2023 International Conference on Computer Communication and Informatics (ICCCI), Jan 23-25, 2023,

Coimbatore, India

Artificial Intelligence Advances and Their

Repercussions on the Financial System
Nunna Suresh, Dr. Hema Neelam, Mr. E. Chakrapani, Kotha Anil Kumar, Dr. Sayyad Saadiq Ali,
Assistant Professor, Assistant Professor, Assistant Professor, Assistant Professor, Assistant Professor,
2023 International Conference on Computer Communication and Informatics (ICCCI) | 979-8-3503-4821-7/23/$31.00 ©2023 IEEE | DOI: 10.1109/ICCCI56745.2023.10128319

Department of Business Department of Business Department of Business H&S Department, School of Management
Administration, Institute Management, Balaji Management, Vignana VNR Vignana Jyothi and Commerce, Malla
of Aeronautical Institute of Management Bharthi Institute of Institute of Engineering Reddy University,
Engineering College, Sciences, Narsampet, Technology, Ghatkesar, and Technology, Maisammaguda,
Telangana, India - Warangal Dist. Hyderabad, Telangana Bachupally, Hyderabad, Medchal District,
500043. Telangana State, India. State, India. Telangana, India. Telangana, India.

Abstract— The recent rapid advancement of AI and ML

has led to their widespread usage in many sectors of the
financial system and their significant influence on the
financial sector. The advent of a number of cutting-
edge financial services like sophisticated consultation,
intuitive lending, supervision and warning systems, and
intelligent customer assistance when appropriate has
been made possible by artificial intelligence technology,
which has significantly transformed the whole financial
industry. This paper seeks to provide a concise
overview of the development, implementation, and
effects of AI & ML in the financial system. In the
meanwhile, it has become clear that artificial
intelligence has caused a number of issues and concerns
throughout its use. Finally, based on the issues
highlighted by financial risk mitigation raised by
artificial intelligence, some recommendations and
techniques are offered for the responsible use of AI in
financial risk management.
Keywords-- Financial System, AI & ML, Micro
Economics, Macro Economics
I. INTRODUCTION
The exponential growth of the Internet and information
systems, along with the backdrop of Internet-Finance, has led
to a way of financial data wrangling that goes beyond the
standard statistical approach and incorporates cutting-edge
information processing technologies like machine learning.
For instance, the support vector regression algorithm and the
time - series data model from machine learning are utilized to
build a prediction model utilizing the performance measure
problem. The accuracy of prognosis and financial information
analysis may improve as a result. [1]
The public has a constant need to understand the logic behind
a transaction in the stock market so that it may be analyzed
and predicted [2]. Investment experts from all over the world
are also attempting to apply various methods of investment
research and data mining in the volume of stock data in an
attempt to determine potential operating principles and
securities trading rules underlying the stock market as well as
to predict the trend of the financial sector with the goal of
maximizing profit. The financial industry is touched by a
number of market and non-market factors that interact with
one another, making it difficult to construct a precise model
that represent the concept of internal interaction. [3] As a
result, stock market prediction is increasingly using machine
learning as a "black box" model.
As computer processing power grows, more sophisticated
AI algorithms can satisfy the desire for more strength in the
financial sector. More precisely, AI is commonly employed in
loan and insurance underwriting, fraud detection, algorithm
trading, and investment management. However, AI has a huge
impact on organizations that oversee the financial industry and
will help regulators spot improper compliance. This assistance
will build on previous knowledge based on transaction
supervision using algorithms and data analysis, while
regulators will need to acquire new skills and knowledge.
The main theme of this paper is to providing insights of the
financial industry's with the use of AI & ML, their effects on
macro- and microeconomics, and recommendations for
improving financial regulation through the use of these
technologies.
1.1 Artificial Intelligence's Advancement in the
Financial Sector
Due to the technology's quick progress, AI is becoming
increasingly used in the financial sector. Factors promoting the
advancement of AI & ML in the financial sector as well as
encouraging financial institutions to use these technologies to
manage risk, cut costs, improve service quality, and boost
profits. Early in the 1960s, Bayesian Metrics, one of the
ML algorithms, gained notoriety. Since then, it has been
widely applied in the financial industry [4]. The popularity of
Bayesian Theory in the financial industry is also due to its
application in the auditing industry. In the subject of auditing,
the auditor's decisions typically depend on their expertise and
experience, yet every case is unique. The decision-making
process for auditing must take into account a variety of

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 2023 International Conference on Computer Communication and Informatics (ICCCI), Jan 23-25, 2023,
Coimbatore, India
unknown elements. As a result, the Bayesian model offers the
auditor objective and logical probability, assisting them in
making more accurate assessments and lowering the
likelihood of emotional misjudgment [5]. The initial goal of
the collaboration between AI and the financial sector is to
lighten the workload of financial professionals through
computer processing capacity. Decision support systems, also
known as knowledge-based intelligence systems, were utilized
by the financial sector up to the 1980s to foresee market
movements and provide fully customizable financial
strategies.
As shown in figure 1, a basic expert system consists of six
parts: a knowledge base, a database, an inference engine, a
facility for providing explanations, a mechanism for acquiring
information, and a user interface. A rule-based Expert System
was developed by Hodgkinson and Walker [7] to aid in
decision-making and assist financial intuitions when applying
for a cooperative credit loan. When creating an inference
engine, Shue et al. [8] include a core knowledge base and an
operational knowledge base, which are credited with the
ranking of the listed companies on the Taiwan stock market.
Janulevicius and Goranin [9] created a risk managing
Inference Engine to aid small and medium-sized businesses in
tackling the issue of inadequate access to qualified data
security analysis because of budget constraints.
Fig. 1 Basic elements of an inference engine
The time period of 1990-2000 had been witnessed the
development of a number of automated technologies for the
identification of financial fraud. Artificial intelligence is
attempting to sift through vast amounts of data and identify
anomalies in order to detect financial fraud. [10] AI and the
financial sector will increasingly be integrated, and it will also
be used in additional areas of the financial business, as a result
of rising processing capacity and ongoing algorithm
improvements.
1.2 AI in the Financial System
Four categories can be used to categorise how AI and ML are
used in the financial sector. Next are management-level (back-
end) applications like optimal capital prediction, risk
evaluation, and market assessment, as well as financial market
transactions and portfolio management. Customers-focused
(front-end) applications like underwriting, superannuation, and
customer-oriented service robots are examples of these.
Finally, financial institutions use AI and ML for "Regulation-
Tech" or investment firms use it for "Supportive-Tech."
Furthermore, the use of AI and ML in specific fields like
natural language processing, knowledge discovery, and
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cognitive investment consultants is rather popular. These
contexts include quantitative financial transactions.
2. Data Mining
The use of data mining is widespread and encompasses a wide
range of areas, with the manufacturing and finance sectors
particularly popularizing its use. [11] The emergence of the
big data era has increased interest in data mining, particularly
for market research and targeted advertising. Data warehouse
development has accelerated thanks to advancements in
computer and data mining technology [12]. Investment
specialists from various countries, particularly in the securities
investment of financial markets, use a variety of stock analysis
techniques for data mining from large stock data in order to
discover likely operating rules and stock trading rules
underlying the stock market and to realise expecting changes
in the stock market in the future in order to realise the goal of
maximum returns. [13-14]. Common data mining techniques
include cluster analysis learning, cluster analysis,
classification analysis, sequence analysis, deviation detection,
prediction analysis, pattern similarity mining, and regression
analysis. [15-18]
Financial applications are increasingly using data mining.
Data mining was initially used in sales, particularly when it
comes to succeeding in e-commerce. To discover the client's
purchasing behavior pattern, data engineers deep mine and
analyze customer browsing, search, order, and other behavior
to achieve considerable performance on advertisements and
product recommendations. Looking at a bank or insurance
customer's creditworthiness, assets, and loan configuration can
help with risk analysis and fraud detection by revealing fraud
behaviour such bad debt and fraud insurance. The quality
assurance engineer can find the flaws and take corrective
action in the manufacturing industry by detecting the
abnormality and mining the data to study the cause of product
failure or reveal the unqualified product, according to a
complete analysis of the data. Furthermore, the most of banks
and financial organisations provide very structured and highly
accurate financial data, which is useful for data mining and
data visualisation as well as for techniques like pattern
analysis that are used to discover embezzlement and other
financial fraud.
3. AI's IMPACT ON MICROECONOMICS
AI's quick progress has given several sectors new influences
and life. The Internet business, which serves as a practice area
for conventional AI, also gave traditional industries like
manufacturing and service provision a fresh impact and sense
of vitality.
1) "Programmable job" can be automated by AI. Once the
expenses of automating is much cheaper than the price of
labour, industry won't be able to replace this segment of the
workforce with AI. As a result, a sizable portion of
"programmable" experts will lose their jobs. It is also difficult
for most unemployed "programmable" professionals to retrain
for a new job because of their low educational qualifications
and competence. On the other hand, despite the fact that AI
will largely replace those who do "programmable job,"
employment is given new life by AI. Practitioners of "non-
programmable work" will become more in demand. In the
long run, there will be a significant increase in the number of
practitioners with advanced degrees and skills.
2) Artificial intelligence encourages the rearrangement of
internal income distribution among workforce since it alters
 2023 International Conference on Computer Communication and Informatics (ICCCI), Jan 23-25, 2023,
Coimbatore, India
the structure of the workforce market. The incomes of workers
with different skill levels will differ more significantly. A
component's shift in income distribution is also reflected in
(industry). AI has less of an impact on the industry with fewer
"programmable" work than other industries, and it also has
less of an impact on how money is distributed.
3) Upgrading and changing in accordance with the market's
industry structure. Every technology development brings in a
new industrial update and supplement. Modern technology
and internet-based businesses have supplanted the financial
and manufacturing sectors. The introduction of artificial
intelligence will enhance the hegemony of technology and
Internet firms, so traditional industries must adapt and accept
new technology to stay afloat in the tide of progress. [19]
4) The effect of AI on businesses' capacity for innovation
Businesses require a strong ability to innovate quickly in order
to sustain their core competitiveness as the labor force moves
toward a high-tech and knowledgeable workforce. Enterprise
managers need to be well-versed in cutting-edge technology
and courageous enough to apply new technologies to products
that are innovative. [20]
5) The effect of AI on human resources: As businesses need
innovation to preserve their core competency, tremendous
talent facilities will be especially in demand, and experts in
artificial intelligence will become a valuable asset for
businesses. Additionally, businesses will draw talent by
creating more favorable conditions[21].
4. AI's EFFECTS ON MACROECONOMICS
1) How AI affects economic expansion: The primary use of
artificial intelligence (AI) is the computerized processing of
"programmable" activities, which lowers labor costs and
boosts operating efficiency, both of which boost profitability.
The non-automated sector will see greater expenses as a result,
which will reduce the economy's capital return share.
2) How AI affects business structure: The immediate effects of
technology are the first channel, and the change in enterprise
structure brought on by technology is the second channel. The
trend of major platform corporations acquiring downstream
businesses through mergers and acquisitions will grow more
pronounced with the advancement of AI. Large-scale platform
enterprises are competing for the metadata of the entire
industrial chain rather than for aggressive marketing earnings
and market shares in order to further the development of AI.
3) The effect of AI on trade: Since AI modifies the relative
returns between various elements and has a substantial impact
on factor returns, this has an impact on how dynamically
advantageous countries are. Because high-tech, high-
knowledge talent is essential to the development of AI, talent
will become a significant trade object.
4) The effect of AI on GDP: AI can be a significant factor in
the e-commerce recommendation system, which has the
potential to alter consumer behavior and encourage
consumption. It can fulfil the need to increase domestic
demand and turn into a new mode of transportation that
promotes consumption. The government should create
targeted public measures to ensure that general welfare
spending is not jeopardised and to lessen the pressure caused
by income disparity so that people may more fully enjoy the
boost in new features and functionality on by AI and the
sustainable growth brought on by social stability.
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5) The impact of AI on public policy: For instance, the first
industrial revolution left many low-skilled workers
unemployed in the UK, which led to an unequal distribution of
income. The British government addressed the issue of
economic disparity by giving unemployed people access to
free public education and enhancing the legal standing of
unions.
6) The impact of AI on macroeconomic methodologies: The
limitations of the standard financial model are brought on by
the traditional economic model's emphasis on random studies
and low-dimensional data. After incorporating AI, it is
possible to verify new economic models using large-sample,
high-dimensional data. The advancement of economics will be
tremendously aided by AI. [22]
5. Results and discussion
AI is an inevitable byproduct of the emergence of new
technologies, but there are equal challenges in using it. It's a
new field full of prospects and obstacles. As a result, the
financial system needs to fully understand artificial
intelligence and develop more sophisticated application
systems. Creating a fully functioning AI requires establishing
principles aimed at guiding the entire process of creating,
designing, using, managing, and controlling artificial
intelligence. The targeted promotion of AI applications in the
field of financial risk management is also an important first
step.
To cinch the effectiveness of information gathering and the
interests of those who do not harm the source of information,
the use of AI for information gathering in the field of financial
risk management must comply with a number of criteria.
Information gathering by artificial intelligence is standardized
in terms of type, performance, and behavior. In addition, we
will focus on research and development of user information
authentication technology and strengthen the use of AI in the
field of financial risk management.
The motto of every advancement in science and technology
must torch a path to the betterment of living kind. So all the
growth prospects should enact for the growth of financial
prospects whenever the technologies are intended for the
financial markets.
Abbreviations: AI - Artificial Intelligence; ML - Machine
Learning
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