Ratings giant Moody’s has warned that banks rushing to embrace AI could end up dependent on a small handful of Silicon Valley companies, leaving them vulnerable to outages and price hikes.

While AI use is likely to eventually cut costs and increase revenues in major financial sectors, Moody’s said, it will require “substantial investments”, and the number of players in the sector could lead to many of the benefits being lost through increased competition.

There are also short-term risks created by the concentration of AI provision, the report said.

The analysis noted that most financial firms depend on a small number of companies for frontier AI and cloud computing services, which “risks creating a systemic dependency” as outages in one company can quickly spread across customers and sectors. This is likely to come under increasing scrutiny by regulators as adoption grows, it added.

Adoption in the UK is already high. More than three-quarters of firms in the City use AI in some form, according to a Treasury select committee report from January, with insurers and international banks at the forefront.

Increasing AI usage may also lead to vendor dependence, the report said, meaning that “a set of dominant AI model and infrastructure providers could, over time, exert control over the price of AI services”.

This is likely to become more of an issue over time as AI companies such as OpenAI and Anthropic, both of which are currently loss making according to Moody’s, come under increasing pressure from investors to turn a profit.

Despite this, banks will retain control over key assets, including proprietary data, and may use open-source models to offset dependency risks, the report added.

In the longer term, AI may begin taking jobs away from lower-level staff in the industry, Moody’s said, assigning a 20 per cent probability that AI will be able to do the work of a “solid mid-level employee” by 2030.

The report concluded that for customers, AI increases the likelihood of them moving money to higher interest rate accounts at short notice, making customer relationships and trust increasingly important.

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