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Fintech interview: “Artificial intelligence must not be a black box”

As ZHAW Professor for Finance and Risk Modelling, Jörg Osterrieder works in the areas of data analysis, blockchain and artificial intelligence. His expertise is sought internationally. In this interview, he provides insights into current developments in the field of financial technology.

Prof. Jörg Osterrieder conducts research at the ZHAW in the focus areas of finance, risk management and econometrics.

Fintech start-ups were shooting up from the ground like mushrooms prior to the outbreak of the coronavirus pandemic. What is the situation now?

Jörg Osterrieder: Fintech start-ups have also not been able to escape the impact of the economic destabilisation owing to Covid-19. The volume of financing has been lower than it has been for years. During the Covid-19 pandemic, however, technology has also created new opportunities for digital financial services to accelerate and improve financial inclusion. In no small part due to the social distancing and containment measures, the use of digital financial services and e-commerce has increased enormously. At present, the economy is once more switching its mode from “respond” to “recover” – this transition could create new opportunities for some Fintechs. A key question is how these can make use of their unique financial assets and skills to seize new opportunities in future. The immediate concern is of course the handling of the current uncertainty. While this will persist, it will certainly also be overcome.

Is the Fintech start-up trend set to continue over the medium to long term then?

Digitisation is currently making itself felt in all aspects of life. In terms of economic and business activities, the financial industry is no exception. Investment in the Fintech sector is increasing worldwide. If we look at the foundation of new companies, we can see that in Switzerland alone, more than 360 Fintech start-ups were registered at the beginning of 2020. The volume of data and digital financial assets is really exploding. At the same time, there are significant concerns with respect to privacy. Sustainability aspects are also becoming ever more significant. And finally, technological advances are opening up new opportunities.

You mean artificial intelligence?

Artificial intelligence – or AI for short – is a prominent example of these new technologies and appears most frequently in the media. Up to 2021, global investment in AI of up to USD 58 billion is expected. There are two ways in which financial companies can generate added value from analytics and machine learning: by reducing costs and increasing sales. For example, banks can make use of machine learning in their credit process. Depending on the client, the loan amount and the complexity of the process at hand, the granting of credit can be automated, which in turn directly affects operating costs. Furthermore, machine learning can identify patterns in data that are not recognised by people. This can contribute to better credit decisions, even if the process cannot be fully automated.

“Those who followed our research results would not have been surprised by the considerable drop in the price of cryptocurrencies in the course of 2018”.

Jörg Osterrieder

Is this also a research subject for the ZHAW?

Yes, we are working on this at the ZHAW on an interdisciplinarity basis across the different Schools. As part of an EU research project, we have used network models to make more accurate predictions about the creditworthiness of clients. Together with 22 European partner universities and 27 national supervisory authorities, we want to use this project to investigate new ways of better assessing risks. A further main research area is explainable AI. Within the framework of an Innosuisse project, we are focussing on transparent, non-discriminatory and understandable loan decisions. Thanks to machine learning, creditors can reduce the level of credit risk by assessing a wealth of client data. What these models are lacking, however, is the transparency required by the regulatory authorities. We therefore suggest a visual analysis tool in order to understand the inner workings of such models for loan assessments. AI must not be a black box.

What impact does blockchain technology have on the financial sector?

Blockchain technology can be used in several areas. At present, it is primarily used as a decentralised transaction database for cryptocurrencies such as Bitcoin. Blockchain-based, intelligent contracts can be executed or enforced without human interaction. Banks are interested in this technology because it has the potential to speed up back-office processing systems. Despite the hype surrounding blockchain, it is still very rare to encounter its use outside the realm of cryptocurrencies. Our applied research and development in this area is therefore all the more in demand. As part of our Innosuisse “Digital real estate dossier” project, we are working together with the ZHAW School of Management and Law to develop a client-oriented real-estate platform without a central database – with intelligent contracts and blockchain. And in a research project, we have also analysed with Swisscom how contracts in the blockchain can be signed so that they are legally valid.

Why are cryptocurrencies so popular?

They are primarily used outside existing bank and government institutions and exchanged via the Internet. These special circumstances, and especially their marked price increases in the past, have drawn attention to cryptocurrencies. Due to their largely unregulated use, they are also exposed to manipulation and illegal activities. In a series of research papers on the risks associated with cryptocurrencies, we already showed back in 2016 that trading with them entails risks. Those who followed our research results would not have been surprised by the considerable drop in the price of cryptocurrencies in the course of 2018.

You also mentioned sustainability aspects earlier on. Is it possible to counter climate change with Fintech projects?

The topic is also becoming increasingly important in the financial sector. We are examining the sustainability of major financial investors, together with researchers from the ZHAW School of Management and Law, as part of a Swiss National Science Foundation project. We are using various key figures to demonstrate how sustainable and economically viable a company is. By combining this with statistical methods, we can use it as a basis to derive recommendations for action for investors and governments. We hope that in doing so we will be able to contribute to climate protection.

European Conference on Artificial Intelligence in Industry and Finance

At this annual conference, the ZHAW’s School of Engineering and the School of Management and Law, as hosts, bring together European scientists and researchers, as well as students and the business world, to discuss the use of artificial intelligence in industry. The conference took place for the fifth time in 2020 – though for the first time it had to be held exclusively as a webinar. It is therefore all the more remarkable that over 340 participants took part in the four thematic sessions. The topics discussed included neural networks for equity trading, ways to achieve new, comprehensive, human artificial intelligence and ethical issues. The sixth European Conference on Artificial Intelligence in Finance and Industry will take place on 9 September, 2021.