Agefi Luxembourg - juillet août 2024

AGEFI Luxembourg 40 Juillet / Août 2024 AI / ICT F acedwith the questions surroun- ding the use ofGenerativeArtifi- cial Intelligence (GenAI), the Associationdes Banques et Ban- quiers Luxembourg (ABBL) in colla- borationwithSociétéGénérale Luxembourg, conducted a second edition of their survey* to unveil the current perceptions and trends on the use ofGenAIwithin the Luxembourg financial sector. AI: betweenmyths, misconceptions and perceived opportunities Implementing GenAI in the bankingindustryinvolvesnav- igating variousmyths, miscon- ceptions, opportunities, and threats.Acommonmisconception is that GenAI can operate au- tonomously without issues, disregarding the need for robust oversight over the technology to maintain accuracy and reliability of GenAI. There is also a myth that AI implementation is straightfor- ward, ignoring the complexities of integrating AI withexistingsystemsandensuringcompliancewith stringent regulations. GenAI offers obvious opportunities, suchas, for ex- ample, enhancing data analysis for better decision- making and improving fraud detection through advanced pattern recognition. However, the tech- nology also introduces risks, including algorithmic biases andsecurityvulnerabilities that can be exploited. Furthermore, data protec- tion and ethical concerns arise around data privacy and the fairness of AI- driven decisions. To take the pulse of progress in this area, the secondedition of the survey, after the one conducted in March 2023 explores the uptake of GenAI tools by banking services pro- fessionals. AI:An opportunity rather than a threat “The first thing we noticed”, says Ananda Kautz (portrait), HeadofDigital,Innovationand Sustainability at ABBL, “is a very positive stance onAI”. 94%ofrespondentsnowviewAI as an opportunity, up from 76% in 2023. This shift reflects growing opti- mism about its potential to drive growth and in- novation.Thisself-assuredapproachtoAIisreflected intheimplementationplansofplayersinthebanking sector. 81% of surveyed entities plan to implement GenAI for specific use cases, showing strong interest in leveragingAI technologies. Furthermore, 26% of the respondents indicate they have initiated IAprojects in Luxembourg.And fur- ther 30%activelyparticipate inprojectswithin their groups.AnandaKautz: “Thebalancedapproachbe- tween local and headquarters-driven initiatives highlights the collaborative nature of AI deploy- ment ensuring that local adaptation allows for tai- lored solutions that meet specific market needs in Luxembourg”. 43% of credit institutions rely on headquarters with local adaptations, indicating a structured yet flexible approach. This ensures consistency in AI strategies while allowing for local customisation. Productivity gains, cost reduction and enhanced decision-making seen asmajor benefits Efficiency andproductivitygains (87%) are themost widely recognised benefits, followed by cost-reduc- tion(59%).“TheabilityofAItoautomateroutineand complexprocessesisseenasamajorcost-savingmea- sure”,saysAndreyMartovoy,SeniorAdvisor-Inno- vation & Digital. Enhanced decision-making (57%) completesthetoptrioofbenefitsofGenAIaccording to the survey. “Improved data analysis and insights are highly valued across all sectors”. As for specific use cases, respondents indicate a focus on virtual as- sistants, development and coding support and doc- ument anddata processing. ABBL’s role in creating trust and ensuring confidence “We must not be blind to the fact that there are still many questions surrounding the implementation of GenAI, and that this movement still involves many challenges. TheABBL’s task is to facilitate the adop- tionof the technologyandencourage itsmembers to explore it in a compliant way for the benefit of all stakeholders”, reflectsAndreyMartovoy. One of themajor areas of concern is the familiarityof seniormanagementwithGenAI,whichisimproving but still needs to be boosted. 4% of respondents say that their senior management have a good knowl- edge of the IAfield, 87%that theyhave basic knowl- edge and 9% that they have no knowledge at all. “There is room for optimisation in this aspect, be- cause, as always, the “tone from the top” is crucial. I stronglybelieve thatC-level executiveswitha robust understanding of IA technologies can significantly enhancetheircompany’sabilitytoinnovate”,under- linesAnandaKautz. Other avenues of work are the need for continuous upskilling and clear communication aboutAI’s role, but also the establishment of robust internal gover- nance framework to address concerns related to job displacement,datasecurity,andethicaluse.Todoso, the ABBL and more precisely its Digital Strategy Commifee (DSC) and the FinTech and Innovation Forum(FIF) play a crucial role. The DSC facilitates strategic dialogue with ABBL members and external stakeholders to drive inno- vation anddigitalisation inLuxembourg’s financial services sector. Meanwhile, the FIF provides a plat- formfor direct exchange andcollaborationbetween ABBL members and FinTech firms on matters of mutual interest. *ThesurveywasdistributedtomembersofABBL,encompassingCIOs, COOs, CTOs, Chief Innova8on Officers, Digital Community and Fintech Circle of ABBL. In total, the survey resulted in 54 par8cipant responses.Responseswerecollectedoveramonth,fromApril24toMay 28, 2024. In addi8on to the topics highlighted above, the survey also covers issues such as internal guidelines and policies, the maturity of companies in terms of data and infrastructure, internal governance, policies and training. The survey also provides a granular view of the state of play among the various players in the banking ecosystem of Luxembourg(creditins8tu8ons,otherfinancialins8tu8ons,consul8ng &lawfirms,marketinfrastructures,andfintechs&soHwarevendors). Taking the pulse on GenerativeAI adoption in the Luxembourg financial sector ByOriane KAESMANN, ResearchManager the LHoFT T he rapid evolution of artificial intelli- gence (AI) and other technologies is revolutionising the banking indus- try, presenting both newopportunities and significant risks. AI andmachine learning (ML) are being used in credit underwriting, fraud detection, and customer service, en- hancing efficiency and riskmanagement. However, these technologies bring strategic challenges, such as competition fromfin- tech, operational challenges with legacy systems, and reputational risks frompoten- tially unfair outcomes. Regulatorybodies,liketheBaselCommitteeonBank- ing Supervision, are evolving frameworks to ensure responsible innovation. Initiatives such as the EU’s DigitalOperationalResilienceAct (1) aimtostrengthen financial entities’ resilience against ICT-related inci- dents. To stay competitive banksmust balance inno- vation with risk management, foster collaboration with regulators and technology partners, and adapt to the changingdigital landscape. Innovative technologies and applications The Basel Committee on Banking Supervision re- centlypublishedareport (2) whichconsiderstheimpli- cations of the ongoing digitalisation of finance on banks and supervision. The section on “Innovative Technologies andApplications” presents several key technologies driving this phenomenon. - Application Programming Interfaces (APIs) are pivotal in facilitating data sharing between applica- tions, enabling real-time processing, and enhancing data connectivity. Banks leverage APIs for various functions, includingmobile andopenbankingappli- cations, where the financial data can be shared with third-party providers for personalised products and services; and internal systemdatamanagement. - Artificial Intelligence (AI) andMachine Learning (ML) areincreasinglyemployedbybanks,particularly in customer-facing services and revenue generation. These technologies allow computers to perform so- phisticated tasks that previously requiredhuman in- tervention.TheadoptionofAI/MLtechnologiesvaries amongbanks,reflectingdifferentlevelsofinterestand implementation. -DistributedLedgerTechnology(DLT) isrecognised for its role in providing secure, transparent, and de- centralized record-keeping. Though specific details are sparse, DLT is acknowledged as a significant in- fluence on the financial sector (3) , shaping how trans- actions anddata aremanaged. - Cloud computing is another crucial technology beingwidely adopted by banks. This trend is set to continue, indicating a growing reliance on cloud services for various operations within the banking industry. All these technologies playa crucial role in reshaping the banking landscape and are essential components of the digital transformation in the financial sector. Newcompetitors andbusinessmodels The innovative technologiesmentioned above have enabled the rise of new digital-only participants in thefinancial services sector, includingneobanks, fin- techs, and larger technology companies. These new competitors oftenholdadvantages indata and tech- nology,operatingondigitallynativeplatformswith- out the burden of legacy IT systems. This shift is reshaping the competitive landscape, particularly in payment services. This influx of new entrants and the adoption of ad- vancedtechnologieshavepromptedtraditionalbanks to formstrategicpartnershipswithvariousfirms. For example, J.P.MorganPaymentsprovides embedded bankingservicesone-commerceplatformslikeAma- zon, Macy’s Marketplace, and SalonCentric, serving as the invisible provider of banking services (4) . Gold- manSachspartneredwithAppletolaunchtheApple Card, a credit card integrated with Apple’s ecosys- tem (5) . These collaborations are transforming tradi- tional bankingbusinesses, introducingnewchannels and interconnectionswithin the banking system; this evolutionunderscoresthechangingdynamicsofafi- nancial industrydrivenby technology. Navigating the risks Strategic Risks Strategic risks emerge from the threats posed to a bank’s business strategy due to digitalisation. Banks must adapt to evolving customer preferences, com- petitive pressures, and technological advancements. Continuously evaluating and adjusting strategies is vitaltoremaininsyncwiththedigitaltransformation sweeping through the financial sector. Howcan banks adapt? By investing in agile technologyplatforms that allow forrapidadjustmentstoshiftingmarketdemandsand customer behaviours. Reputational risks Reputational risks arise from operational mishaps, regulatorynon-compliance,oradversepublicpercep- tion.TheuseofadvancedtechnologieslikeAIandML canresultinunfairoutcomes,tarnishingabank’srep- utation. Collaborations with non-bank entities also carry risks if problems occur (6) . Upholding trust re- quires clear communication, transparency, and ad- herence to ethical standards. Howcan banks adapt? ByimplementingAIethicscommitteestooverseethe fairnessandtransparencyoftheirAI/MLsystems,and conductingappropriateduediligenceontheircollab- orators and external service providers. Operational risks Operational risks encompass internal failures, exter- nalevents,orflawedprocesses.Digitalisationheight- ens complexity and reliance on technology, which can increase the likelihood of operational issues. Strong riskmanagement practices and internal con- trols are crucial to mitigate these risks and ensure technological robustness. Howcan banks adapt? Byconductingregularcybersecuritydrillsandupdat- ing their internal control systems tohandlenewtech- nological challenges. Data issues and related risks Data-related risks involve challenges in data gover- nance, privacy, security, and compliance. Effective datamanagementisessentialforprotectingcustomer information and meeting regulatory requirements. Banks need to implement robust data governance frameworks and security measures to prevent data breaches andmisuse. Howcan banks adapt? by adopting advanced encryptionmethods and reg- ularlyauditingtheirdatagovernanceprotocolstoen- sure compliance. Financial stability risks Digitalisationintroducessystemicrisksthatmayaffect financial stability. Greater interconnections with fin- techs and tech firms add to the complexity. Rapid technologicalscalingcanexposesystemicvulnerabil- ities.Regulatorsmustmonitorandmanagetheserisks tomaintain the financial system’s resilience. Howcan banks adapt? By collaborating with regulators to develop frame- works that address the complexities introduced by fintechpartnerships and technological innovations. Conclusion The digitalisation of finance, driven by cutting-edge technologieslikeAI,ML,DLT,andcloudcomputing, opensupaworldofunprecedentedopportunitiesfor banks while also presenting significant risks. To stay ahead in this dynamic landscape andmeet the ever- evolving customer preferences, banksmust continu- ously innovate and adapt their strategies. Embracing effective governance, robust risk management, and comprehensive data governance frameworks is es- sential to prevent operational failures, data breaches, and regulatorynon-compliance. Asdigitalisationincreasesinterconnectionswithinthe financial system, systemic risks emerge, demanding vigilantoversightandflexibleregulatoryframeworks. For banks and regulators,working together is vital to fosterresponsibleinnovationandensurefinancialsta- bility.Byskillfullybalancinginnovationwithstrategic riskmanagement, banks canmaster thedigital trans- formation, seize new opportunities, and strengthen their resilience. 1) Regulation (EU) 2022/2554 of the European Parliament and of the Council of 14December 2022 on digital operational resilience for the fi- nancialsectorandamendingRegulations(EC)No1060/2009,(EU)No 648/2012,(EU)No600/2014,(EU)No909/2014and(EU)2016/1011 https://lc.cx/hw8PyM 2 )https://www.bis.org/bcbs/publ/d575.htm 3) See “Distributed ledger technology in payment, clearing and settle- ment-ananalytical framework”(27February2017) https://www.bis.org/cpmi/publ/d157.htm 4 )https://lc.cx/yxOj9A 5 )https://www.apple.com/apple-card/ 6) See the case of JPMorgan against Fintech startup Frank: https://lc.cx/HQaBrf Embracing the future: Digitalisation’s opportunities and risks in banking ©Midjourney Source :https://www.bis.org/bcbs/publ/d575.htm