AI in Personal Finance

It seems nearly everyone has been talking about artificial intelligence for years now, and one of the industries where it’s gained the most attention is personal finance. A.I. is becoming so popular that many online banking users today have become used to—and even dependent on—receiving personalized insights into their spending habits, all powered by A.I.

On the other side of personal finance, artificial intelligence also plays a crucial role in retail investing. An increasing number of traders depend on algorithmic trading based on A.I.s to stay profitable. In this post, I’ll discuss these and other ways how A.I. is impacting personal finance and, more importantly, how you can take full advantage of it.

What is Artificial Intelligence, and Why is it so Important?

Artificial intelligence refers to a branch of computer science where engineers develop software to “think” independently. The goal is for a computer to solve problems by itself with little to no input from a human. In other words, A.I.s are computer programs that learn by themselves.

Here are some of the benefits of implementing A.I. from both companies and customer’s perspectives:

  • Companies can save revenue by making processes more efficient and automated.
  • The A.I. becomes a revenue-generating asset that reduces the risk of losses and helps financial institutions make more money.
  • Customers can get an edge on financial health with A.I.’s analysis and remarks on spending (automatic spending insights).
  • Customers can enjoy a more accessible financial experience through chatbots.
  • Both companies and individuals can manage risk and automate investing by using A.I.-based trading.

All these benefits from A.I. are already making it a valuable tool for both companies and customers, which explains why big tech companies have been acquiring A.I. startups left and right.

Of course, A.I. does not come without its risks. For example, one of the primary use cases of A.I. within finance today is to pick wise investments. Remember, though, that this technology is far from perfect, and its efficacy is not guaranteed. Therefore, it’s still a good idea to do your own research by studying the markets and studying investments on your own to spot potential investment opportunities the A.I. missed.

With that disclaimer out of the way, let’s dive in a little deeper into how A.I. is shaping the future of personal finance.

Chatbots & Personal Finance Managers

A.I. in mobile banking has already made great strides 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 A.I. whose only purpose is to speak with customers and answer their questions. These questions can range from how to perform certain operations to how certain features or services work. With a chatbot at your disposal, you can easily schedule transfers, automate transactions, and even get directed to a live agent if needed.

For short, personal finance managers, or PFMs, refers to a type of A.I. that’s typically used in banking applications or digital wallets. Their job is to analyze all of your transactions to give them context. As a result, they generate insights into your spending habits and suggestions on where you can spend more or where you should spend less. The importance of PFMs is that they allow you to have an eagle’s eye view of your finances to see where they could improve.

These two tools represent the first step towards future tools that will make personal finance even more powerful and useful. The two key reasons for this are:

Ease of 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 only 34% in 2018. This is partly because A.I.s have made online banking a lot easier to use and more accessible to all types of public.

PFMs and chatbots serve this particular purpose since they’re implemented solely to make things easier for you as a user. Automating transactions, scheduling transfers, and having spending insights available is more than enough to make mobile banking easier, especially if you have “someone” to ask a question to anytime you want or need.

As a millennial or perhaps someone even younger, it’s easy to assume that everyone should be able to use their online banking apps and take advantage of all of its features to the fullest. However, some people will inevitably have difficulties with this technology, even the younger crowd. 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 A.I. will take care of the transaction. It’s that simple!

PFMs go hand in hand with chatbots, sometimes even functioning as part of the same A.I. However, PFMs can also exist as standalone applications that look into a person’s bank account. An example of this would be Wallet.ai, an application that’s focused on crafting automated spending insights. It gathers the context surrounding a transaction and gives tips regarding future transactions.

The result is that everything related to personal finance is much easier to do now than it ever was, and we owe it all to artificial intelligence.

Making Digital Banking More Engaging

Engagement and mobile banking apps are not two words that are used together that 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 in check, A.I. now invites them to use personalized spending insights. A.I.’s impact is not about making a better spreadsheet; it’s about technology genuinely helping people with their finances and helping them make better decisions based on insights they probably wouldn’t be able to get just by looking at a balance.

With the adoption of these new tools for personal finance, more people will be willing to go online for most of their banking operations.

Now let’s jump onto another way in which A.I. is impacting personal finance today:

Algorithmic Trading

Investing and, particularly, trading, have been somewhat demystified since their early beginnings. Today, online stock brokers and new financial instruments have made the stock market available to the masses, which has spurred interest in it quite a bit. As a result, people today are continuously coming up with new strategies to make the market work for them. One strategy that has been gaining popularity in the last couple of years is A.I.-powered algorithmic trading.

Algorithmic trading, or algo-trading, is a way of investing in stocks that relies on a mathematical model that executes specific actions automatically depending on certain preset conditions. For example, this model can check the prices of the pre-selected assets and make decisions based on that information at a speed that wouldn’t be possible for a human.

However, software engineers and professional traders developed a new branch of algo-trading based on A.I. It works by “feeding” millions of data points, including news, stock prices, and market trends, to an A.I. that can calculate a prediction of where the market is going.

In 2018, the quantitative hedge fund industry closed in with $1 trillion in assets under management thanks to algorithmic trading. Ever since A.I.-powered algo-trading has evolved from disruptive technology into mainstream technology, and it’s had a significant impact on the finance industry and traders’ finances. Here’s how.

A.I. Powered Algo-Trading’s Impact on Traders’ Performance

Trading is a complex process involving a deep understanding of the stock market and a bit of luck. However, algorithmic trading based on A.I. takes care of the “deep understanding” part as it can learn by itself and make decisions on its own with little to no input from a person.

This type of algorithmic trading eliminates various pain points that some traders have struggled with in the past. For example, an A.I. doesn’t second guess itself based on emotions, nor does it have to deal with a clunky interface or subject itself to the errors humans make when trading.

A.I. offers a method of accurately predicting the evolution of stock prices, automating transactions, and gaining an edge over the broader market. Big names like JP Morgan have implemented A.I. in a significant way, setting a precedent for others to follow.

A.I. is still in its infancy, though it’s clear that it will play a major role in how individuals go about managing their personal finances, regardless of where they live.

In Summary: A.I. is Here to Stay

Whether through chatbots, PFRs, or algorithmic trading, it’s clear that artificial intelligence is already changing the landscape of personal finance. With more firms jumping on the A.I. bandwagon every year, it’s safe to say that the A.I. trend will continue as the tech improves more over time.

Either way, the impact artificial intelligence has and will continue to have on personal finance cannot be overstated. Of course, this is but a glimpse of the most fundamental ways in which this tech is making things easier and better for people right now, but A.I. will continue to improve over time, and there’s no telling on what’s to come.

Image Credit: tara winstead; pexels; thank you!

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