Has the Era of Fairer AI Finally Arrived? Fintech Startups Are Leading the Way

The intersection of artificial intelligence (AI) and financial services is a hot topic. AI’s potential to revolutionize the financial services industry is enormous, reflected in the endless parade of fundraising announcements, but all this AI buzz also raises important questions about the fairness, ethics, and regulation of AI’s use in providing core financial services.

In a recent episode of “The Pnyx,” we interviewed Kareem Saleh, CEO and founder of FairPlay AI, where he delved into these issues, sharing insights on how his company is using AI to create fairer lending practices. Kareem’s unique perspective, informed by his background in law and finance, offers compelling insight into the challenges and opportunities in this rapidly evolving field.

Here are the three most important takeaways from the conversation:

1. Innovative applications of AI could lead to fairer lending

Kareem makes the case for using AI to make lending more equitable. He shares his “lightbulb moment” when he discovered that by applying hostile-rule deviation techniques to a major mortgage originator’s credit model, approval rates increased for black consumers by about 10% without any additional risk. By reducing reliance on conventional credit scores and optimizing the impact of other predictor variables, the mortgage originator was able to extend billions of dollars of additional credit. This breakthrough not only made it easier for 50,000 more black families to secure homes, but also showed that more equitable lending practices can align with financial institutions’ profitability goals. Others have certainly taken notice. Last month, AI startup Stratyfy partnered with cash flow and issuance platform Prism Data “to help lenders make more informed decisions in cases where traditional credit data is insufficient.” It is clear that AI has real potential to democratize credit and expand lenders’ accounting records.

2. We need to address credit score discrepancies

According to Kareem, the discrepancies in decision-making systems are often due to “the limitations of data and math,” not “bad faith people building these models.” To address this, companies need to adjust the weights of different predictor variables to increase fairness without compromising accuracy. For example, while traditional credit scores can dominate credit scoring decisions, they can inadvertently perpetuate historical biases. By rebalancing the importance of these scores and integrating alternative data points, more equitable outcomes can be created for underserved communities, ensuring that deserving individuals are not unfairly denied credit opportunities. As an industry, the solution is to be proactive; we can’t let limited data and math have their way. Investors in particular need to be diligent about AI models, as Accion details here . earlier to add fuel to the fire.

3. Balancing innovation and regulation is key

AI regulation is a double-edged sword, and Kareem says it’s “one of the hardest questions”; overregulation can stifle innovation and perpetuate the dominance of big tech companies. To ensure AI advances successfully, society must adopt smart, adaptive regulation that prevents misuse without hindering competition. Drawing parallels with the strict regulation of the nuclear power industry, Kareem argues for a balanced approach that encourages innovation while implementing safeguards to prevent ethical violations and harmful practices. The CFPB is already taking steps to regulate AI, such as home appraisals earlier this summer. Whether they’re using frameworks from other industries or developing something entirely new, it’s crucial that regulators balance the risks and benefits of AI technology.

Application

AI has significant transformative potential in financial services and beyond, while requiring careful consideration of ethical and regulatory challenges. FairPlay AI’s innovative approach and vision provide an example of how we can ensure AI-driven decisions are fair and equitable, benefiting both individuals and society as a whole. If companies implement AI correctly and ethically, it can lead to the “strong competitive advantage” that Ganesh Rengaswamy, Managing Partner at Quona Capital, shared in our previous 2023 Reflections.

The responsibility of ensuring AI is a beneficial force in society does not rest solely with fintech startups, but with all of us. Where do you see AI making significant improvements in financial services? What risks worry you? Let us know in the comments.