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Advances in artificial intelligence and digital technologies are transforming the world of finance. Generative AI continues to become a bigger player in the financial advice space, small businesses are using data to access more funding opportunities, and the cryptocurrency market continues to consolidate, for better or worse.
Policymakers, practitioners, and academics explored a variety of developments in the financial sector at a conference hosted last month by the MIT Shaping the Future of Work Initiative, “Aligning Innovation and Equity in the Digital Economy.”
One panel discussion focused on the ways in which technology continues to reshape financial markets. Led by MIT Sloan professor , the panel featured insights from MIT Sloan professor and professor Randall S. Kroszner of the University of Chicago.
Here are four ways those experts see data and technology transforming finance.
1. Generative AI may one day become your personalized financial adviser.
From budgeting apps to customer service chatbots, AI is already being used in finance; now it’s on its way to providing personalized financial advice and may eventually replace traditional financial advisers, Kroszner said. He raised the question of whether ChatGPT may become so personalized that it could one day advise people on what credit card to get or what savings account to open based on their circumstances.
“I think that will become much easier,” Kroszner said, noting that the prospect holds particular appeal for lower-income households, which are less likely to have access to a human financial adviser. “With AI, it should make it much, much cheaper to [offer] something that’s bespoke for people who don’t have a lot of resources,” he said.
Kroszner cautioned that AI isn’t foolproof, however. While some research has shown that AI can personalize the financial advice it delivers, the study showed that large language models require supplemental modules to do so effectively.
When it comes to generative AI and financial advice, Kroszner said, people still need to be able to ask the right questions and have enough financial sense to question what they’re being told.
2. New data streams are linking small businesses to funding.
Historically, it’s been difficult for small businesses to get funding, especially if they have a limited credit history or inconsistent cash flow, or lack a long financial track record. But recently, lenders have been focusing on companies’ current cash flows and revenue streams when evaluating loan eligibility, aided by access to a trove of real-time financial data.
“Small-business funding has become very data-heavy and data-driven, and there’s now much more cash-flow-based funding for small businesses than ever before,” Schoar said.
Companies like Stripe Capital, Square Funding, and Amazon Lending are helping with funding opportunities in the U.S., while Alipay continues to be transformational for small businesses in China, Schoar said.
“You can basically get funding from the Alipay platform based on the orders that they see come through, rather than just having to take a loan when you don’t have a credit score,” Schoar said.
Kroszner pointed to the more granular data available through Alipay, Stripe, and similar companies.
“You’re getting transaction-by-transaction monitoring [on] what’s happening at the firm,” he said. “That’s extraordinarily valuable to a lender, to know whether they should be increasing credit [or] increasing the interest rate, etc.”
3. Consumers may consider exchanging personal data for perks.
Kroszner raised the possibility that consumers might be willing to provide their personal data in exchange for an incentive. For example, a health insurance company might give someone a lower rate for engaging in healthy behavior and submitting their data as evidence.
“There are a lot of privacy problems with that, but someone might say, ‘I’m willing to make that trade-off to basically have the insurance company monitor my glucose level and monitor my [calorie] consumption on a real-time basis and then give me incentives for acting better,’” Kroszner said.
Schoar said such quid pro quo arrangements can prove too good to be true for some consumers, however. Research she previously conducted on the credit card market found that less-educated and less financially sophisticated people were typically offered more confusing contracts and offer letters. Even when they were offered perks like a zero annual percentage rate for six to 12 months, they were not able to keep their balances down over time.
“What we have seen in the credit card market is that people are not fully rational and they often misunderstand themselves and their own self-control and their own sophistication,” Schoar said. “I very much hope that we will become better and better at really understanding some of these dimensions of people’s behavior and help them make better choices.”
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4. Once the wild west, the crypto market is becoming more concentrated.
Cryptocurrency has been hailed as a way to revolutionize financial access by helping the unbanked get access to a digital banking system. But crypto trading is concentrated on a handful of exchanges, which raises concerns about the impact one exchange’s failure could have on the entire sector.
Initially, crypto markets “had been hailed as this free-entry nirvana,” Schoar said. But because there hasn’t been much regulation or many restrictions to market entry, “we now have a market that is very concentrated,” with just a handful of players in swap exchanges, such as Binance and Coinbase.
“In those markets, if we cannot ensure that enough players survive, then we might actually be at a place where a few very large players have true market power and extract a lot of rent,” Schoar said.
Read next: Can generative AI provide trusted financial advice?
