Artificial Intelligence in Banking 2024: Examples & Challenges

Introduction

Millennials and their changing preferences have led to a wide-scale disruption of daily processes in many industries and a simultaneous growth of many more in other sectors. Much like hand soaps and cereals, the use of a physical bank location has declined. Physical bank locations may soon be a thing of the past, as per a report from Business Insider.

With the customer preferences that are changing, the industries are adopting newer methods to match the pace of changing demands. Banking is digitizing as the word spreads. There is evident incorporation of operational process flows with artificial intelligence, robotics, and other machine assistance.

The banking and financial sector today is continuously battling to reduce liabilities and increase assets. To provide systematic compliance management and operations, a fast-track strategy is required. Artificial intelligence (AI) is a key component of the banking and financial industries, helping to deliver affordable and dependable banking services. With a predicted CAGR of 32.6% from 2021 to 2030, the market for AI in banking Sector, which was valued at $3.88 billion in 2020, is expected to reach $64.03 billion by 2030.

The financial landscape is experiencing a metamorphosis as artificial intelligence (AI) reshapes the very core of banking operations. From intelligent chatbots delivering personalized service to sophisticated algorithms predicting market trends, AI is revolutionizing the way banks interact with customers and navigate the competitive landscape. Let’s embark on a journey to explore the captivating world of AI in banking, delving into its transformative artificial intelligence applications in banking and real-world examples.

Technology and the fourth industrial revolution have penetrated its way into many sectors. This technology is now reconstructing social skills and the workforce. Not only limiting the existence of a changing workforce, but the use of artificial intelligence is very evident in the banking sector. Artificial intelligence applications are not just modernising the banking sector but the entire world as we know of. Read more about the top artificial intelligence applications.

Why Use AI

Technology is the face of this generation. To all the problems this generation has- there is a rising demand for answers. And, the solutions are sought after at the tip of their fingers. The other side of the screen might be a computer solving queries or a human employed as a relationship manager.

Big data is the industry standard today, and every sector is working on grasping all that it could from the repositories of unstructured data. Big data applications in banking are already transforming the industry. Here comes artificial intelligence. Not only utilizing the benefits of AI in extracting and structuring the data in hand, finance, and banking sectors are stepping in to use this data to improve customer relations.

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Banking and AI

Artificial intelligence is being used in the banking industry to scale new heights in customer relationship management.

This sector is implementing this from the ground level with a principal aim of climbing heights in customer-centric approaches. A significant part of the banking industry concerning its customers is customer relationship management, which includes communicating with them.

Banking saw a shift in preferences for visiting the locations with the introduction of ATMs. These machines allow cash deposit and withdrawal directly communicating with input points on the device, thus, not requiring human assistance at all. It was a revolution that led to the growth and demand for artificial intelligence.

Artificial intelligence (AI) technology is being used more and more by banks and other financial institutions for a variety of purposes, such as improving customer service through the use of virtual assistants or credit scoring to correctly determine a borrower’s risk. But the battle against fraud and money laundering is one of the most significant applications of AI in banking sector.

Digitization and Cyberthreats

Banking is evolving in terms of digitization. Net banking, mobile banking, real-time money transfers, and similar services have changed the face of the sector from the last decades. With this digitization, there is an increase in the cyberthreat that comes along.

These services again need to be secured from cybercriminal activities to ensure trust and safe transactions amongst users. With the availability of the right support, banks face difficulties in terms of the right workforce to drive the industry needs in the right direction.

When sectors like banking, telecom, and information technology come together, the world witness’s plethora of valuable user- information on the world wide web. Every report of any user is as vulnerable as it is secured. Cybercrimes lead to disruption in the practices, and hence there have been strict regulations from government bodies to improve the banking industry’s adequacy to retain this massive data it has.

Banks can benefit from digitalization thanks to artificial intelligence (AI), which also enables them to compete with FinTech companies. For instance, 32% of banks are currently utilizing AI technologies, such as predictive analytics, speech recognition, and other ones, to get a competitive edge in the market, according to a joint study by the National Business Research Institute and Narrative Science in 2020.

Application Areas

Artificial Intelligence is working to personalize human experiences with machines. Robots replacing the front-office staff in the banking sector are aimed to provide a 24*7 uninterrupted, diligent, and undeterred expertise to the customer in front.

Banking today is witnessing a collaboration between humans and machines. This collaboration again is opening doors to customized opportunities for better service encounters and delivery.

Benefits

Artificial Intelligence in finance gives banks the ability to manage massive amounts of data at breakneck speeds to get insightful knowledge and better understand their clients’ behaviours. Due to the ability to offer customized features and easy interactions, artificial intelligence in finance is now able to tailor financial goods and services, resulting in significant consumer engagement and the development of solid client relationships. Restructuring reasons for the description, the following are the benefits in use:

•         Improved service responses
•         Reduction in human error
•         Personalized options in the making
•         Strengthening customer base by increasing satisfaction and trust
•         Reducing time to travel locations

Banks are capturing the artificial intelligence by administering it into daily operational workflow by including changes in the values, employment and information patterns. Some of the application areas of artificial intelligence in the banking industry are listed as follows:

1. Refining Consumer Participation

Artificial intelligence helps understand the customers better. The data gathered from the customer’s choices and preferences enable AI to lead machines to decode the next decisions and thus create a personalized container of information for each customer.

This, in turn, is helpful for the banks to customize the buyer experiences as per their choices, in turn improving satisfaction and loyalty towards the institute.

Interactive Voice Response System (IVRS) are examples of such AI-led systems that include voice assistance to customers. It guides the customers by understanding their queries in the right direction by routing calls to the correct department as well as assisting them with the transaction and other banking-related issues in real-time.

2. Wealth Supervision

These customized plans for customers not only benefit the banks by increasing their customer-base but also helps the user to manage their wealth in hand with personalized inputs and advice on risk and investment plans. Involving AI-led customer service to meet the front office standards is a challenge with the diverse language set in countries like India.

3. Examining Data to Enhance Defence

AI has the power to foretell future trends by interpreting data from the past. This property, when associated with machine learning, will help produce data-driven predictions to counter cases of capital laundering and identifying fraud.

4. Upgrading Security

Unusual data pattern recognizing property of AI-led machines helps banks tighten security and recommend changes by identifying loopholes in existing processes. Deceptive emails and log reports, patterns in breach of process flows can be tracked by artificial intelligence to provide better security in the existing methods.

5. Interfacing Emotions

AI-led machines use technology that identifies the emotions of the customers based on the text they use to input requirements. Based on this, the devices respond, suiting the tonality and fabrication of the words used by the customer. Natural language processing helps this happens. Read more about the applications of natural language processing.

This not only a realistic experience but also helps banks save massive costs on human resources and large chunks of time.

Chatbots are examples of AI in banking that are replacing the front-desk scenes at the banks. These AI-led machines provide next level digitized and customized interactive experiences to the customers. Learn more about creating a chatbot using Python.

6. Utilizing Knowledge Database

AI-led systems in the banking sector is a massive treasury of data. It has all the details there is for every user on board. This database provides for more meticulous decision making based on improving strategic and business plan models. The AI-led repository is equivalent to a human expert on cognitive thinking.

Face-detection and real-time cameras in ATMs and other such interventions is helping banks heighten measures into security and providing a clear and crisp insight into user’s behaviour patterns and techniques in operation.

7. Controlling Risks

The vast data bank available from AI-powered systems allows the banks to manage risk by analysing their plans, studying failures from previous strategies, and eliminating human errors.

AI is expanding into the roots of banking security processes to encrypt each step with codes that authenticate transactions, provide understanding to the companies on anti-fraud and anti-money-laundering activities. Regulatory checks like Know Your Customers (KYCs) help heightens security measures.

8. Expanding Through Front-office

By offering to be personalized financial guides to customers and strengthening security against fraudulent activities, artificial intelligence is paving its path, strengthening not only in the front-office operation (customer interactions) but into the middle-office(security) and back-end development (underwriting banking service applications) as well.

9. Chatbots

Chatbots powered by machine learning (ML) algorithms are at the forefront, providing personalized assistance 24/7. These virtual assistants answer queries, assist with account management, and even facilitate transactions, enhancing customer experience while reducing response times. Beyond customer service, AI algorithms analyze vast amounts of financial data in real-time, aiding in:

10. Tracking Market Trends

Identifying investment opportunities and risks by discerning patterns and forecasts, keeping banks ahead of the curve.

11. Regulatory Compliance

Automating processes, monitoring transactions, and detecting suspicious activities to ensure adherence to complex regulations, minimizing compliance risks.

12. Predictive Analytics

Anticipating customer needs, optimizing product offerings, and mitigating risks using insights gleaned from historical data analysis, driving profitability and customer satisfaction.

13. Credit Scoring and Risk Assessment

Analyzing vast datasets to assess creditworthiness, predict default risks, and determine loan eligibility, streamlining loan approvals, improving portfolio management, and increasing lending accessibility.

14. AI and Blockchain

Enhancing security, scalability, and efficiency in banking operations by analyzing blockchain data, detecting anomalies, verifying transactions, and automating smart contract execution, fostering transparency and trust in financial transactions.

Challenges Faced

The financial services industry has seen a surge in artificial intelligence (AI) investments, which has raised new concerns about data security and transparency. As data management techniques change in response to the introduction of new AI solutions, these and other difficulties of AI in financial services are especially crucial to overcome. Organizations need to be aware of the upcoming difficulties listed below and implement safety measures to maintain progress.

1. Many banks face the challenge of an unwillingness to improve or adapt to new methods. Standardized with set practices in conventional ways, some locations in tier two and three cities across the country face this challenge. These units also lack the level of commitment required to upskill their labour force and human resources skills.

2. With the lack of supporting data to implement operational changes, the banking sector is facing a disconnect between the need and response from customers. The banks adapt to a switch that fails to comply with the actual requirement of the masses.

3. Banks with upscaling use of artificial intelligence need to keep up with the regulatory standards of government. The increasing services like net-banking and online transactions come under the ambit of privacy regulation policies as well, which necessitates compliance from the bank’s end.

4. There is also an evident lack of training witnessed in the existing workforce associating with the advanced tools and applications of the use of AI in banking. With the increasing use of artificial intelligence, there is an apparent demand for a skilled workforce. Proficient and experienced engineers in streams like data science and machine learning are needed to provide credibility to the data in hand.

Real-World Examples: The Power of AI in Action

Several compelling use cases demonstrate the transformative impact of artificial intelligence in banking sector:

Fraud Detection and Prevention: Banks leverage AI to detect anomalies in real-time, safeguarding customer assets from fraudulent activities, fostering trust and financial security.

Customer Service Chatbots: AI-powered chatbots provide instant support, answer queries, and handle basic transactions, enhancing user experience, freeing up human agents for more complex issues, and improving overall customer satisfaction.

Personalized Recommendations: AI tailors product recommendations based on individual preferences and financial goals, boosting customer satisfaction, loyalty, and driving cross-selling opportunities.

Algorithmic Trading: AI enables high-frequency trading based on market data and predictions, allowing banks to capitalize on market fluctuations, enhance returns, and stay competitive.

Credit Scoring and Loan Underwriting: AI analyzes diverse data sources for faster and more accurate loan approvals, minimizing defaults, optimizing lending portfolios, and promoting financial inclusion.

RPA (Robotic Process Automation): Bots automate repetitive tasks, reducing operational costs, improving efficiency, and freeing up human resources for more strategic tasks.

Sentiment Analysis: AI monitors social media and news for brand mentions and feedback, enabling proactive customer service, reputation management, and risk mitigation.

 

Embracing the Future: A Symbiotic Relationship

Use of AI and banking is not about replacing human expertise, but rather about augmenting it. By automating mundane tasks and providing data-driven insights, AI empowers human professionals to focus on strategic decision-making, delivering exceptional customer service, and fostering stronger relationships. As technology continues to evolve, use of generative ai in banking promises to drive further innovation, efficiency, personalized experiences, and inclusive financial services, shaping the future of finance for both institutions and customers alike.

Conclusion

The digital revolution is changing the functionality of every other business operating today. Just like all distinct industries that are focusing on leveraging the revolution to increase profits, banking is on the territories as well. The applications and examples present a clear picture of what is in store from the benefit’s point of the use of artificial intelligence in banking.

Their focus on scaling new heights in customer relationship improvement through digitization is rising on the progress scale. Although with challenges like cyber threats from cybercrimes, conventional banking methods, lack of training, etc., the world of banking is picturing technology-faced services into the ground level banking operations.

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