It seems like almost everyone has been talking about artificial intelligence for years, and one of the industries that has gained the most attention is personal finance. Artificial intelligence is becoming so popular that many online banking users today have become accustomed to, and even depend on, receiving personalized information about their spending habits, all powered by artificial intelligence.
On the other side of personal finance, artificial intelligence also plays a crucial role in retail investing. An increasing number of traders rely on AI-based algorithmic trading to stay profitable. In this post, I’ll discuss these and other ways that AI is impacting personal finance, and more importantly, how you can get the most out of it.
What is artificial intelligence and why is it so important?
Artificial intelligence refers to a branch of computing in which engineers develop software to “think” independently. The goal is for a computer to solve problems on its own with little or no human input. In other words, AIs are self-learning computer programs.
Here are some of the benefits of implementing AI from both a business and customer perspective:
- Businesses can save revenue by making processes more efficient and automated.
- AI becomes a income generating asset It reduces the risk of loss and helps financial institutions make more money.
- Customers can get a head start on financial health with AI analysis and feedback on spending (automatic spending information).
- Customers can enjoy a more accessible financial experience through chatbots.
- Both companies and individuals can manage risk and automate investment through artificial intelligence-based trading.
All of these benefits of AI are already making it a valuable tool for businesses and customers alike, which explains why large tech companies have been acquire AI startups left and right.
Of course, AI is not without its risks. For example, one of the top AI use cases in finance today is choosing smart investments. However, remember that this technology is far from perfect and its effectiveness is not guaranteed. Therefore, it is still a good idea to do your own research by studying the markets and studying investments on its own to spot potential investment opportunities that AI missed.
With that disclaimer out of the way, let’s dive a little deeper into how AI is shaping the future of personal finance.
Chatbots and personal finance managers
AI in mobile banking has already come a long way in terms of adoption. Most people have already seen or experienced it in the form of chatbots and personal finance managers.
A chatbot is an AI whose sole purpose is to talk to customers and answer their questions. These questions can range from how to perform certain operations to how certain functions or services work. With a chatbot at your disposal, you can schedule transfers, automate transactions, and even be directed to a live agent if necessary.
For short, personal finance managers, or PFMs, refer to a type of artificial intelligence that is generally used in banking apps or digital wallets. Your job is to analyze all your transactions to give them context. As a result, they generate information about your spending habits and suggestions about where you can spend more or where you should spend less. The importance of PFMs is that they allow you to get an overview of your finances to see where they could improve.
These two tools represent the first step toward future tools that will make personal finance even more powerful and useful. The two key reasons for this are:
Easy to use
In 2020, Accenture estimated that 50% of customers now interact with their banks through mobile apps and other online means rather than in person, a figure that was just 34% in 2018. This is partly because AI has made online banking so much easier to use and more accessible to all audiences.
PFMs and chatbots serve this particular purpose as they are implemented solely to make things easier for you as a user. Automating transactions, scheduling transfers, and having spending information readily available is more than enough to make mobile banking easy, especially if you have “someone” to ask a question anytime you want or need.
As a millennial or maybe someone even younger, it’s easy to assume that everyone should be able to use their online banking apps and take full advantage of all of its features. However, some people will inevitably struggle with this technology, even the very young. This is where talking to a chatbot as naturally as if you were talking to a real person comes in handy, something that was unimaginable a few years ago. Today, anyone can start a chat, type “Transfer $ 500 to X” and forget about it; the AI will handle the transaction. It’s that easy!
PFMs go hand in hand with chatbots, sometimes they even work as part of the same AI. However, PFMs can also exist as standalone applications that search a person’s bank account. An example of this would be Wallet.ai, an application that focuses on creating automated spending information. Gather the context surrounding a transaction and provide advice on future transactions.
The result is that everything related to personal finance is much easier to do now than ever, and we owe it all to artificial intelligence.
Make digital banking more attractive
Mobile banking apps and engagement are not two words that are used together so often. Still, artificial intelligence is making personal finance more interactive and exciting for the everyday user.
Whereas people used to create spreadsheets to keep their finances under control, AI now encourages them to use personalized spending information. The impact of AI isn’t about making a better spreadsheet; it’s about technology really helping people with their finances and helping them make better knowledge-based decisions that they probably couldn’t get from just looking at a balance.
With the adoption of these new personal finance tools, more people will be willing to go online for most of their banking operations.
Now let’s jump to another way AI is impacting personal finance today:
Investment and, in particular, trade have been somewhat demystified since their inception. Today, online stock brokers and new financial instruments have made the stock market available to the masses, which has stimulated interest in it quite a bit. As a result, people today are continually coming up with new strategies to make the market work for them. One strategy that has been gaining popularity in recent years is AI-powered algorithmic trading.
Algorithmic trading, or algo-trading, is a way of investing in stocks that is based on a mathematical model that executes specific actions automatically depending on certain pre-established conditions. For example, this model can check the prices of shortlisted assets and make decisions based on that information at a speed that would not be possible for a human.
However, software engineers and professional traders developed a new branch of AI-based algorithm trading. It works by “feeding” millions of data points, including news, stock prices, and market trends, to an AI that can calculate a prediction of where the market is going.
In 2018, the quantitative hedge fund industry closed with $ 1 trillion in assets under management thanks to algorithmic trading. Since AI-powered algorithm trading has evolved from disruptive technology to mainstream technology, it has had a significant impact on the financial industry and merchant finances. That’s how.
The Impact of AI-Powered Algo-Trading on Traders’ Performance
Trading is a complex process that involves a deep understanding of the stock market and a bit of luck. However, AI-based algorithmic trading takes care of the “deep understanding” part, as you can learn on your own and make decisions on your own with little or no input from one person.
This type of algorithmic trading eliminates several pain points that some traders have struggled with in the past. For example, an AI does not guess itself based on emotions, nor does it have to deal with a clunky interface or submit to the mistakes humans make when trading.
AI offers a method to accurately predict the evolution of stock prices, automate transactions, and gain an advantage over the broader market. Big names like JP Morgan have implemented artificial intelligence in significant ways, setting a precedent for others to follow.
AI is still in its infancy, although it is clear that it will play an important role in the way people manage their personal finances, regardless of where they live.
Bottom line: AI is here to stay
Whether through chatbots, PFR or algorithmic trading, it is clear that artificial intelligence is already changing the landscape of personal finance. With more companies jumping on the AI bandwagon each year, it’s safe to say that the AI trend will continue as technology improves further over time.
Either way, the impact that artificial intelligence has and will continue to have on personal finances cannot be overstated. Of course, this is just a glimpse of the more fundamental ways this technology makes things easier and better for people right now, but AI will continue to improve over time and there is no telling what’s to come.
Image credit: tara winstead; pexels; Thank you!