The Federal Reserve Bank of Boston’s 68th Economic Research Conference, held this past weekend, delved into the transformative potential of emerging technologies like machine learning, data analysis, and artificial intelligence (AI) on the financial system. Titled The Future of Finance: Implications of Innovation, the conference explored how these innovations are shaping the future of financial services and their impact on both businesses and customers.
Embracing Technological Innovation in Financial Services
The conference brought together economists, financial experts, and academics to examine the rapidly evolving landscape of financial technology (fintech). Topics ranged from how innovations could drive financial inclusion to the evolving regulatory framework for banks, and the implications for monetary policy. Boston Fed President and CEO, Susan M. Collins, underscored the significance of these changes. She emphasized that the Federal Reserve’s role in overseeing the U.S. financial system makes it essential for researchers to explore the benefits and risks that come with financial innovation.
Collins noted that technological advancements are advancing at a pace that requires policymakers to consider both the opportunities and potential risks they present for traditional and nontraditional financial intermediaries, as well as the broader public’s access to financial services.
Key Papers and Presentations at the Conference
Researchers presented a series of papers, offering deep insights into the evolving role of technology in finance:
- Fintech, Financial Inclusion, and The Future of Finance by Emily Williams (Harvard Business School).
- Regulation Meets Technology: Evolution of Small Business Lending in Underserved Areas since 2007 by Mattia Landoni and J. Christina Wang (Federal Reserve Bank of Boston).
- FedNow and Faster Payments in the U.S. by Charles M. Kahn (University of Illinois).
- Big Tech, Financial Intermediation, and the Macroeconomy by Fiorella De Fiore (Bank for International Settlements and the Centre for Economic Policy Research).
In addition to these papers, two key panel sessions sparked lively discussions. One explored the future of decentralized finance (DeFi) and the role of blockchain and distributed ledger technology (DLT). The other panel session focused on the potential for technology to improve regulatory efficiency and make bank supervision smarter.
Small Businesses and Credit Access: The Role of New Tech Lenders
A particularly important discussion centered on the role of fintech in increasing access to credit for small businesses, especially those in underserved areas. The paper by Wang and Landoni highlighted how fintech companies and merchant cash advance lenders stepped in as key credit providers during the post-2007 financial crisis period, particularly when traditional banks scaled back lending.
The research also revealed the challenges small businesses faced during the pandemic, when both banks and fintech lenders scaled back on lending. However, those small businesses with preexisting relationships with banks were able to access the Paycheck Protection Program (PPP) loans more swiftly than those relying on newer fintech lenders. The key takeaway from this discussion was the need for a better understanding of technological advancements in lending and how government programs might adapt to the growing role of fintech lenders in supporting small businesses.
AI in Credit Risk Assessment: Opportunities and Risks
The conference’s keynote address, AI Innovation for Credit: Frontiers of Benefits & Red Flags, was delivered by Adair Morse, a finance professor at UC Berkeley’s Haas School of Business. Morse discussed how AI is revolutionizing credit risk assessment, improving efficiency in underwriting models, and enabling financial institutions to target customers more effectively. She noted that AI tools can automate tasks, enhance data analysis, and even personalize marketing strategies to maximize profitability for lenders.
However, Morse also highlighted significant concerns about the use of AI in the credit sector. The “red flags” she raised included potential issues such as discrimination, data privacy breaches, and the risk of AI-driven lenders prioritizing profit over the needs of small businesses. Morse pointed out that AI could replace traditional community banks that have long supported small businesses, leaving these businesses vulnerable to profit-driven lending practices that may not align with the unique needs of the communities they serve.
As Morse put it, AI’s role in finance should be approached holistically. “We need to address the red flags to ensure we move safely into the next era of finance,” she stressed, underscoring the need for safeguards to prevent harm to vulnerable sectors of the economy.
Looking Ahead: The Role of Innovation in Financial Regulation
The discussions at the conference also touched on how regulators can use technology to improve the efficiency of supervision and regulation in the financial sector. With technology advancing at such a rapid pace, regulatory bodies must balance innovation with oversight. The panel on smart regulation explored ways that data-driven technologies can help regulatory bodies work more efficiently while ensuring the integrity and stability of the financial system.
In the coming years, regulators will likely have to grapple with the increased use of decentralized finance platforms, which challenge traditional financial intermediaries. As part of the evolving landscape, the question remains whether traditional financial systems and blockchain-based systems can coexist or if new regulations will be needed to manage the impact of digital finance.
Conclusion: Financial Innovation as a Double-Edged Sword
The 68th Economic Research Conference organized by the Federal Reserve Bank of Boston provided valuable insights into the future of finance. As technological innovations in AI, machine learning, and fintech continue to reshape the landscape, there is immense potential to drive greater financial inclusion, efficiency, and profitability. However, these advancements also introduce risks, particularly for small businesses and underserved communities that may become marginalized by profit-driven algorithms.
As policymakers, regulators, and financial institutions work together to navigate these changes, it will be essential to strike a balance between embracing innovation and safeguarding the interests of consumers, particularly those who rely on trusted, long-term relationships with financial intermediaries.
For more details on the conference papers, presentations, and panel sessions, please visit the Federal Reserve Bank of Boston website.
References:
- Federal Reserve Bank of Boston – 68th Economic Research Conference. Boston Fed
- Adair Morse’s Keynote on AI Innovation in Credit. UC Berkeley Haas School of Business
- Research on Financial Innovation and Small Business Lending. Federal Reserve Bank of Boston
