You’ve probably heard of the “Three Body Problem”, the outstanding Chinese future fiction novel by Liu Cixin (or the perhaps the Netflix series based on it). The three body problem in the title is a real problem in physics: the motion of two bodies can be calculated with precision but adding a third body introduces unpredictable chaos. With the arrival of non-human financial services customers just around the corner, I think we are about to see similar chaos in the universe of retail financial services. We cannot predict the trajectory of products and services when we have not three bodies interacting, but three bots interacting: the bank bot, the regulator bot and (soon) the customer bot.
Using AI In Financial Services
Banks are already investing in AI but it is more than just another technological trend in banking—it’s a catalyst for change, shaping the future of how banks operate and serve customers. From enhancing customer experiences and safeguarding against fraud to optimizing operations and meeting regulatory standards, AI’s role is undeniable. As we look towards the future, one thing is clear: the integration of AI in banking is not just evolutionary but essential for staying relevant and competitive in a rapidly changing world.
At high level the pressure for AI’s deployment in banking is driven by the need to improve efficiency, enhance customer service and maintain a competitive edge in an increasingly digital world. A variety of AI technologies, ranging from including machine learning and data analytics to generative AI and natural language processing are being employed to personalize customer experiences, streamline operations and help banks to make more informed decisions. The use of AI in risk assessment and fraud detection has already shown particular promise, significantly improving the ability of banks to manage and mitigate risks.
Yet while people talk about AI changing the face of banking, and even talk about a revolution reshaping the industry, if you look around at how banks are leveraging AI, you do not see a revolution at all but existing processes being enhanced or made more efficient.
Just as banks are exploring AI, so are regulators. They have been using ML to some effect in anti-money laundering activities, credit and regulatory capital modelling, insurance claims management, pricing investigation, order routing and many other activities. Responses to a Bank of England and U.K. Financial Conduct Authority survey in 2022 indicated that such early AI applications were already widely deployed, so the implementation of those technologies is now reaching an advanced stage for many financial service providers. But what does the interaction of compliance bots with regulator bots mean for compliance, consumer protection, crime and the long-term re-shaping of the sector?
AI is set to transform financial regulation, offering significant opportunities for enhanced compliance, fraud detection, and consumer protection. With these advancements, however, come responsibilities. Regulators must balance innovation with the need to safeguard consumer interests while ensuring data privacy and ethical usage. As AI continues to evolve, so must the frameworks that govern its deployment in financial regulation in order to deliver a more robust and secure financial landscape.
I have written before about the arrival of AI agents that will act for customers. Gartner calls these ‘custobots’ but I prefer “economic avatars”, a term originated by Jaron Lanier for what others also call the “digital twins” of the customer. These are the smart, non-human actors that can autonomously negotiate and purchase goods and services in exchange for payment. Gartner think that in five years there will be 15 billion connected products with the potential to behave as customers, with billions more to follow in the coming years. This all sounds a bit hyperbolic, but the fact is I think that Gartner might be right and as Kim Bates, Chief Futurist at Faith Popcorn’s Brain Reserve, who said “The customer journey of the future will begin to emerge as Business to Robot to Consumer (B2R2C)”.
The first two bodies, the bank and the regulator, are already using AI and we can have some views about their future directions. But the third body, the customer, brings unpredictability. Imagine a near future where a customer bot becomes vastly more intelligent than any human account holder. It negotiates and challenges bank product selection in real-time. Meanwhile, the bank bot attempts to optimize the institution’s revenues while complying with strict regulations and the regulator bot monitors their interactions, using increasing intelligent AI to both enforce compliance and check on the duty of care. Wow.
The Unpredictable Impact Of AI
This interplay between bots will create new dynamics that we cannot predict using traditional strategic planning primarily because as these bots interact, they will reshape our concepts of value, trust and identity. We have already seen experiments in which bots left to communicate with one another have developed their own language, their own groups and indeed even their own religions.
This “three-bot problem” therefore challenges us to rethink regulation, privacy, and customer relationships in an AI-centric financial services world. It’s a new era of uncertainty and it will require fresh thinking and new frameworks to maintain trust and security in a landscape increasingly defined by machines.
The central problem, as I see it, comes from the acceleration of interactions. Right now, while industry often complains about the speed of regulatory change, there is time for feedback and monitoring. To take a current case study: Customers adopt instant payments (which means instant fraud); The regulators demand a higher duty of care and fraud reimbursement from banks; Banks respond by de-risking vulnerable customers; The customers complain to the regulators; The regulators demand the banks support the customers more; The banks impose restrictions on what payments customers can make; And so life goes on.
Now imagine that in milliseconds rather than months: The unexpected consequences of speed-of-light bank responses to changes in regulations, the instantaneous and coordinated consumer responses to shifts in the regulatory landscape, the bank products and services that exist in that landscape and the fault lines running across that landscape that will demand immediate action from regulators in an endless spiral of complexity: a three body problem if ever there was one and a fintech opportunity for new bot-on-bot solutions.
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