January 6, 2025 AI & Compliance: The Dynamic Duo for Competitive Edge

Financial institutions are leveraging AI for personalization and efficiency while navigating tightening regulations.

By Veronica Torres, Jumio’s Worldwide Privacy and Regulatory Counsel

The banking industry bet big on AI in 2024, using the technology for personalized services, fraud detection and operational efficiencies. However, as professionals in this industry know, these advancements come from increasing regulatory requirements aimed at ensuring AI is used ethically, transparently and safely. While AI regulations may seem like a burden, they can be leveraged to create a strategic edge for financial institutions if approached correctly.

The good news is there are effective ways for financial organizations to select compliant AI solutions and turn regulatory compliance into a competitive advantage — all while maintaining consumer trust and keeping up with the demand for innovative, robust user security.

Navigating the Regulatory Landscape

AI laws are being enacted on local, national and international levels, with examples including the European Union’s AI Act and California’s regulatory proposals, both of which aim to set standards for the responsible development of AI technologies. Compliance with these measures affects everything from data privacy to the transparency of AI decision-making processes.

For example, laws like GDPR and the California Consumer Privacy Act (CCPA) are increasing pressure on banks to ensure customer data is secure, especially in AI-driven services. New rules on algorithmic fairness, such as those in the EU AI Act, push banks to audit their AI systems to prevent bias, particularly in areas like loan approvals and credit scoring.

In addition to regulation pressures, financial institutions must also maintain operational resilience, regularly assessing risks tied to AI, such as system failures and potential cyberattacks.

To stay ahead, financial institutions must proactively track these developments and adjust their strategies to ensure compliance. Here are a few ways financial leaders can approach this:

1. Assign dedicated teams or collaborate with legal experts who specialize in AI and privacy regulations to ensure your institution is up-to-date on the latest developments, including data privacy, bias prevention and operational risk measures.
2. Given that regulations vary by region, financial leaders must understand both international and local requirements. For example, a bank operating in multiple states or countries needs to account for different regulatory nuances. This may seem like a no-brainer, but I’ve seen my fair share of slip-ups in this area from organizations operating under the assumption that if they’re compliant with one law they’re compliant with all.
3. Building relationships with regulatory bodies can provide insights into upcoming regulations. This proactive approach allows your institution to ensure its AI systems — whether used for customer service or fraud detection — remain compliant with transparency and fairness guidelines, rather than playing catch-up once regulations are enforced.

Finding Compliant AI Solutions

It’s vital to ensure that the AI solutions meet regulatory standards from the outset. Selecting compliant AI providers can save time and costs in the long run, preventing the need for extensive retrofits to meet new regulations.

When evaluating potential AI solutions, consider the following key components to ensure compliance:

1. Internal compliance programs: AI vendors should have well-established compliance initiatives that allow them to quickly adapt to evolving regulatory standards. Ask about their internal audits, data governance policies and how they stay ahead of changing regulations. For example, I’ve initiated a company-wide program that ensures employees gather, analyze and distribute quality data — minimizing risk as our AI capabilities for our customers advance.
2. Transparent data usage: Ensure that the AI systems you implement are built using ethically sourced datasets which are tested to remove bias. This includes training data. Vendors that leverage biased training data to develop their AI solutions run the risk of increased error — impacting their customers’ success.
3. Customization and scalability: Look for AI solutions that are dynamic enough to quickly and seamlessly implement the law into their platform. This flexibility will help institutions remain agile in a fast-changing regulatory environment and reduce operational complexities and increased costs from vendors having to modify their solutions to fit new regulations.

Leveraging Regulation as a Competitive Advantage

I’ve witnessed firsthand the confusion and frustration from enterprises trying to comply with a flurry of evolving regulations. With so many moving parts, companies view AI regulatory adherence as a hurdle, but there are ways to fortify AI strategies amidst the confusion and turn compliance into an opportunity for a competitive advantage in the market.

Building customer trust is essential in an era where data breaches and AI-bred vulnerabilities are growing. Customers want assurance that their financial institutions are using AI ethically and responsibly. By implementing a robust compliance framework, banks and credit unions can reinforce customer trust, positioning themselves as reliable custodians of both financial data and AI technologies.

Unlocking new markets becomes easier with a solid compliance strategy. Strict AI regulations can act as barriers for companies that haven’t prioritized compliance. Incorporating an all-encompassing AI compliance approach will secure operations across multiple jurisdictions and enable institutions to expand into new markets without the fear of penalties for non-compliance.

Contrary to belief, regulations can ignite the development of innovative, AI-driven products and services that are both advanced and ethically sound. For example, creating AI tools that streamline user experiences and offer personalized banking experiences while maintaining high standards of data protection and fairness can differentiate an institution from its competitors. Especially in the financial sector, compliance must be rooted in the first steps of innovation.

The Way Forward

To effectively capitalize on the evolving regulatory environment, financial institutions can regularly assess AI solutions to ensure they meet current and emerging regulatory standards. This could involve working with third-party auditors to identify any gaps.

Additionally, they can invest in building dedicated teams that focus on privacy, data governance and AI compliance. These teams should work closely with technology providers to ensure all AI applications meet the required standards. Successful teams often entail continuous training to ensure that employees, from top executives to technical staff, understand the importance of AI compliance and are aware of the institution’s obligations under various regulations.

As the regulatory landscape around AI tightens, financial institutions have a unique opportunity to turn compliance into a strategic advantage. By staying informed, selecting compliant AI solutions and adopting strategies that use regulation as a tool for innovation, financial institutions can not only meet regulatory requirements but drive customer trust and growth in the market.

About the Author:
Veronica currently serves as Worldwide Privacy and Regulatory Counsel for Jumio. She provides strategic legal counsel regarding business processes, applications, and technologies to ensure compliance with all privacy laws.

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