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How Artificial Intelligence Is Driving The Fintech Revolution And Why Investors Should Care


About three weeks ago, the speech and dialogue research group at Microsoft Corporation (NASDAQ: MSFT) announced they’d created a system that could make out words in a sentence with the same accuracy as professional transcribers. The Microsoft 2017 Conversational Speech Recognition System achieved a 5.1 percent error rate for speech recognition, which was on par with the 5.1 human parity rate benchmark set by human transcribers.

This is a 12 percent improvement from Microsoft’s efforts last year, which provides an indication of just how fast the field of artificial intelligence is evolving.

And that’s just a tip of the iceberg. AI is advancing at a faster rate than we thought, promising to upend many sectors of the economy.

Take for instance the events that occurred on April 23rd, 2013. On a seemingly quiet trading afternoon that day, the official Twitter account of the Associated Press lit up the web with a chilling tweet:

“Breaking: Two Explosions in the White House and Barack Obama is injured.”

Almost immediately, the stock market plunged. The S&P 500 Index lost over $136 billion in value, with the Dow Jones Industrial Average dropping 143.5 points – all within the first few minutes following the false tweet.

And even though markets stabilized a few minutes later after clarification from the AP, the world had witnessed the true power of AI. Artificially intelligent algorithms manning high-frequency trading platforms had picked up keywords from a trusted news source and reacted to the false story, leaving markets in disarray.  

Algorithmic trading has been around for quite some time. High-frequency traders use proprietary software to sift through sets of rules and data to help make decisions in real-time, sometimes without human intervention. The most sophisticated AI-based systems often use neural networks to “learn” certain patterns over time, enabling their users to predict market trends that competitors can’t see.

Further down the consumer chain, fintech startups are using AI platforms to help regular investors make complex, data-driven investment decisions. Robinhood, which was recently valued at $1.3 billion, uses an artificially intelligent platform to provide stock brokerage services to millennials - for free.    

And the revolution isn’t confined to the mysterious stock market.

Imagine waking up one morning with a bad backache brought on by the old mattress you’ve been meaning to replace. While contemplating whether to go to work or take the day off, the AI-powered health monitor on your wrist sounds an alert, prompting you to check out an assortment of bed and mattress recommendations. It’s even picked one for you on, Inc. (NASDAQ: AMZN) – all you need to do is to check out.

And no, this isn’t a scene from a futuristic Hollywood blockbuster. Greg Pratt, co-founder and CEO of the online bed and mattress reviews platform Sleep Junkie, says AI plays a big role in helping to fuse personalized, in-store experiences with the convenience of online shopping. Indeed, a recent report by the Boston Consulting Group (BCG) found that retailers that use AI-based personalization strategies often see up to 10 percent in sales gains, which is almost three times faster when compared to other retailers.

This is why Amazon is among the biggest companies making huge investments in AI, with the online retailer investing over $300 million in AI startups and an AI-savvy labor force.

Closer to home, AI is taking a more central role in personal and business finance. For close to two decades, traditional credit scores from the likes of Fair Isaac Corporation (NYSE: FICO) and Vantage have been used to rate the creditworthiness of potential borrowers, often with mixed results. While these scoring models have been able to prevent potential defaulters from accessing credit facilities, they’ve also been known to overlook the creditworthiness of many potential borrowers.

Some of those who are overlooked include Millennials, average business owners looking for small business lines of credit, and others who shun traditional banking services such as credit cards and checking accounts. In fact, about one in every four Americans doesn’t have a FICO score.

Many new lenders are cashing in on the opportunity presented by the old scoring system. SoFi, a privately-held fintech startup currently valued at over $4 billion, is using AI to analyze troves of data from noncredit sources such as educational pedigrees. The company then uses the credit scores it generates to disburse mortgages, personal loans, and student loan refinancing. For a brief stint in 2016, SoFi even did away with traditional FICO scores in an experiment dubbed “FICO-Free Zone.”

Others like PayPal Holdings Inc (NASDAQ: PYPL) are also using AI to improve traditional credit rating processes. PayPal Credit uses multiple data points from your shopping history on eBay Inc (NASDAQ: EBAY) to generate real-time credit scores in just under a second, which helps the lender make less risky decisions.

There’s no market segment in fintech that will escape the transformative effects of AI. Still, as an investor in this space, it pays to tread carefully when buying into AI-powered investments. As with any emerging industry, there's going to be consolidation in the space as the best companies rise to the top and the rest fold or get bought out. 







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