AI is revolutionizing the banking and financial sector. Read this article to get to know why banks need to introduce AI-based solutions in their workflows—the faster the better.
Banking is one of those industries that can earn or save billions of dollars thanks to AI. Institutions that introduce AI-powered solutions earlier than their rivals gain a significant competitive edge. In this article, we’ll analyze the primary benefits of AI in banking and a few drawbacks that the industry should be able to overcome soon.
Compliance and Fraud Detection
If a banking institution fails to comply with the industry regulations, it might face the following types of sanctions:
- Monetary fines
- Criminal charges
- Operational shutdowns
AI helps businesses to minimize risks across every line of business. It analyzes huge amounts of data to identify suspicious transactions. For instance, money launderers avoid transacting large sums of money to avoid attracting attention to themselves. For a human, it would be difficult to detect this type of fraudulent operation. AI can easily comb through billions of transactions and flag any that meet specific criteria.
Traditionally, banks have received the largest part of their income from interest. Yet now, non-interest revenue of many institutions is growing significantly. It consists of three main parts:
- Investment income
When considering investment income opportunities, banks need to compare multiple options and pick those that provide the best return at an acceptable risk. Before AI came to play, bank employees would gather behind closed doors to carry out complex calculations and conduct investment valuation. This process would involve the following types of professionals:
- Product specialists
- Portfolio managers
- Credit analysts
- Investment asset management experts
They would decide how to diversify assets among industry sectors and currencies, how to allocate funds across various asset classes, and when to enter a transaction or liquidate an investment position.
AI can facilitate and accelerate the process in the following way:
- Learn each analyst’s preferences and biases regarding investments, risk tolerance, and time horizon
- Process large amounts of data from multiple sources in real-time
- Determine the best investment options
Unlike humans, AI makes unbiased decisions based 100% on fundamental and technical evidence.
For most financial institutions, the biggest expense category is benefits and compensations—that is, labor costs. AI can’t entirely replace human specialists—but it can enhance their productivity. For instance, people can make better decisions faster thanks to decision management systems.
Plus, AI can make selected types of human professionals redundant, such as front-line staff. This is how it happens:
- When a new client wants to onboard, they don’t need to wait until a human employee attends to them.
- When the client is ready, AI asks them to fill out an online application with standard questions.
- Once the application is filled in, AI instantly determines the type of account available to the client.
The above-mentioned regulatory risks—as well as reputational ones—often happen because of human error. This might lead to dire financial consequences. AI minimizes these risks thanks to correctly inputting all the information and accurately distributing it across all channels.
Credit Valuation and Know Your Customer (KYC)
Before opening an account for a new client, a bank needs to conduct due diligence. The set of documents required might vary depending on the customer’s profile. Credit valuation takes a lot of time and effort. Banks need to be sure that they have exhaustive and up-to-date information about each client to estimate their creditworthiness.
AI can get the necessary information from the following external sources:
- Central banks
- National statistical agencies
- Public registries
- Company registry agents
- Social networks
Plus, AI can pull facts from internal databases. By performing automated checks, it helps banks to comply with KYC requirements and maintain accurate records at all times and for every client.
The higher the quality of customer service, the less likely clients will be to leave their bank and relocate their savings to another one. Compared to human managers, AI works quicker and never makes mistakes. Banks value AI-based customer service solutions because they can do the following:
- Provide personalized service
- Use conversational interfaces in various messengers that people use every day
- Automate repetitive tasks so humans can focus on high-priority issues
- Learn through machine learning algorithms based on interactions with clients to come up with smarter suggestions
- Increase retention rates among existing clients
When properly set up, AI can not only meet but even exceed consumers’ expectations.
Disadvantages of AI in Banking and Finance
Despite all its benefits, banks might point out at least three shortcomings when using AI:
- Cost. The newer the technology, the higher its price. In most cases, banks need to pay for AI-based software upfront. Plus, they need to pay for its maintenance and upgrades. When an organization opts for an AI-powered solution, it shouldn’t expect to reduce its expenses and maximize its revenue immediately. It should be able to appreciate the results in the medium term.
- Bias. AI is unbiased—but humans need to train it and humans are biased. AI might inherit the prejudices of its human teacher. Consequently, a client might get a higher interest rate without any logical justification or their loan application might be rejected. Human supervisors should monitor AI and be ready to correct and improve it when necessary.
- Consumer attitude. Many people aren’t ready yet to trust AI. Clients of banking institutions appreciate top-notch customer service provided by humans. This is one of the crucial factors that make people come back to the bank. Chatbots become smarter every year and strive to provide more personalized service—but people still need time to get used to them.
As you see, the drawbacks of using AI in banking and finance are not critical. Banks will overcome them with time and the benefits of using AI far outweigh the disadvantages.
Hopefully, this article came in handy and now you better understand the importance of using artificial intelligence in banking. AI helps banks comply with regulatory requirements, detect fraud, and carry out investment valuation. AI also enables financial institutions to enhance their customer service and better cope with loan approvals. Thanks to AI-powered solutions, banks can reduce their expenses and maximize their revenue.