The banking industry is constantly evolving as innovative new ways of spending and saving money are discovered. This was catalysed during the pandemic, leaving many to turn to fintechs and neobanks, believing them to be the future of the industry. Traditional banks have adjusted to the changes but have always been slow in their adaptation. Understanding and implementing AI and machine learning (ML) are key in order, for not only incumbent banks to catch up, but for modern solutions to pull further away.
Ricardo Costa is LOQR’s Founder and CEO. Costa is an experienced cyber-security international project leader within the Financial, Payment Systems, Digital Certification and Electronic Identity fields. Costa is also a Researcher and holds a PhD in Computer Science (Artificial Intelligence).
He spoke to The Fintech Times to explain how AI works and the benefits it could have in terms of customer loyalty, and security:
Over the years, banks have adapted their operation with the newest technology innovations to improve their customers’ experience. ATMs, card-based payments, and online banking were a few adaptations that helped traditional banks re-adjust and keep up with the latest tech trends. Now, we’re living in the AI-powered era, and it is crucial to understand how to use Artificial Intelligence (AI) technologies to empower the transformation of the banking sector.
What is Artificial Intelligence and how does it work?
AI allows machines to learn and adjust to new inputs and perform tasks like humans. It works by gathering vast amounts of data with fast processing and using an algorithm that allows the software to learn from patterns in the data. AI-powered systems are helping to customise content and services to an individual-preference level – which makes a significant impact on the customer experience – and increase security standards.
A study shows that more than 50% of bank customers believe personalised services are critical factors for them to trust their banks; however, only 35% of traditional banks offer a personalised service to their customers. Those numbers can be explained due to the lack of a clear strategy for AI and short investments in operational models that can enable an AI-powered operation.
Why are AI-powered systems crucial for the banking industry?
McKinsey‘s research estimates that AI technologies could potentially deliver up to $1trillion of additional value annually for global banking. AI systems can also help boost revenues by personalising services and lowering costs due to the increased efficiency of internal processes. According to Forbes, one out of three financial services professionals believes AI will improve their company’s annual income by at least 20%.
Regulatory and risk management
Banks tend to be at constant risk due to their business and operation, so regulations and risk management are essential to the industry and occupy a relevant part of their budget. According to the Global Regulatory Outlook 2020, 33% of banks reported to have allocated more than 5% of their annual budget on compliance last year.
AI can help decrease those costs through processes that automatically detect regulatory changes and ensure that the bank remains compliant. Banks can use Artificial Intelligence to create automated Know Your Customer (KYC) processes and verify their customers’ identity once, within seconds, reducing time and potential inaccuracies.
Increased data security
Data security is one of the most critical issues for the banking sector due to the nature of their business. Artificial Intelligence, combined with Machine Learning techniques, act by increasing accuracy and security while decreasing fraud and detecting possible fraud actions before they happen.
A study showed that, on average, one in 123 mortgage applications contained fraudulent information. The annual value of online banking fraud losses in the UK in 2020 was approximately £159.7million.
Banks can use AI and ML to confirm their customers’ identities and increase accuracy in the identification process, especially for remote operations. With the increase of online operations, the banking sector must rely on technology to assure the accuracy of data and reduce the risk of fraud.
Personalised customer experience
Leading banks and neobanks are building their business around AI platforms because they understand the gains and significant impact on their organisations: AI systems add intelligence to existing products and drive innovation further and faster than any other technology before.
The more personalised the service through AI capabilities, the more significant is the retention of customers. A report shows that a large bank that recently used data-driven AI to offer personalised reward programs by predicting their customers’ preferences had an increase of 40% in their reward program usage. The same report shows that other banks who have also applied AI models to predict customers’ needs have increased almost 30% in sales.
What to expect next?
The growing adoption of AI techniques is changing the banking industry forever, demanding an urgent movement from traditional banks, especially to adapt and embrace the new technologies. There’s still a considerable challenge to readjust the operation to a new format that prioritises AI-powered systems but with a promising outcome for the banking sector.
This digital transformation movement has also led businesses and banks to move from a process orientation to a platform orientation model to build better environments.
Those platforms will help them serve customers better and more customised and comply with regulatory changes while delivering frictionless experiences. Besides, the platform will become a key enabler in the banking sector’s future with the upcoming changes such as embedded banking, invisible payments, open data, and more.