The rapid adoption of artificial intelligence by banks is creating a new financial-sector vulnerability as institutions become increasingly dependent on a small number of technology companies, Moody’s has warned.
The credit-rating agency said banks and other financial institutions are turning to AI to reduce costs, improve efficiency and automate a growing range of operations. However, the concentration of AI models and cloud infrastructure among a relatively small group of technology providers could create significant operational and systemic risks.
Financial institutions are already using AI for tasks ranging from administrative work and customer services to insurance claims processing, fraud detection and credit assessments. As adoption expands, Moody’s expects the technology to deliver efficiency gains and potentially increase revenues.
But the agency cautioned that these benefits will require substantial investment. With financial institutions competing to deploy similar technologies, some of the economic gains could ultimately be reduced by intense competition.
One of the most significant concerns is what Moody’s describes as “vendor dependence”. If banks become heavily reliant on a handful of AI model and infrastructure providers, those companies could gain greater influence over the cost and availability of essential services.
A major outage affecting one leading AI provider could potentially disrupt numerous financial institutions at the same time. Such concentration could make an isolated technology failure capable of spreading across companies and even sectors.
The growing use of AI also introduces additional concerns over data privacy, cybersecurity and fraud. Banks must ensure that sensitive customer and financial information remains protected while AI systems become more deeply embedded in everyday operations.
Another potential risk is faster movement of customer deposits. AI-powered financial services could make it easier for customers to identify and transfer money into accounts offering better returns, potentially accelerating so-called deposit flight during periods of financial stress.
Moody’s also highlighted the financial pressures facing major AI companies. As providers of generative AI seek to turn enormous investments into sustainable profits, banks could face higher costs if the market becomes concentrated around a few dominant suppliers.
The concerns come as financial institutions across major markets accelerate their AI strategies. In the UK, more than three-quarters of City firms were reported to be using AI, with banks and insurers among the leading adopters.
The challenge for banks will therefore be to balance the potential benefits of AI with the risks created by dependence on external technology providers. Moody’s indicated that regulators are likely to pay increasing attention to operational resilience and concentration within the AI supply chain.
For banks, the AI revolution could ultimately deliver major efficiency gains. But the more deeply financial institutions integrate technology supplied by a small group of companies, the more important it becomes to maintain alternative providers, strong safeguards and contingency plans.
