01.09.2021

Top 5 Benefits of AI in Banking and Finance

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Top 5 Benefits of AI in Banking and Finance

AI is currently the hype in banking and finance. And with good reason. Technological advancements in AI, such as machine learning, computer vision, and natural language processing, profoundly change business and work. Moreover, these developments can drive meaningful outcomes for banks, such as improving back-office operations, customer experience, and employee satisfaction.

AI also has the potential to lead to massive cost savings. According to a study by Accenture, banks can leverage AI tools to increase their transactions by two and half times using the same headcount.

And, financial services companies are well placed to take advantage of AI. There is no AI without data. But the financial industry collects lots of data in the ordinary course of business.

Admittedly, the use of AI and machine learning in the financial services industry isn’t new. AI is already responsible for detecting suspicious credit card activity. With identity theft on the rise, the industry needs to employ the right technology to protect its customers and mitigate its liability.

As the mode of operations goes virtual, vulnerabilities in financial systems are exposed. In the past, bank robbers wielded ski masks and guns; these days, culprits use code and a keyboard. The only way to combat technological threats is with better tech.

AI provides an opportunity for financial institutions to create a friendly customer experience, reduce error rates by employees, and make better investments. Intelligent Decision Management Systems (DMS) helps the institution remain compliant by cutting down error rates and reducing time spent capturing customer information accurately.

However, a proper evaluation of AI would be incomplete without examining some misconceptions of AI. For example, the idea that machine learning is at par with human intelligence is a myth. Furthermore, even where AI appears to surpass human abilities, such as using many variables to predict an outcome, the cost often exceeds the benefits.

What are the Top Benefits of AI in the Banking Industry?

Below is a list of the five of the top benefits of AI in banking and finance. We also discuss some of the risks and challenges faced by the financial services industry when using AI.

1. Regulatory Compliance and Fraud Detection

The banking industry has had a colorful past costing investors millions of dollars. Legislation such as the Sarbanes–Oxley Act of 2002 (SOX) lays out hefty penalties for players caught in violation of the regulations. It is therefore in the best interest of banks and financial organizations to automate compliance where possible.

Using DMS allows for early fraud detection and comprehensive audit documentation. Third-party auditing exercises can be disruptive to regular operations when employees are called away from their desks to provide missing details or explain entries. With the right software and machine learning, information captured in the system will be accurate, and errors immediately highlighted or disallowed.

As financial institutions increase their vigilance, fraudsters alter their behavior. Since large sum transactions are flagged for investigation, fraudsters have learned to deal in amounts just under the limit of detection. Without proper analysis, criminal activity can go undetected despite meeting the prescribed requirements. This is one area where AI is genuinely superior to humans. AI analyzes large amounts of data and picks out suspicious transactions. Manually analyzing such transactions leads to mistakes. Without an AI fraud detection system in place, it’s a field day for criminals to launder money or finance illegal activities.

2. Improved Investment Evaluation

Interest income is only one facet of income generation. As a result, banks are continuously searching for lucrative opportunities to invest and earn a healthy return.

The right investment software can provide investment recommendations that match the risk appetite of these institutions. In addition, they can accurately evaluate client funding proposals, given that industry-specific information is often difficult to understand.

The decision to invest is still in the hands of human analysts. Investment analysis software makes the process easier and accommodates more variables. If the institution has interests outside its national borders, accessing information can be time-consuming. Assessing a new environment can be a challenge, but the right AI software is instrumental in hastening the process.

3. Better Customer Experience

Customers are constantly looking for convenience. For example, the ATM was a success because customers could access a vital service even when banks were closed. That level of convenience has only inspired more innovation. Now, clients can open bank accounts and verify themselves, using their smartphones, from the comfort of the couch.

In the quest for a shorter turnaround time, a decision management system (DMS) can reduce the time it takes to capture Know Your Customer (KYC) information and eliminate errors. In addition, with proper business rules software, business decisions can be implemented and rolled out without lengthy procedures.

New products and seasonal financial offers can be available on time. In addition, new business decisions or changes in tariffs are easily accommodated in the system.

Eligibility is automated meaning, clients who do not qualify are not frustrated by going through an entire process only to be rejected. This kind of technology provides the illusion of a personal touch despite a varied customer base.

Banks can earn the trust and confidence of clients by reducing turnaround time. In addition, DMS software can reduce approval times for facilities.

Sometimes, bank employees open accounts erroneously, leading to restrictions placed on client accounts. That can be very frustrating for a client. Accurately capturing client information and correctly setting up client accounts ensures a smooth experience for your customers.

4. Reduced Operational Costs and Risks

As much as we enjoy human interaction, it has one significant drawback. Errors are common, and they can have serious repercussions. Even when experienced employees are at the helm, the wrong keystroke could expose the institution to liability and cause irreparable reputational damage.

Decision management systems reduce this risk by creating logic flows in data capture and combining predictive and prescriptive techniques to solve business problems.

Let’s use on-boarding as an example. Using DMS, you can set up rules that show the client what types of accounts they can open depending on their bio-data or business information.

If a client is opening an account online, age and source of income can determine the type of account available to them. In that case, underage persons cannot open accounts in their name, and personal savings accounts will not have an overdraft facility. This means that you need fewer customer-facing employees, which reduces your labor cost.

Furthermore, with increased accuracy, the number of people the organization needs to assess transactions and activities is further reduced.

There’s also a benefit to employee wellness. For example, a DMS reduces data entry time, meaning your team can spend more time innovating and focusing on core business tasks.

Despite its advantages, AI can’t replace the value of a handshake. However, with the savings derived from investment in AI systems, financial institutions can redirect resources away from data entry to business development.

5. Improved Loan and Facility Evaluation

Using credit scores to evaluate eligibility for financing often relies on outdated information, misclassification, and errors. However, these days there’s so much more information available online that can give a more realistic picture of the person or business under evaluation.

An AI-based system can give approval or rejection recommendations by considering more variables even when the party, whether personal or business, has little documentation.

The tricky bit is that it is not always clear why the software comes up with a particular recommendation. When an application is approved, no one asks any questions. However, when an application is rejected, the institution owes the client an explanation.

Even though systems are designed to be objective, they can demonstrate bias. This is because configurations are only as good as their developers. Fortunately, most of the funding requests received by institutions are similar, and people are aware of institutional bias. As a result, developers are better positioned to key in better variables when designing applications and updates.

What Are Some of the Pitfalls of AI?

AI is an emerging technology. Being immature and the limited time it has been in use, it is a significant business risk that is further compounded by the fact that the field is also evolving rapidly. As a result, financial services companies must weigh the benefits of AI against the following risks and challenges.

1. Does Not Provide Ethical Justification for Rejected Loan Applications

As mentioned above, AI application is dependent on its creator. A flawed algorithm leads to faulty analysis. Software is designed within specific parameters, and those parameters are subject to interpretation. For instance, a proposal for a mortgage in a low-income neighborhood would be considered high risk. Therefore, the application will recommend a high interest rate to mitigate the risk to the institution. Unfortunately, the division of these neighborhoods has less to do with income generation and more about social-economic factors, including race. The system isn’t capable of discerning this bias. It can only analyze information based on its design.

Without proper justification, it is difficult to explain a rejection to a client. With people taking their fights to social media, a financial institution can have its name run through the mud because it could not explain its decision.

2. People Still Prefer to Deal with People

Even though clients are direct beneficiaries of improved efficiency when dealing with machines, they are still suspicious of a fully automated system. In truth, a glitch in the system can spell disaster for a client, and negotiations are not possible with software. Whenever banks update their system and, a bug is exposed, social media is always aflame with complaints and bad press. Unfortunately, no one sings praises when things go well. Even though these incidents are few and far between, it hurts the brand.

The paranoia that the machines are taking over contributes to the suspicion clients have toward AI. Many people, including top tech investors such as Elon Musk, think computers will develop a type of consciousness, like something out of a sci-fi film, and put humanity’s very existence at stake.

It also doesn’t help that social media sites sell personal data to marketers. Such revelations only add to the anxiety that clients already have.

3. High Cost of Investment?

Unlike the cost of an analyst spread out in years, the software fee is paid upfront—furthermore, additional hardware such as servers and physical infrastructure may be necessary.

Furthermore, regular updates need to be scheduled and implemented. If there’s a problem with an update, the system could be unavailable for an extended amount of time. In addition, new software can put a strain on existing hardware.  You can reduce this risk if you can rely on a trustworthy partner.

Conclusion:

Despite its challenges, Artificial Intelligence is changing the financial industry for the better:

  1. It provides a channel to identify suspicious activity quickly.
  2. It allows financial institutions to make better investments and accommodate a broader customer base.
  3. It creates a user-friendly experience for clients with its increased accessibility and flexibility.

Decision management software is an AI-based tool that forms a crucial part of business process management in banking and finance. The system allows non-IT people to make smarter automated business decisions and ultimately improve the company’s competitiveness.

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