AI in Banking – How Artificial Intelligence is Used in Banks

AI’s transformative impact has been profound since its advent, changing how enterprises, including those in the banking and
finance sector, operate and deliver services to customers.

The introduction of AI in banking apps and services has made the sector more customer-centric and technologically
relevant.

AI-based systems are now helping banks reduce costs by increasing productivity and making decisions based on
information unfathomable to a human. Also, intelligent algorithms can spot fraudulent information in a matter of seconds.

A report by Business Insider suggests that nearly 80% of banks are aware of the potential benefits of AI in banking.

Another report by McKinsey suggests the potential of AI in banking and finance would grow as high as $1 trillion.
Cybersecurity and Fraud Detection

Several digital transactions occur daily as users pay bills, withdraw money, deposit checks, and do much more via apps or
online accounts. Thus, there is an increasing need for the banking sector to ramp up its fraud detection efforts.

This is when artificial intelligence in banking comes into play. AI and machine learning help banks identify fraudulent
activities, track loopholes in their systems, minimize risks, and improve the overall security of online finance.

One such example of a bank using AI for fraud detection includes Danske Bank, which is Denmark’s largest bank to
implement a fraud detection algorithm in its business.

The deep learning tool increased the bank’s fraud detection capability by 50% and reduced false positives by 60%.

The AI-based fraud detection system also automated a lot of crucial decisions while routing some cases to human analysts
for further inspection.

AI can also help banks to manage cyber threats.

In 2019 the financial sector accounted for 29% of all cyber attacks, making it the most-targeted industry. With the
continuous monitoring capabilities of artificial intelligence in financial services, banks can respond to potential cyberattacks
before they affect employees, customers, or internal systems.
Chatbots

Chatbots are one of the best examples of practical applications of artificial intelligence in banking. Once deployed, they
work 24*7, unlike humans with fixed working hours.

Additionally, they keep learning about a particular customer’s usage pattern.

It helps them understand the requirements of a user efficiently.

By integrating chatbots into banking apps, banks can ensure they are available for their customers around the clock.

Moreover, by understanding customer behavior, chatbots can offer personalized customer support reduce workload on
emailing and other channels and recommend suitable financial services and products.

One of the best examples of AI chatbots for banking apps is Erica, a virtual assistant from the Bank of America.

The AI chatbot handles credit card debt reduction and card security updates efficiently, which led Erica to manage over 50
million client requests in 2019.
Loan and Credit Decisions

• Banks have started incorporating AI-based systems to make more informed, safer, and profitable loan and credit
decisions.

• Currently, many banks are still too confined to the use of credit history, credit scores, and customer references to
determine the creditworthiness of an individual or company.

• However, one cannot deny that these credit reporting systems are often riddled with errors, missing real-world
transaction history, and misclassifying creditors.

• An AI-based loan and credit system can investigate the behavior and patterns of customers with limited credit history to
determine their creditworthiness.

• Also, the system sends warnings to banks about specific behaviors that may increase the chances of default. In short, such
technologies are playing a key role in changing the future of consumer lending.
Tracking Market Trends

• AI-ML in financial services helps banks process large volumes of data and predict the latest market trends.

• Advanced machine learning techniques help evaluate market sentiments and suggest investment options.

• AI solutions for banking also suggest the best time to invest in stocks and warn when there is a potential risk.

• Due to its high data processing capacity, this emerging technology also helps speed up decision-making and makes
trading convenient for banks and their clients.
Data Collection and Analysis

• Banking and finance institutions record millions of transactions every single day. Since the volume of information
generated is enormous, its collection and registration become overwhelming for employees. Structuring and recording
such a huge amount of data without any error becomes impossible.

• Innovative AI and banking solutions help in efficient data collection and analysis in such scenarios.

• This, in turn, improves the overall user experience. The information can also be used for detecting fraud or making
credit decisions.
Customer Experience

• Customers are constantly looking for better experiences and higher convenience. For example, ATMs were a success
because customers could avail of essential services of depositing and withdrawing money even during the non-working
hours of banks.

• This level of convenience has only inspired more innovation. Customers can now open bank accounts from the comfort of
their homes using their smartphones.

• Integrating artificial intelligence in banking and finance services further enhances the consumer experience and increases
the level of convenience for users.

• AI technology reduces the time taken to record Know Your Customer (KYC) information and eliminates errors.
Additionally, new products and financial offers are released on time.

• Eligibility for cases such as applying for a personal loan or credit gets automated using AI, which means clients can
eliminate the hassle of manually going through the entire process. In addition, AI-based software reduces approval times
for facilities such as loan disbursement.

• AI in banking customer service also helps to accurately capture client information to set up accounts without any error,
ensuring a smooth customer experience.

Assignment:6 ways the Fintech industry is using AI to woo millennials

Risk Management

• External global factors such as currency fluctuations, natural disasters, or political unrest seriously impact the banking and
financial industries. During such volatile times, taking business decisions extra cautiously is crucial.

• Generative AI services in banking offer analytics that give a reasonably clear picture of what is to come and help you
stay prepared and make timely decisions.

• AI for banking also helps find risky applications by evaluating the probability of a client failing to repay a loan.

• It predicts this future behavior by analyzing past behavioral patterns and smartphone data. Read the given blog to learn
how technology is shaping the future of digital lending.
Regulatory Compliance
• Banking is one of the highly regulated sectors of the economy worldwide. Governments use their regulatory authority to
ensure that banking customers are not using banks to perpetrate financial crimes and that banks have acceptable risk
profiles to avoid large-scale defaults.

• Banks usually maintain an internal compliance team to deal with these problems, but these processes take a lot more time
and require huge investments when done manually. The compliance regulations are also subject to frequent change, and
banks need to update their processes and workflows following these regulations constantly.

• AI and ML in banking use deep learning and NLP to read new compliance requirements for financial institutions and
improve their decision-making process. Even though AI in the banking sector can’t replace compliance analysts, it can
make their operations faster and more efficient.

Predictive Analytics
• One of the most common use cases of AI in the banking industry includes general-purpose semantic and natural language
applications and broadly applied predictive analytics.

• AI can detect specific patterns and correlations in the data, which traditional technology could not previously detect.

• These patterns could indicate untapped sales opportunities, cross-sell opportunities, or even metrics around operational
data, leading to a direct revenue impact.
Process Automation

Robotic process automation (RPA) algorithms increase operational efficiency and accuracy and reduce costs by
automating time-consuming, repetitive tasks. This also allows users to focus on more complex processes requiring
human involvement.

As of today, banking institutions successfully leverage RPA to boost transaction speed and increase efficiency.

For example, JPMorgan Chase’s CoiN technology reviews documents and derives data from them much faster than
humans can.
Challenges in Adopting AI & ML in Banking

The wide implementation of high-end technology like AI is not without challenges.

Several challenges exist for banks using AI technologies, from a lack of credible and quality data to security issues.

Data Security
The amount of data collected in the banking industry is huge and needs adequate security measures to avoid any breaches
or violations. So, looking for the right technology partner who understands AI and banking well and offers various security
options to ensure your customer data is appropriately handled is important.

Lack of Quality Data

Banks need structured and quality data for training and validation before deploying a full-scale AI-based banking
solution. Quality data is required to ensure the algorithm applies to real-life situations.

Also, if data is not in a machine-readable format, it may lead to unexpected AI model behavior. So, banks accelerating
toward the adoption of AI need to modify their data policies to mitigate all privacy and compliance risks.
Lack of Explainability
AI-based systems are widely applicable in decision-making processes as they eliminate errors and save time. However, they
may follow biases learned from previous cases of poor human judgment. Minor inconsistencies in AI systems do not take
much time to escalate and create large-scale problems, risking the bank’s reputation and functioning.

To avoid calamities, banks should offer an appropriate level of explainability for all decisions and recommendations
presented by AI models. Banks need to understand, validate, and explain how the model makes decisions.

Why Must the Banking Sector Embrace the AI-First World?

Despite the current challenges, banks are in a race to become AI-first, and that too for a good reason. For many years, the
banking industry has been transforming from a people-centric business to a customer-centric one. This shift has forced
banks to take a more holistic approach to meet customers’ demands and expectations.

With their focus now on the customer, banks must begin thinking about how to serve them better. Customers now expect a
bank to be there for them whenever they need it – which means being available 24 hours a day, 7 days a week – and they
expect their bank to do it at scale. The way banks can do this is with AI.

To meet these customer expectations, banks must first overcome their internal challenges – legacy systems, data silos, asset
quality, and limited budgets.
Steps to Become an AI-First Bank
CASE STUDY

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