Banks racing to adopt artificial intelligence could become dangerously dependent on a small group of technology companies, exposing the financial sector to operational disruptions, higher costs and wider systemic risks, Moody’s has warned.
The credit-rating agency said financial institutions are increasingly integrating AI into their daily operations in an effort to reduce costs, improve efficiency and generate new revenue. However, the growing reliance on a limited number of technology providers could create a new vulnerability for banks and insurers.
A major concern is “vendor dependence”. As financial institutions rely on the same technology companies for AI models, cloud infrastructure and other essential services, a disruption at one major provider could affect a large number of institutions simultaneously.
Moody’s warned that banks could also face the possibility of technology companies increasing prices once financial institutions become deeply embedded in their systems. Such dependence could reduce banks’ bargaining power and make it more difficult to switch providers.
The benefits of AI are nevertheless expected to be significant. Banks and insurers are using the technology for a wide range of activities, including customer services, claims processing, fraud detection, credit assessments and other administrative tasks. The technology could eventually deliver substantial efficiency gains across the financial sector.
However, Moody’s said those gains will require significant investment. With many financial institutions pursuing similar AI strategies at the same time, competition could also reduce some of the benefits companies hope to achieve.
The agency highlighted other risks associated with the rapid adoption of AI, including data privacy, cybersecurity and fraud. Financial institutions must ensure that sensitive customer information is protected as AI becomes more deeply integrated into their operations.
AI could also change the way customers manage their money. Faster digital services may make it easier for depositors to move funds between banks in search of better interest rates. That could increase the risk of rapid deposit outflows during periods of financial stress.
Despite the concerns, Moody’s noted that banks have several ways to reduce their exposure to technology providers. Some institutions are exploring open-source AI models, developing partnerships and using their negotiating power to secure more favourable technology contracts.
The UK financial sector is already a major adopter of AI, with more than three-quarters of City companies reported to be using the technology. Banks and insurers are among the most active users.
Major financial institutions are also committing billions of pounds to AI-led transformation. Lloyds Banking Group, for example, has outlined a £13 billion strategy involving AI investment, efficiency measures and cost reductions.
The technology could also have significant consequences for employment. Moody’s estimates there is a possibility that AI could eventually perform the work of a substantial proportion of mid-level employees, increasing pressure on companies to retrain workers and redesign jobs.
For banks, the challenge will be to capture the benefits of AI without creating a new concentration risk. As financial institutions increasingly depend on a small number of powerful technology companies, maintaining alternative suppliers, protecting critical data and ensuring operational resilience are likely to become increasingly important.
Moody’s warning underscores a central dilemma facing the financial industry: the same technology that promises to make banks faster and more efficient could also make them more vulnerable if too much of the sector comes to depend on too few providers.
