RESEARCH PAPER ON IMPACT OF ARTIFICIAL

INTELLIGENCE ON BANKING SECTOR

Prisha Jain, student at Amity Law School, Amity University, Noida

Abstract:-

The purpose of this research is to find out the impact of artificial intelligence (AI) on the
banking sector. The use of artificial intelligence in the banking industry has increased
significantly in recent years, and this article aims to explore the benefits and challenges of
its implementation. The research begins with an overview of the history and development
of AI in banking, followed by an analysis of the various areas where AI is used, such as
customer service, fraud detection, risk management and investment analysis. The paper
also discusses ethical and regulatory issues related to the use of artificial intelligence in
banking, including privacy concerns, algorithmic biases, and lack of human oversight.
Overall, this research paper provides an overview of the role of artificial intelligence in
transforming the banking industry and its impact till now.

ITRODUCTION:

As global technology has evolved over the years, we have moved from landlines to mobile
phones, from television to the internet, from branch banking to mobile banking, and today we
are seamlessly and gradually adopting artificial intelligence (AI). John McCarthy introduced the
word artificial intelligence to the world in 1956. It includes robotic process automation and the
actual robotic process. Artificial intelligence is very popular among large companies these days
because these companies process data. A unique feature of AI is that it understands data
patterns, which has increased its demand. AI is much more effective at recognizing patterns in
data than a human, so it is beneficial for businesses to understand their target audience and
provide them with better insight. Companies around the world, including the financial sector,
are looking at artificial intelligence as the next big thing. It has the power to transform banking
and financial transactions in the world. Artificial intelligence is not the only disruptive
technology.

A central goal of AI in banking is to help consumers prioritize their choices. In addition,

artificial intelligence plays an important role in ensuring consumer satisfaction with the bank's
services. In addition, artificial intelligence or machine intelligence helps the bank to understand
the demands of the consumer. The impact of artificial intelligence on the banking sector
Artificial intelligence technology is rapidly gaining ground in the banking sector. Every
business in the banking sector can be automated with the help of artificial intelligence. So, the
role of artificial intelligence in banking is huge.

Digital disruption is redefining industries and changing the way businesses operate. Every
industry evaluates opportunities and adopts ways to create value in a technology-driven world.
Ground breaking changes await the banking sector: above all, the growth of customer
orientation. Tech-savvy customers who come into contact with high technology in their daily
lives expect a seamless experience from banks. To meet these expectations, banks have
expanded into the retail, IT and telecommunications sectors to enable services such as mobile
banking, online banking and real-time money transfers. Although these advances have allowed
customers to access most banking services at their fingertips anytime, anywhere, it has also
come at a cost to the banking industry. The convergence of banking and industries such as IT,
telecommunications and retail has increased the transmission of critical information over virtual
networks that are vulnerable to cyber-attacks and fraud. These events not only affect banks'
profitability, but also weaken banks' trust and customer relationships.

The rise of online security threats in banking has made government regulations more stringent.
While these regulations are useful for monitoring online financial transactions, they have
hindered banks' ability to keep pace with digital transformation. Banks cannot invest in
technology because they have to maintain solvency ratios according to the guidelines of
international regulatory frameworks.
An AI algorithm performs anti-money laundering operations in seconds that would otherwise
take hours and days. Artificial intelligence is also enabling banks to manage huge amounts of
data at record speeds to extract valuable information from it. Features like AI bots, digital
payment advisors and biometric fraud detection mechanisms will bring the quality of services to
a wider customer base. All this increases revenues, reduces costs and increases profits.

OBJECTIVE OF THE STUDY:

1. To study the implementation of Artificial intelligence in Banking Industries.

2. To understand the challenges in the adoption of ai in banking.
3. To know about different banks who are using ai for their services.
4. Study through charts and graphs, people who still prefer in banking services, the most
used AI technologies in banking sector, the market size of AI in Banking sector
worldwide and the total value of digital payment transactions that took place in
different years.

RESEARCH METHODOLOGY:

This study is of descriptive nature and talks about the meaning and reasons of Artificial
Intelligence along with the challenges faced in the implementation of Artificial Intelligence
in Indian banking industry. Hence makes use of secondary data. The entire study is based
only on observation and documentary analysis. The datasets based on which the graphs are
presented are collected from different websites and research papers.

FINDINGS:

This part is divided into three parts:

1. How AI is strengthening competitiveness of banks

2. Challenges faced in wider adoption of AI
3. Examples of AI in different Indian Banks
4. Datasets and Graphs
HOW AI IS STRENGTHENING COMPETITIVENESS OF BANKS

1. Better customer experience:

Based on past interactions, AI develops a better understanding of customers and their

behaviour. It enables banks to customize financial products and services by adding personalized
features and intuitive interactions, enabling meaningful customer engagement and building
strong customer relationships. The integration of artificial intelligence into banking and
financial services will further improve the consumer experience and increase user convenience.
Artificial intelligence technology reduces the time required to record Know Your Customer
(KYC) data and eliminates errors. In addition, new products and financial offers may be
released in time. Cases such as applying for a personal loan or credit are automated with the
help of artificial intelligence, which means that customers can eliminate the hassle of going
through the entire process manually. In addition, AI-based software can reduce times for
operations such as loan approvals. AI Bank also helps accurately collect customer information
to create error-free accounts, ensuring a seamless experience for customers.

2. Chatbots:
Chatbots are undoubtedly one of the best examples of practical applications of artificial
intelligence in banking. Once deployed, they can work 24/7, unlike people who have fixed
working hours. In addition, they are constantly learning about the usage patterns of a particular
customer. This helps them to understand user requirements effectively. By integrating chatbots
into banking applications, banks can ensure that they are available to customers 24/7. By
understanding customer behaviour, chatbots can also provide personalized customer support
and recommend appropriate financial services and products accordingly. One of the best
examples of AI chat in banking applications is Erica, a virtual assistant at Bank of America.
This AI chat can handle tasks like credit card debt reduction and card security updates. Erica
managed more than 50 million customer surveys in 2019.

3. Predict future outcomes and trends:

AI predict future scenarios by analysing past behaviour patterns and helps banks predict future
outcomes and trends. It helps banks detect fraud, detect money laundering and provide
recommendations to customers. Money launderers use a number of actions to prove that the
source of their illegal money is legitimate. Using the power of machine learning and thinking,
AI detects these hidden activities and helps save millions of banks. Similarly, artificial
intelligence can identify suspicious data patterns in vast amounts of data to check for fraud. In
addition, AI examines the past using key recommendation engines to predict the behaviour of
data points in the future, helping banks successfully up-sell and cross-sell.

4. Automate cognitive processes:

This feature enables the automation of many information-intensive, expensive and error-prone
banking services, such as claims management. This ensures a return on investment, lowers costs
and ensures accurate and fast servicing at every stage. Cognitive process automation essentially
automates a set of tasks that improvise past iterations through continuous machine learning.

5. Realistic interactive user interfaces:

Chatbot’s recognize the context and emotions of a text conversation and respond to them in the
most appropriate way. These cognitive devices not only help banks save time and improve
efficiency, but also help banks save millions of dollars through cumulative savings.

6. Effective decision-making:

Cognitive systems that think and react like human experts provide optimal solutions based on
real-time information. These systems maintain a repository of expertise in their database, called
a database. Bankers use these cognitive systems to make strategic decisions.

7. Predictive analytics:
One of the most common use cases for AI includes general purpose semantic and natural
language applications and widely used predictive analytics. Artificial intelligence can detect
certain patterns and correlations in data that traditional technology was previously unable to
detect. These models can point to untouched sales opportunities, cross-selling opportunities, or
even operational data on related metrics that directly drive revenue.

8. Robotic Process Automation:

AI controls and changes processes using Robotic Process Automation (RPA) technology. It
enables the automation of approximately 80% of repetitive work processes, allowing knowledge
workers to devote their time to value-added activities that require high levels of human
intervention. AI will not only empower banks by automating their knowledge workforce, but
also make the entire automation process intelligent enough to eliminate cyber risks and
competition from FinTech players.

9. Loan and credit decisions:

Banks have started implementing AI-based systems to make more informed, safer and more
profitable lending and credit decisions. Currently, many banks are still too limited to use credit
history, credit scores and customer references to determine the creditworthiness of an individual
or business. However, it cannot be denied that these credit reporting systems are often filled
with errors, lack real transaction history, and misclassify creditors. An AI-based lending and
credit system can examine the behaviour and patterns of customers with limited credit histories
to determine creditworthiness. In addition, the system sends warnings to banks about any
actions that may increase the probability of default. In short, technologies like these will play a
key role in changing the future of consumer credit.

10. Data collection and analysis:

Banks and financial institutions record millions of transactions every day. Since the amount of
information produced is huge, collecting and recording it becomes an overwhelming task for
employees. Structuring and storing such a huge amount of data without errors becomes
impossible. In such scenarios, innovative solutions based on artificial intelligence can help in
effective data collection and analysis. This in turn improves the overall user experience. This
information can also be used to detect fraud or make credit decisions.

11. Risk management:

Global external factors such as currency fluctuations, natural disasters or political unrest
significantly affect the banking and financial sector. In such volatile times, it is very important
to make business decisions with extra care. AI-powered analytics can give you a pretty clear
picture of what's ahead and help you be prepared and take timely decisions. Artificial
intelligence also helps to find risky applications by estimating the probability that the customer
will not repay the loan. It predicts this future behaviour by analysing past behaviour patterns
and intelligent date.

12. Regulatory compliance:

Banking is one of the most regulated economic sectors in the world. Governments use
regulators to ensure that bank customers do not use banks to commit financial crimes and that
banks have an acceptable risk profile to avoid large-scale defaults. In most cases, banks have an
internal compliance team to deal with these issues, but these processes take much more time
and require large investments to be made manually. Compliance regulations also change
frequently, and banks must constantly update their processes and workflows to comply with
these regulations. Artificial intelligence uses deep learning and NLP to read the new compliance
requirements of financial institutions and improve their decision-making process. Although AI
cannot replace a compliance analyst, it can make their operations faster and more efficient.
CHALLENGES IN THE WIDER ADOPTION OF AI IN FINANCE
AND BANKING

The wide implementation of high-end technology like AI is not going to be without

challenges. From the lack of credible and quality data to security issues, a number of
challenges exist for banks using AI technologies.

A few of them are:

1. Data security:

One of the central challenges of artificial intelligence in banking is the amount of data collected
containing sensitive information, which requires additional security measures. That's why it's
important to find the right technology partner that offers a variety of security options to ensure
that your customer data is handled correctly.

2. Lack of high-quality data:

Banks need structured and high-quality data for training and validation before implementing a
full-scale AI-based banking solution. High quality data is needed to ensure the applicability of
the algorithm in real situations. Also, if the data is not in a machine-readable format, it can
cause the AI model to behave unexpectedly. Banks accelerating the adoption of AI will
therefore need to change their data practices to mitigate any privacy and compliance risks.

3. Lack of explain ability:

AI-based systems are widely used in decision-making processes, because they eliminate errors
and save time. However, they may follow biases learned from past instances of poor human
judgment. Small inconsistencies in AI systems don't take long to escalate and cause major
problems, jeopardizing a bank's reputation and operations. To avoid accidents, banks must
ensure that all decisions and recommendations of AI models are adequately explained. Banks
need to understand, validate and explain how the model makes decisions.

4. Cyber Security
At several phases of AI deployment, such as data collecting, model building, and system
integration, cybersecurity issues may surface. A malevolent entity could, for instance, target the
data pipelines of a financial institution in order to alter the data used for AI training,
jeopardizing the accuracy of the models that are produced.

5. Ethical Consideration

There are ethical issues with artificial intelligence (AI) in finance that need to be resolved.
Due to AI algorithms' propensity for discrimination and bias perpetuation, fairness and
potential harm to individuals or groups are ethical problems. These moral considerations
are especially important in the financial services industry, as AI systems can significantly
affect people's lives through underwriting insurance policies, investing decisions, and loan
approvals. Establishing moral criteria and rules for the creation and application of AI in
finance is therefore crucial.

6. Lacked Human Oversight

While AI systems might boost productivity and automate decision-making processes, they can
also perpetuate biases or make mistakes in the absence of human oversight. This lack of human
supervision may result in unforeseen repercussions and moral dilemmas.

A study by the Financial Stability Board found that the increasing use of AI and machine
learning in finance has raised concerns about the potential for these technologies to undermine
financial stability and market integrity.

7. Skill Gap and Workforce Adaptation:

For generative AI to be implemented successfully, a highly qualified staff that can comprehend
and use the technology is required. Banks may encounter difficulties hiring fresh talent with
experience in AI and machine learning or upskilling their current workforce. The market's lack
of qualified experts makes implementation more difficult. Furthermore, banks must develop an
environment that inspires staff members to welcome the changes brought about by generative
AI and cultivate a culture of AI adoption.

EXAMPLES OF ARTIFICIAL INTELLIGENCE IN BANKING IN

INDIA

Private financial institutions such as ICICI Bank, HDFC Bank, Axis Bank, Kotak
Mahindra Bank, and others are spearheading the digitization and integration of artificial
intelligence into the Indian banking systems. Conversely, major nationalised banks such as
SBI, Canara Bank, Central Bank, and so on are also progressing gradually towards
digitalising their banking offerings.

State Bank of India (SBI)

SBI proudly claimed in its annual report (June’23) that it has deployed revolutionary
technologies like artificial intelligence (AI), machine learning (ML), and business analytics
to expand its product offerings and improve customer satisfaction.

In addition to deploying the NextGen Data Warehouse and Data Lake, the leading public
sector bank in India is also dedicated to exploring new partnerships for co-lending with
fintechs and NBFCs. Customer-centric design, hyper-personalized experiences, and
cutting-edge product offers made possible by the application of AI/ML will be given top
priority in SBI's upcoming YONO app version.

You may get the most up-to-date information about products and services from ILA, the
Interactive Live Assistant for SBI Cards. Anyone can easily chat with ILA to learn about
Card features, advantages, services, and much more. They have generated over 130,000
leads so far thanks to the use of this generative conversational AI system, which has also
increased top-line revenue by thousands of dollars.
HDFC Bank

"Eva," an AI-powered chatbot created by Bengaluru-based Senseforth AI Research, was

created by HDFC Bank. Eva, which stands for Electronic Virtual Assistant, has conducted
1.2 million chats, answered more than 2.7 million consumer inquiries, and engaged with
over 530,000 distinct individuals since its introduction.

According to the bank, Eva can process information from thousands of sources and deliver
straightforward responses in less than 0.4 seconds. Eva has responded to over 100,000
inquiries from thousands of users in 17 different countries in the first several days after its
launch.

ICICI Bank

The second-largest private sector bank in India, ICICI Bank, has implemented software
robotics in more than 200 business operations spanning multiple departments. ICIC
appears to be referring to a type of software that is frequently called "robotic software,"
which is typically used to automate office tasks.

The bank claimed to be the first in the nation and one of the few in the world to use this
technology, which automates and completes time-consuming, repetitive, high-volume
business processes by simulating human behaviors. According to an ICICI representative,
software robots currently handle more than a million financial transactions every working
day.
DATASETS AND GRAPHS:

The table and the chart below represent the percentage of people in different age groups
that still prefer in person banking services rather than mobile or net banking:

Age Group Percentage who prefer in person banking services

12-27 4%
28-43 4%
44-59 9%
60-78 16%
Table 1.

Percentage who prefer in person banking services

12-27 yrs 28-43 yrs 44-59 yrs 60-78 yrs

Figure 1.
The most commonly used AI technologies are: robotic process automation (36 percent) for
structured operational tasks; virtual assistants or conversational interfaces (32 percent ) for
customer service divisions; and machine learning techniques (25 percent) to detect fraud
and support underwriting and risk management.

The most used AI technologies Percentage

Robotic process automation 36

Virtual assistants 32

Machine learning techniques 25

Table 2

Percentage

Machine learning techniques

Virtual assistants

Robotic process automation

0 5 10 15 20 25 30 35 40

Figure 2
The global AI in banking market size was valued at $3.88 billion in 2020, and is projected
to reach $64.03 billion by 2030, growing at a CAGR of 32.6% from 2021 to 2030.

Year The market size of AI in Banking sector

worldwide
2020 $3.88 Billion
2030 $64.03 Billion
Table 3

The market size of AI in Banking sector (In

Billions)

2032
2030
2028
2026
2024
2022
2020
2018
2016
2014
$3.88 $64.03

Figure 3
India has become a leader in digital payments in recent years because of the creation of an
environment that makes it easier to embrace and use digital payment modes. It has a very
high rate of digital payment adoption as compared to other nations, and as a result, many
other nations want to learn from the country and leverage its learnings and design choices.
The value of digital payment transactions increased by 58% in a single year, from INR
71.97 billion in FY 2021–22 to INR 113.94 billion in FY 2022–23.

Financial Year The value of digital payment transactions

2021-2022 71.97 Billions
2022-2023 113.94 Billions
Table 4

The value of digital payment transactions (In

Billions)
120 113.94

100

80 71.97

60

40

20

0
2021-2022 2022-2023

Figure 4
CONCLUSION:

In conclusion, the impact of artificial intelligence (AI) on the banking industry is profound
and transformative. This research paper has delved into various aspects of how AI
technologies are reshaping traditional banking practices and contributing to the evolution
of financial services. The findings highlight both the opportunities and challenges
associated with the integration of AI in banking.

One of the key advantages discussed is the enhancement of operational efficiency through
automation and intelligent decision-making processes. AI-driven applications, such as
chatbots, predictive analytics, and fraud detection systems, have significantly improved
customer service, reduced processing times, and strengthened security measures.
Moreover, the ability of AI to analyze vast amounts of data in real-time enables banks to
make more informed and accurate decisions, contributing to risk management and strategic
planning.

On the customer experience front, AI has facilitated personalized services and tailored
financial products. Chatbots and virtual assistants have become valuable tools in providing
instant support and guidance to customers, enhancing overall satisfaction. The adoption of
AI has also paved the way for innovative services like robo-advisors, which offer cost-
effective and algorithm-driven investment advice, democratizing access to wealth
management.

However, this technological revolution in banking is not without its challenges. Privacy
concerns, ethical considerations, and the potential for job displacement are issues that must
be addressed by both the banking industry and regulatory bodies. Striking the right balance
between leveraging AI for efficiency and ensuring responsible and ethical use is crucial for
the sustainable growth of the sector.
Looking ahead, it is evident that AI will continue to play a pivotal role in shaping the
future of banking. As technology advances, banks must invest in ongoing research,
development, and staff training to stay at the forefront of innovation. Policymakers and
regulators must also adapt to the changing landscape, establishing frameworks that foster
innovation while safeguarding consumer rights and ethical standards.

In conclusion, the impact of AI in banking is a dynamic process that requires collaboration

between industry stakeholders, regulators, and society as a whole. Embracing the potential
of AI while addressing its challenges will be essential for navigating the evolving
landscape of the banking sector in the years to come.

REFRENCES:

1. Editorial Note on Artificial Intelligence, Journal of Computer Science & Systems

Biology, available at:

https://www.hilarispublisher.com/open-access/editorial-note-on-artificial-intelligence-
49605.html

2. Banking on Artificial Intelligence (AI) – Wipro, available at:

https://www.wipro.com/business-process/why-banks-need-artificial-intelligence

3. AI in Banking – How Artificial Intelligence is Used in Banks , LinkedIn, available at:

https://www.linkedin.com/pulse/ai-banking-how-artificial-intelligence-used-banks-
neurodata

4. Use of AI in Banking- How Indian Banks Are Leveraging the Power of Artificial
Intelligence, LinkedIn, available at:

https://www.linkedin.com/pulse/use-ai-banking-how-indian-banks-leveraging-power-
artificial-intelligence-8kz8f