Balancing Innovation and Compliance: How To Innovate Responsibly with AI

As technologies like AI constantly emerge and evolve, institutions must find a balance between pushing boundaries and staying within regulatory frameworks.

This balance was the focus of one of our sessions at our recent Posh Conversations 2024 event, where we gained valuable insights into how credit unions and banks can successfully walk this tightrope from a panel of industry experts, including:

• Rodney Hood, Former Chairman, National Credit Union Administration (NCUA)
• Barbara Yastine, Former Chair, CEO, & President of Ally Bank; Alkami Technology Board Member
• Gene Ludwig, Comptroller of the Currency from 1993-1998; Partner, Canapi Ventures; CEO & Founder, Ludwig Advisors
• Karan Kashyap, CEO & Co-founder, Posh

Let’s dig into some of the actionable strategies discussed during the panel that financial institutions can use to maintain compliance while driving innovation forward:

1. Find the Synergy Between Innovation and Compliance

It may seem like innovation and compliance are at odds at times, but in reality, they can complement each other with responsible adoption of AI. The key to striking this balance is recognizing that compliance does not inhibit innovation — it enhances it. During the panel, Barbara Yastine highlighted this point by saying, "Regulators of financial institutions want banks and credit unions to innovate."

In other words, regulators are not opposed to innovation — they often encourage it as long as financial institutions do it responsibly. By integrating AI solutions, banks and credit unions can significantly enhance their compliance efforts. Gene Ludwig pointed out that, "Compliance is more likely to be followed when technology is doing it the same way every time." AI can reduce human error and streamline complex processes, making it easier for institutions to adhere to regulatory standards.

Instead of viewing compliance as a roadblock, institutions should see it as a framework within which they can innovate effectively. As Ludwig aptly put it, "Regulation can actually be your friend, not your enemy."

2. Collaborate With Regulators

One of the main takeaways from the panel was the importance of collaboration with regulators, particularly when adopting AI. Financial institutions that wait too long to engage with regulators may encounter challenges down the road. By working with them early in the process, institutions can ensure that their AI solutions align with regulatory requirements from the outset.

Ludwig stressed the need for transparency, noting, "Being able to walk the regulator through the process in a thoughtful way is important." Transparency allows regulators to understand how institutions are leveraging AI, reducing the risk of future complications.

Additionally, Rodney Hood praised regulatory sandboxes, which provide a controlled environment for testing new technologies. "Regulatory sandboxes allow institutions to innovate while maintaining compliance," Hood explained. These sandboxes enable institutions to experiment with AI tools while minimizing risk, ensuring they address both innovation and compliance simultaneously.

3. Start Small, Validate and Scale

For financial institutions looking to adopt AI, starting small is a critical strategy. By rolling out AI in small, controlled pilot programs, institutions can test their innovations without taking on unnecessary risks. Small-scale pilots allow for the collection of valuable data, enabling institutions to identify potential compliance issues and fine-tune their AI models before broader implementation.

Posh’s own Karan Kashyap recommended this approach during the panel, stating, "We always recommend starting small, testing the waters and validating outcomes before scaling." This gradual process ensures that AI solutions meet both innovation goals and regulatory standards before scaling them up.

As Ludwig added, "Once you validate, you can scale with confidence." By using an incremental approach to test both the innovation and compliance aspects of AI, institutions can avoid bigger issues later on and ensure a smoother transition to full-scale implementation.

4. Focus on Customer Experience as Part of Compliance

AI has the potential to greatly enhance the customer experience, and this should be a core part of any compliance strategy. By streamlining processes like information retrieval, AI can simplify regulatory interactions for customers, improving service and ensuring greater transparency.

"Simplifying complexity for customers is a win for both innovation and compliance," said Yastine. When financial institutions use AI to make regulatory processes more accessible, they not only adhere to compliance requirements but also improve customer satisfaction.

Additionally, Hood noted that AI can play a pivotal role in making regulatory compliance easier to understand for customers. "AI can enhance customer interactions by making regulatory compliance easier to understand," he explained. In an increasingly digital banking landscape, simplifying complex regulations will be key to driving customer engagement and trust.

5. Choose Best-of-Breed Solutions Over Vendor Consolidation

When it comes to choosing AI vendors, it can be tempting for institutions to consolidate their services under one provider. However, this can compromise the effectiveness of specialized services, particularly in critical areas like compliance. Yastine warned, "Vendor consolidation can lead to less effective, less fit-for-purpose solutions."

Instead, institutions should opt for best-of-breed solutions that specialize in navigating specific regulatory frameworks. Hood echoed this sentiment, saying, "Best-of-breed vendors often have deeper expertise in navigating specific regulatory frameworks." Specialized vendors offer the depth of knowledge needed to ensure that AI solutions meet both innovation and compliance requirements.

Building a Balanced, Compliant AI Strategy

Balancing innovation and compliance may seem daunting, but with the right strategies, it’s not only achievable — it’s essential. By collaborating with regulators, starting small with pilot programs and choosing specialized vendors, financial institutions can drive innovation while ensuring compliance. 

As the panelists in the Posh Conversations 2024 webinar highlighted, responsible AI adoption can help institutions enhance both their innovation and regulatory compliance efforts, ensuring a stronger, more sustainable future.

Learn more about the intersection of AI, innovation and compliance in the full webinar.