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Legal and ethical challenges of AI

28 February 2023 – Vanessa Galhardo-Galhetas

Artificial Intelligence (AI) has undisputedly enormous business potential and has all elements to change the way we work and live. Today, AI has already entered into our lives through different applications and companies increasingly explore different forms of AI. In parallel, this rapid deployment of AI, gives rise to different legal and ethical challenges.


The potential of AI in fraud detection 

The capacity of AI to quickly analyze large amounts of transaction data to identify suspicious patterns and anomalies that may indicate fraudulent activity has led to the use of AI in fraud detection. Machine learning models can be trained to analyze transaction data and identify patterns of behavior that are associated with fraud. These models can be trained using historical data on fraudulent transactions and can continually adapt and improve as new data becomes available. Moreover, predictive modeling can be used to identify transactions that are likely to be fraudulent based on a range of factors, including the type of transaction, the location of the transaction, and the user’s history. AI algorithms can also be used to identify unusual patterns in transaction data, such as transactions that are much larger than normal or occur outside of normal business hours, which may be indicators of fraudulent activity.

Overall, AI-based fraud detection systems can help identify and prevent fraudulent activity more quickly and effectively than traditional fraud detection methods, ultimately reducing financial losses and protecting customers from fraud.



The potential of AI in customer service

A war for talent and the increase of labor costs, have made AI increasingly interesting and used in customer service to provide personalized and efficient service to customers.

AI-powered chatbots can be used to provide 24/7 customer support, helping customers with account inquiries, transactions, and other issues in real-time. Chatbots can also provide personalized recommendations and advice based on customers’ account history and preferences. The so-called Natural Language Processing (NLP), a form of AI that can be used to understand and respond to customer queries and requests in a more natural and conversational way, can be used to identify and resolve customer issues more quickly and efficiently.

A step further is that personalized recommendations can be made using AI, because of the use of an analysis of customer data, including transaction history and spending patterns.

Overall, AI is transforming customer service, providing customers with faster, more personalized, and more efficient service. By leveraging the power of AI, companies can improve customer satisfaction, reduce costs, and increase profitability.



The potential of AI in Risk Management

AI is increasingly being used in risk management to identify, assess, and mitigate potential risks. Concretely, AI can be used to develop predictive models that forecast future risks, such as market fluctuations, interest rate changes, or credit defaults. These models can help financial institutions anticipate and prepare for potential risks, reducing their impact on business operations and financial performance. Furthermore, AI can be used to detect and prevent cybersecurity threats, such as malware or phishing attacks, by analyzing network traffic and identifying potential vulnerabilities. And AI can be used to optimize investment portfolios by analyzing market trends and identifying opportunities for diversification and risk reduction.

Overall, AI can help companies to more effectively manage risk by providing more accurate and timely insights into potential threats and enabling faster and more effective response to risks as they arise. By leveraging the power of AI, companies can reduce financial losses, protect customer data, and maintain the trust and confidence of their stakeholders.



Legal and ethical challenges of AI


It is clear that AI is a very promising technology, which is in full development, however it goes hand in hand with many legal and ethical challenges.

When we look at the financial sector, one can identify following challenges to be addressed.

  1. Data protection

The use of AI in the financial sector requires the collection, storage, and processing of large amounts of personal data. Financial institutions must ensure that they comply with data protection regulations, such as the EU’s General Data Protection Regulation (GDPR), to protect the privacy and security of their customers’ data.

  1. Liability

Moreover, the use of AI in financial decision-making raises questions of liability in the event of errors or damages. It may be difficult to determine who is responsible for any losses resulting from AI decisions, particularly if the AI system is self-learning and autonomous.

  1. Discrimination

AI systems can perpetuate discrimination and bias if they are not designed and trained with sufficient care. Financial institutions must ensure that their AI systems do not discriminate against individuals based on factors such as nationality, gender, or age.

  1. Transparency

Furthermore, AI in financial decision-making may lack transparency, making it difficult for individuals to understand how decisions are made and challenge them if necessary. Financial institutions must be transparent about how their AI systems operate and provide individuals with access to their personal data.

Overall, financial institutions must navigate complex legal challenges when using AI, requiring them to carefully balance the benefits of AI with the need to comply with relevant laws and regulations and protect the interests of their customers.


Are you interested in learning more about what this means for your organization?

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