk when they’re making their investment decisions, and then they can allocate the capital as they see fit. They’ve been very clear for a very long time that they need better information on climate risks.”
Commissioner Lee discussed how a lot of groundwork for this framework had been completed due to all the private ordering that has taken place around climate. However, even after those orderings, many companies still don’t make disclosures, don’t disclose fully, or have varying disclosure periods. Several of these disclosures also occur outside of SEC filings which raises questions about their reliability. All these challenges have resulted in investors demanding clearer information in response to how a company plans for climate risks.
The proposed rule comes at a time when there is a rising worldwide movement for climate action and standardized disclosure of climate-related risks. The United Kingdom, New Zealand, Japan, Hong Kong, and the European Union are all taking similar steps.
Dr. Brummer was keen to know more about the industry’s response to these proposed rules for disclosure. He mentioned how the rules had attracted a significant amount of attention, with support as well as criticism from various stakeholders. In this regard, he was curious to find out where the SEC stood on the matter.
Commissioner Lee first went on to explain how the notice and comment period for the proposed rules is significant for the entire process. It allows helpful criticism to be highlighted and allows the SEC to respond to that feedback. One critique that she was eager to disprove was a jurisdictional one, which put forward the argument that the proposed rule was not consistent with SEC’s legal authority.
The understanding Lee sought to push forward was that the rule is compatible with the SEC’s jurisdiction to require corporations to disclose information required for investor protection, such as climate risks and associated preparation. The Securities Act and the Securities and Exchange Act provide the SEC authority to compel disclosures that are “necessary or appropriate in the public interest or for the protection of investors.” In addition to investor protection, the SEC is responsible for “promot[ing] efficiency, competition, and capital formation.” The SEC states that it is proposing this regulation in response to the “investor need [for] information regarding climate-related risks” that “have present financial consequences.”
The two Washingtonians also discussed the intricacies of private and public markets and what the consequences of such disclosure requirements would be for companies looking to go public but who would naturally view such disclosures as additional costs. Such disclosure requirements could also encourage companies to keep certain areas of their business private.
Dr. Brummer also brought into the conversation an angle that is rarely pushed through in the regulatory space – the question of inclusion and how minorities are excluded from participating in private markets due to the costs involved. Although Commissioner Lee believed that private markets were inherently riskier for non-accredited investors, Dr. Brummer argued that if there is a particular kind of risk, the SEC needs to work on solutions to speak to mitigate such risks as opposed to locking participants out. He was also eager to see further conversations on how the commission can leverage whatever opportunities are presented and minimize whatever risks are there.
AI is going to play an even more important role in mitigating these risks. A growing number of financial institutions will need to find ways to deploy it to their advantage.
Towards the end of the episode, Dr. Brummer brought up the new executive order passed by President Biden on “Ensuring Responsible Development of Digital Assets,” which also pertains to a roadmap for cryptocurrency. “What’s the relationship between the independent agency that is the SEC and the executive order coming out of the White House?” asked Brummer.
“Yeah, I think that’s a great question. And I think it’s something that observers want to understand and, you know, you point out we’re an independent agency. That’s right. What that means legally is we’re not bound by those executive orders, not strictly. But it’s certainly fair to say that we’re gonna look at them and we’re gonna think about principles encompassed in them, the best practices that might inform, you know, our policy making. So, so we do, we can, and we do look at and think about these types of things and ask ourselves what part of this potentially implicates our jurisdiction and our responsibilities and how well those need to be aligned with what’s happening across the regulatory space with, with both independent and, and non-independent agencies. So it’s important to us. We are not bound by it, but we look at it and think about it.”
AI Helps Fintech Companies Bolster Security
A growing number of fintech companies are using AI. One of the biggest benefits is that AI helps improve their security. AI will also help address many of the concerns that Allison Lee referenced in her statement.
