In an era defined by advancements in technology, AI has the potential to revolutionise nearly any industry. The financial services industry is no different, and a plethora of financial services, including banks and asset managers, have already recognised the benefits of incorporating AI into their operations.
AI is reshaping the financial landscape by streamlining customer interactions, enhancing operational efficiency, and driving innovation. Let’s explore the impact of AI innovation in the financial services space and the role of VCs in capitalising on this race to automation.
The need for innovation in finance
The financial industry as a whole is extremely crowded, with numerous funds across the asset classes competing to raise, and banks and wealth managers trying to differentiate themselves.
It has, therefore, never been more pertinent to innovate and find ways to keep up with the competition. Is AI the answer?
AI has various applications across finance, including:
- Elevating client experience: AI-powered conversational interfaces or biometric profiles can assist in personalising and improving customer experiences. Retail banks may utilise AI to personalise offerings and suggest investment products based on transaction data. Chatbots, like KAI by Kasisto, can streamline customer experiences and reduce wait times.
- Assessing risk: AI can assist in making appropriate informed decisions about risk and capital allocation. The founder of Eigen Technologies, Dr Lewis Liu, notes that 80-90% of the world’s data is unusable, and as such many financial institutions make decisions using 10-20% of the data that is structured and easily accessible. AI and machine learning tools can help process large data sets with greater efficiency, to ensure decision-making is data-led and lower risk.
- Preventing or reducing fraud: AI can help financial services providers comply with anti-money laundering (AML) and know-your-customer (KYC) regulations. Leveraging AI, organisations are able to monitor large transaction data sets in order to flag anomalies resulting in a higher fraud detection rate.
- Improving outcomes in investing or trading: AI analyses large data sets to identify industry trends or changes, enabling strategic trades to be made. AlphaSense is an AI-powered search engine for the finance industry that utilises natural language processing (NLP) to analyse keyword searches within filings, transcripts, research and news, in order to discover potential opportunities within the markets.
- Optimising internal efficiency: AI can also be utilised to improve back-end efficiency across the spectrum of firms, from companies such as Moveworks, which specialises in offering AI-powered employee support, to AllyO which automates large parts of the recruitment process.
The centre stage: VCs and AI
Venture funds are arguably at the forefront of the AI revolution in the finance industry, both as users of the technology and as investors. Not only can they directly benefit from utilising AI in a host of ways, but they also have the ability to invest in what seems to be the most recent technology generating widespread hype and excitement across the ecosystem.
Many of the most exciting and innovative AI companies that have the opportunity to transform the industry are VC-backed, like Eigen Technologies (an AI-powered data extraction tool), or previously referenced Moveworks (a generative AI-based employee support platform, automating functions from IT to HR).
Eigen Technologies has raised a total of $60mn so far, most recently raising a Series B round led by ING. Moveworks most recently raised £200mn Series C round, led by Tiger Global and Alkeon Capital. This brings their total funding to $315mn, adding to previous rounds from existing investors such as Bain Capital Ventures, and Lightspeed Venture Partners. This positioning enables VCs to have first-hand access and exposure to AI-driven technologies.
Moreover, as the AI industry continues to develop and AI begins to become more ubiquitous, new potential unicorns are emerging, providing VCs with exciting and potentially highly lucrative investment opportunities in the space.
VCs – utilise AI for your own success
VCs can face a number of pain points that negatively impact their success in a competitive landscape. One example is an inability to maximise efficiency in order to spend sufficient time on value-add activities such as sourcing new investments, or portfolio management. Another may be employing what is sometimes dubbed as a ‘spray and pray’ approach to investing, with VCs unable to clearly screen and identify outlier opportunities, or ‘cut the wheat from the chaff.’
“Utilising AI will soon become not just additive, but essential for VCs wishing to stay competitive in the market”.
AI can solve many of these issues. For example, backend operations can be streamlined in the same ways as for other FIs, enabling more time to be devoted to value-add tasks. Similarly, in a 2020 paper by Dr Andre Retterath, machine learning models were to outperform human investors in screening success outcomes, filtering companies that were more likely to produce positive returns on investment. Here, the research demonstrated that the algorithm used outperformed the average VC by 29% using a comprehensive dataset of 77279 European early-stage companies.
Indeed, Retterath does not propose AI replaces human investors, instead suggesting that similar algorithms should be utilised as a means of narrowing the funnel of companies that human investors must more closely monitor. This will not only improve financial outcomes for the VCs, but also save investors time, enabling more detailed attention to be paid to potential investments. This will further improve the ratio of successful investments and positive returns. As such, it seems clear that utilising AI will soon become not just additive, but essential for VCs wishing to stay competitive in the market.
VC investment in AI
As mentioned, VCs are well positioned to not only benefit from AI as users but also as investors. A report from PitchBook showed that VCs have increased their positions in generative AI from $408mn in 2018 to $4.5bn in 2022. Indeed, off the back of shrinking interest in trends that previously had the confidence of the market, such as Web3 and the Metaverse, AI seems to be the next hot trend.
This is reinforced by the continued robust interest in AI across the VC landscape, in contrast to the rest of the market. The range of use cases, alongside the multi-layer model of the market, makes AI an attractive investment opportunity to those looking for the next disruptive technologies.
Act now
AI innovation is dramatically transforming the financial industry, and it seems unlikely that these developments will cease. AI investment will help financial services organisations significantly enhance operational efficiency and decision-making capabilities, as well as elevate customer support and experiences. VCs, in particular, can and are strategically capitalising on these developments, utilising the transformative benefits of AI themselves, as well as investing in innovative AI providers serving financial institutions.
“We help senior business leaders turn ideas into actions. Of course, it’s execution that determines success; that’s why we also make change happen, treating our clients’ business like our own.
Our people make our firm. And while our team expands across the globe, we continue to attract the best talent in the industry, building a team of high performing, like-minded individuals who share our vision of building the best consulting firm in the world.
With the launch of our ESPP scheme in 2021, we gave our entire team the opportunity to be part owners of Elixirr — and with a 74% enrolment rate for 2022, entrepreneurialism has never been more embedded into our business.”
