In the dynamic tech-led world we are now living in, data analytics in banking – specifically, artificial intelligence in banking (AI) and generative artificial intelligence (GenAI) – are on the brink of reshaping everything from account holder services to marketing, strategic decisioning to operational frameworks. 

At this pivotal juncture, credit unions and banks face the dual challenge of harnessing GenAI’s potential while adhering to an evolving regulatory environment.

Despite AI’s transformative promise, its adoption in the financial services realm has been tentative. Initial hesitancy around the potential pitfalls of nascent AI technologies is driven not just by security-conscious consumers, but by the nation’s regulatory bodies. However, as AI matures, its capacity to revolutionize service delivery and operational efficiency becomes increasingly evident, and the pressure is on to figure out how to enable its use, while keeping the industry in check.

Implementing artificial intelligence in banking operations introduces a complex array of legal issues, particularly concerning data analytics, management, and the regulation of AI-generated content. Financial institutions are charged with managing the increased risk of fraud and cybersecurity threats amidst a lack of AI-specific legislation, and navigating through a legal landscape that remains to be fully defined. 

Current Regulatory Landscape

Though specific AI regulations in banking are still forming, there have been significant steps towards creating a regulatory framework. For example, a 2023 Executive Order from The White House sought to harmonize AI innovation with risk management, focusing on AI safety and cybersecurity. Similarly, legislative efforts like the Algorithmic Accountability Act of 2023 address potential biases in AI applications, ensuring consumer protection.

Moreover, in 2023, major regulatory bodies emphasized their commitment to enforcing existing laws that mitigate AI’s risks, focusing on transparency in credit decision algorithms and the legality around credit denials. For banks and credit unions, this highlights the critical need for compliance with privacy laws and the imperative to tackle AI bias, ensuring account holder trust remains unshaken.

On the issue of bias in particular, while artificial intelligence provides great potential for eliminating lending decisioning biases that led to historic redlining, many are quick to remind of a key principle in data analytics in banking: Bad data in, bad data out.

Predictive AI Models and GenAI assistants are excellent at processing immense amounts of data according to a set of programmed rules. If a qualifying rule is established, unlike a human who could choose to ignore the rule, AI would not. However, when historical data is provided as a teaching tool for a model, any bias present in that history could also be included. Which is why regulators are getting involved, in order to establish a set of guidelines, before the industry gets too far down the road of automated decision making.

The Path Forward in AI Compliance

As AI regulation evolves, financial institutions must be proactive, readying themselves for stricter oversight. This preparation involves comprehensive risk assessments and the establishment of an internal AI governance framework, ensuring practices align with both current and anticipated regulations. Although the EU AI Act will take years before it is fully implemented it is the first piece of comprehensive regulation that will require many of these measures. An ounce of AI governance now can prevent a pound of regulatory remediations later. 

It is also important, when partnering with a technology provider who may supply AI powered tools, that financial institutions are mindful of their obligations. Recently, the FDIC, the OCC and the CFPB all announced guidance on risk management around third-party relationships.

Embracing Artificial Intelligence in Banking with Caution and Vision

The integration of AI offers banks and credit unions a chance to refine efficiency and enrich account holder digital banking experiences, all while achieving operational savings. However, the journey is fraught with regulatory considerations that demand vigilance and strategic planning. By staying informed and adaptable, they can unlock AI’s benefits while navigating its regulatory complexities with confidence.

What else can you do to stay informed about AI regulations and compliance?

Keep an eye on further news announcements from organizations or regulatory bodies impacting banks and credit unions. Watch for congressional announcements and check back here on the Alkami blog, where we will provide resources and perspectives on this important topic as it evolves.