Finance sector will gain from the tech but it will need substantial investment and create risks, says rating agency<\/p>\n
The rating agency Moody\u2019s has said the race to adopt AI is putting big banks at the mercy of a small group of Silicon Valley firms, leaving them vulnerable to widespread outages and price gouging by profit-hungry tech bosses.<\/p>\n
The financial sector\u2019s efforts to integrate AI into day-to-day operations will eventually cut costs and increase revenues across the City and Wall Street, Moody\u2019s said.<\/p>\n
But that will require \u201csubstantial investments\u201d, and with so many rivals racing towards the same goal, many of those benefits will end up being \u201ccompeted away\u201d.<\/p>\n
AI will also create bigger risks around data privacy, cybersecurity, fraud and so-called \u201cdeposit flight\u201d, as well as an overdependence on a small number of tech firms, the rating agency warned.<\/p>\n
That will raise concerns for bosses across the financial sector. More than 75% of City companies now use AI, according to a UK Treasury select committee report published in January, with insurers and international banks among the biggest adopters. They are mostly using it to automate administrative tasks or even help with core operations, including processing insurance claims and assessing customers\u2019 creditworthiness.<\/p>\n
\u201cThe reliance of most financial firms on a relatively small set of foundation AI model and cloud computing providers risks creating a systemic dependency,\u201d the Moody\u2019s report said.<\/p>\n
\u201cThis is because a model outage at one major provider could potentially spread quickly across customers and sectors. As AI adoption deepens, regulators may increase their focus on operational resilience and third-party concentration in the AI model stack.\u201d<\/p>\n
The AI race also risked creating \u201cvendor dependence risk\u201d, Moody\u2019s said, meaning that \u201ca set of dominant AI model and infrastructure providers could, over time, exert control over the price of AI services\u201d. That issue is likely to emerge as the bosses of loss-making generative AI companies, including the ChatGPT creator OpenAI and the Claude owner Anthropic, come under pressure to deliver profits for investors.<\/p>\n
\u201cWhile this could pose credit risks to financial firms, they would nevertheless retain control over key assets, including proprietary data,\u201d Moody\u2019s said. Many big banks and insurers also have longstanding experience negotiating down tech contracts, and may be using open-source AI models, and striking key partnerships, to try to offset \u201cdependency risks\u201d.<\/p>\n
Lloyds Banking Group\u2019s chief executive, Charlie Nunn, recently doubled down on AI investment plans with a \u00a313bn strategy that would involve using the technology to lure new business, improve efficiency and increase payouts for shareholders.<\/p>\n
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That will involve \u00a32bn of cost cuts, which Nunn said would affect staff. \u201cThat is going to impact work. It is going to require us to continue to reskill people and hire new people, but that\u2019s been my history for 30-odd years in financial services.\u201d<\/p>\n
Moody\u2019s acknowledged the potential blow to some staff, who could be deemed replaceable as a result of new tech. Its report said there was a 20% chance that, by 2030, AI will be able to do the work of a \u201csolid mid-level employee\u201d.<\/p>\n
For banks, AI might also make it easier for customers to switch to accounts offering higher interest rates, creating the possibility that large chunks of cash could be moved at short notice. \u201cIn this context, depositors\u2019 trust in the institution and the resilience and stability of deposit funding are critical,\u201d Moody\u2019s said.<\/p>\n