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Supervisor of Banks Yair Avidan spoke at the “Companies” Forum conference held at the College of Management. The following are his remarks:
Good afternoon, and thank you for the invitation and the honor of speaking here.
We live in an era of technological and digital transformation that is based on information. The world of information has brought with it significant developments for the business world in general, and for the financial realm in particular, thanks to technological developments in the areas of data storage and information processing. These developments make it possible to accumulate big data at relatively low cost, and to translation this immense information into an asset with economic value regarding products, performances, activity, risks, consumer preferences, and the links between them. Technological innovation enables the financial system to integrate the information and the insights derived from it in work processes and in day-to-day decision-making, and thereby to obtain an up-to-date and reliable picture of the financial state of the Bank and its customers. This picture makes it possible to adapt business strategy and policy and to provide a better service response to customers by redesigning financial products and existing processes, making them better, less expensive, more accessible, and better adapted to their needs and characteristics.
The use of advanced technology-based capabilities such as API, machine learning, and artificial intelligence, which is the focus of this session, is rapidly accelerating. According to some forecasts, these technologies are expected to change in the coming decades, or even much sooner, from supportive technologies to a dominant factor in decision-making processes in various content areas, including in the world of finance.
The use of information for the purpose of business activity such as marketing, underwriting, control, and monitoring is not new for the banking system or other financial institutions. On the contrary, it has been common practice for a long time. However, systems and models that use artificial intelligence are expected to increase and greatly enhance such activity, and essentially create a broad range of opportunities and possibilities that allow those adopting them to create a competitive advantage. These opportunities include faster and more informed decision-making processes; identifying patterns, links, and anomalies that enable proactive approaches to customers; and the automation of operational and decision-making processes that until now have required human intervention. These and many other possibilities must be reflected in improved service and a better service experience for the customer, a faster response capability, the adaptation and improvement of financial products, stronger risk management capabilities, a sronger business model, a more efficient decision-making processes, and increased operational efficiency. These are all expected to enhance and accelerate the decomposition of goods and services, bring in new participants, and increase competition, all with the aim of optimizing the state of the customer and of the economy.
The advantages of using information and advanced models are clear and indisputable. However, such activity is not without difficulties and risks. As such, technology must be assimilated and used cautiously and responsibly. Both the professional literature and experience already gained attest to the risks involved in the use of information and advanced models. One of the most significant risks has to do with ethical issues of discrimination, and various tendencies that may be created in the models. These may come to be reflected in prohibited discrimination of customers. The activity of AI-based models depends greatly on the quality of the information used to build them, as well as on the quality and diversity of those building the models. When historical information and/or the modeling factors include tendencies such as certain gender orientations (and almost by definition they include such tendencies, but the question is how much), it is reasonable to assume that the decision-making processes and recommendations of the model will also be affected by them.
The broad use of AI may lead to a change in the division of accountability. If in the traditional world the banks could be held accountable, in a world in which many decisions are made by machine, who should be held accountable in the event of an error?
Alongside this, there are other risks, such as defective planning of business decision-making mechanisms, creation of a “black box” and the loss of transparency, harming privacy protection, and other issues.
Over the weekend, I asked ChatGPT, which has recently taken us by storm, what risks it sees in the use of AI (it may have a conflict of interests on this question…). Of course, it presented the risks that I have just outlined, but it also added another interesting risks. The broad use of AI may create too much dependence, which would lead to a deep impact on the work of humans that may contain both threats and opportunities, certainly in the eyes of those with influence.
These risks are not dwarfed by the expected advantages and value, and those who choose to use such tools must deal with them thoroughly and intensively.
As regulators, we also have a role to play in this developing area. As the one responsible for regulation in the banking system, we are obligated to enable the increased use of information in order to promote and adopt new and advanced technologies, models, and methods. The aim of this is to increase the consumer’s well-being and improve his situation. In addition, we have the heavy responsibility of supervising and making sure that this activity is conducted fairly, responsibly, and in an informed manner, while managing the inherent risks.
The availability and use of information are not solely the realm of financial firms. On the contrary, the information that is gathered belongs first and foremost to the customers themselves. The ability to use these information assets helps reduce the asymmetry in ownership of the information, and thereby strengthens the customer’s position, transferring the power to him. The open banking project that we initiated in 2016, and the legislation that was attached to it about a year ago, now enable other entities to use the customer’s information with his consent, thereby offering the customer value through better and less expensive services. A few months ago, another significant step in open banking was launched, as information on credit activity and deposits is now accessible and available. This is, of course, in aition to information on current account and credit card transactions, which has been available for a longer period.
This must be said directly: This is a very large system, with an immense amount of data, complex business processes, and many participants and others who influence it. After each stage in which new information is integrated, the banking information sources must add more information to open banking and prepare for the next stage, while also stabilizing the system and correcting problems that come up. The handling of breakdowns can certainly be complex. Even though we all want to already be at the point where everything works perfectly and the information flows smoothly between the various entities, we must be patient. We must be patient because adapting to the legislative processes and timetables led to relatively rapid development. As such, there may be initial difficulties. Readily available data and proper handling times for breakdowns and problems on the part of all participants in this important ecosystem are immensely important.
The banking system is a very significant information source, and this reform is the first step in realizing thee vision and strategy of establishing and creating an “open financial world” – a world in which not only banks, but all financial institutions are information sources that allow information service providers broad opportunities to offer value that is tailored to the customer, which was not possible until recently. Then, we must work together toward a world of “open economy”—a digital ecosystem in which information is stored arranged, and shared by a wide variety of entities with the aim of creating significant value.
Just recently, I saw that a legislative memorandum was published on health information mobility, which seeks to lay the regulatory groundwork necessary to make health information on patients who are interested accessible and shareable. I hope that this is the first instance, and that many will follow.
Alongside all the challenges, the usefulness and benefit to customers will be greatly influenced by the business model and the value offered by participants both within and outside the banking system. Most importantly, the trust that consumers place in the development of the ecosystem with all its many layers is a decisive part of its development.
In this context, it is important to also mention the customers themselves. There is no doubt that as a society, we face a significant challenge with regard to financial literacy, digital literacy, and information literacy, alongside making banking services accessibly in every channel and in every contact with the customers, by seeing the customer at the center. A broad and comprehensive public response is necessary that will enable our parents, ourselves, and our children to be more informed and more involved consumers. We all have the task of developing and strengthening the public’s sense of responsibility for its financial state and of encouraging it to show initiative and involvement. The Banking Supervision Department has advanced many reforms in recent years, the main aim of which has been to increase customers’ strength and improve their bargaining power through information and the new tools that these reforms have created. In order to generate significant value from these reforms, customers must use their increased competitive power through involvement, initiative, and informed consumerism.
Thank you.