Almost 17 years later, the 2008 global financial crisis remains a warning of what can happen when investors, banks, and regulators overlook the risks of a game-changing advantage. Back then, it was that house prices would continue rising, fueled by the expectation the global economy would grow indefinitely. In 2025, it’s the expectation that artificial intelligence (AI) and generative AI (GenAI) will bring never-ending significant benefits to the financial sector. 

“In the dynamic world of financial services, AI [and] GenAI [have] become a linchpin of transformative change, redefining the operation and strategic horizons of the banking sector,” Kostis Chlouverakis, EY (formerly Ernst & Young) Central Europe and South Asia financial services AI Leader, said in an April 2024 paper. The technology is changing basic assumptions, “propelling banking toward a future ripe with innovation and efficiency.”

However, a paper by the Bank of England in April warned that with the rapid pace of AI and GenAI development, ”there is a high degree of uncertainty over how the technology and its use will evolve.” 

A June note by the World Economic Forum (WEF) said the future of AI and GenAI in financial markets will largely depend on how they are used by emerging economies.

The technology will be attractive to those nations as it “bypasses legacy infrastructure entirely, leapfrogging traditional financial infrastructure and redefining the very essence of what it means to be ‘financially included,’” WEF said.  

Advantageous tech

For decades, financial institutions have been leveraging data and using sophisticated analytical methods to improve efficiency and enhance returns for investors, according to Tobias Adrian, Director of the IMF’s Monetary and Capital Markets Department. Modern-day AI and GenAI are “just the latest stop in this journey,” he said during the Bund Summit 2024.

The “stop” would have “observable” benefits, including “enhancing productivity by speeding up and automating many current tasks … from back-office operations to customer-facing interfaces, and from research to building analytical models,” Adrian explained.

Another significant advantage is “evolutionary improvements [where] large language models [which underpin GenAI] are now enabling investors to process very large amounts of unstructured … data to enhance their already powerful analytical tools,” he said.

That should create more investment opportunities in new markets as “GenAI is likely to lower barriers to entry for quantitative investors into less liquid asset classes, such as emerging markets and corporate debt,” said Adrian. “This should lead to an improvement in market liquidity.” 

Advantage: Emerging markets

In its June note, the WEF said AI and GenAI have massive potential, with “1.4 billion adults worldwide still lacking access to basic financial services.” A March 2023 Boston Consulting Group (BCG) report estimated 75% of those live in emerging economies. 

The solutions AI and GenAI will produce will be tailored to the countries where they are developed. “It’s a new framework, grounded in the distinct needs and realities of the underserved, that’s serving as a blueprint for the future of finance,” the WEF stressed. 

Their real-world applications will change “the outdated view that inclusion is noble, but costly,” the WEF report said. Instead, “AI-driven ecosystems, designed for mobile-first users, [will] prove more scalable, accessible, and commercially viable.” 

Another change AI and GenAI will bring is that “financial inclusion will no longer be about simply assigning someone a bank account number,” the WEF said. “It will be about enabling them to seamlessly interact with the full spectrum of financial services — transactional, savings, lending, and investment — all within a single integrated experience.” 

That is “not a utopian vision, it’s already happening,” WEF said. “In Nigeria, the fintech industry grew by 70% in 2024. In Indonesia, digital transactions surged by 226% in 2024. Egypt’s fintech ecosystem experienced a 5.5-fold increase over the last five years.”

According to BCG, between 2023 and 2030, “financial technology revenues are projected to grow sixfold from $245 billion to $1.5 trillion.” A significant chunk of those proceeds would come from emerging markets based on the global population distribution of the unbanked. 

Caveats

According to the Bank of England’s “Financial Stability in Focus: Artificial Intelligence in the Financial System” paper, “While bringing potential benefits to both firms and their customers, such as greater choice and product availability, AI can introduce risks.”

The first is that “greater use of AI in banks’ and insurers’ core financial decision-making brings potential risks to [their] institutions,” the bank said. And while it stressed that internal regulations and applying risk management techniques could mitigate such risks, firms could “misestimate certain risks and so misprice and misallocate credit as a result.” 

Another danger is decision-making in financial institutions could rely on identical analyses if they use the same AI or GenAI software. For example, ChatGPT, the most used GenAI software, according to an August 2024 World Bank study, would likely give the same reply if users queried it about interest rate forecasts for the same country.

A bigger problem arises if AI and GenAI are used extensively to determine which and when to buy or sell financial assets, such as stocks. “Trading strategies could lead to firms taking increasingly correlated positions and acting in a similar way during stressful [times], thereby amplifying shocks,” noted the Bank of England. “Such market instability could then affect the availability and cost of funding for the real economy.”

Another risk for financial institutions, including commercial banks, could come from their external AI service providers. “Reliance on a small number of providers for a given service could lead to systemic risks in the event of disruptions … especially if [it] is not feasible to migrate to alternative providers.” 

The bank also highlighted the “changing external cyber threat environment,” stressing, “While AI might increase financial institutions’ cyber defensive capabilities, it could also increase malicious actors’ capabilities to carry out successful cyberattacks.” That threat would be magnified if “financial institutions’ own use of AI … creates new vulnerabilities that [cybercriminals] could exploit.”

Lastly, there is uncertainty over how AI systems calculate an organization’s creditworthiness. Would lenders’ AI systems give high scores to borrowers who utilize AI, emphasizing its benefits, or would they receive a low score, as the lender’s AI focuses on risks.

Leap of faith

In the long term, AI and GenAI will invariably become increasingly critical components in any financial system. Those technologies, without fail, would become more advanced as they train on more data and algorithms become more advanced.

For the Bank of England, that means “the complexity of some AI models – coupled with their ability to change dynamically – poses new challenges around the predictability, explainability and transparency of model outputs.” 

The bank also noted that “very large amounts of data pose new challenges for users around ensuring the integrity of that data.” A “further challenge” is the potential “for market concentration in AI-related services, including vendor-provided models.” 

One solution is more government supervision and regulations. “We have to be continuously on the lookout for how AI could exacerbate traditional financial stability challenges such as interconnectedness, liquidity, and leverage,” Adrian of the IMF said. “Regulators will need the tools to track developments in these changing markets, and more importantly, the entities acting in them.”

Those regulations must be particularly effective in governing nonbank financial institutions. “AI could mean a continuing rise in the importance of nonbanks, particularly broker-dealers, trading firms, hedge funds, and related entities who are well placed to take advantage of this new reality with the burden of intrusive supervision,” Adrian said. “We could wake up to a new reality of them playing a critical role in markets without necessarily a good understanding of who they are, how they are funded, and what they are doing.” 

This article first appeared in August’s print edition of Business Monthly.