Explainable AI in Finance: Between EU AI Act Compliance and Innovation Stagnation

Explainable AI in the Financial Sector: Between EU AI Act Compliance and Innovation Stagnation What is Explainable AI and why is it becoming mandatory now? Explainable AI (XAI) refers to AI systems that can make their decisionmaking transparent and understandable. While traditional Machine Learning models often act as "black boxes," XAI allows users to understand why an algorithm made a particular decision. The EU AI Act effectively makes XAI mandatory for highrisk applications in the financial sector. Credit decisions, risk assessments, and fraud detection fall into this category. By August 2, 2026, financial institutions must be able to demonstrate that their AI systems are "sufficiently transparent" – with penalties of up to 35 million euros or 7% of global annual turnover. The most imp