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The AI banking transformation is here
The banking industry hasn’t always been a leader in tech innovation, but when it comes to artificial intelligence (AI), that may be about to change. According to McKinsey1 , the financial services industry is a top adopter of generative AI tools, second only to the tech industry.
Key takeaways
- From virtual agents to robo-advisors, consumers are experiencing AI innovations in their banking relationships.
- The financial services industry is leading the way in harnessing the power of AI to fundamentally reshape operational processes for greater efficiency and reimagine products and services to anticipate the needs of their clients.
Artificial intelligence is a game-changer for banks. The benefits—higher revenue from innovative products and services, and lower costs from operational efficiencies, to name just two—are impossible to ignore. It’s no wonder banks are ramping up their AI investments, partnering with universities and tech companies to boost research capabilities, and accelerating their AI hires.
How banks are using AI technologies
How is AI transforming banking?
While the potential AI use cases in banking are nearly infinite, the technology holds two main promises for the industry.
First, AI can optimize and automate many tasks currently performed by data processing centers. Functions like decision-making, credit scoring, routine transactions, and even responding to customers can be managed at scale by AI tools.
Second, AI has the potential to make complex human-level decisions at unimaginable speed and scale. Today’s tools go even further, solving problems that exceed human capability. AI can analyze unstructured data—the text of a CEO’s speech to identify sentiment clues, for example, or satellite photos of shipping containers to predict market supply—creating huge potential for banks to capitalize on previously unrecognized opportunities.
Four areas of AI transformation
Banks are harnessing the power of AI to tackle multiple business needs. Reviewing the latest developments, we’re seeing four main areas of emphasis emerge.
1. Enhancing customer experience
On-demand customer service isn’t just nice to have, it’s a business imperative for today’s banks. Banks are using AI-powered virtual agents to fill that need, instantly responding to routine customer inquiries, and escalating more complex issues to their human counterparts when needed.
Beyond that, banks are using AI to customize products and services at the individual level, from credit card offers to investment opportunities. With generative AI, they can deliver those services with a personalized digital experience tailored to the needs of each customer. These enhanced cross-selling opportunities are a key value driver for banks.
2. Improving client service efficiencies
For high and ultra-high net-worth clients, banks need to offer expert individual advice across a broad range of wealth management topics. AI tools put the full power of the bank’s investment, economics, and analysis teams at every financial advisor’s fingertips, 24 hours a day.
AI-based asset management can determine the balance of risk and return for individual stocks across thousands of factors, helping advisors make portfolio recommendations tailored to their client’s objectives and risk tolerance.
Wealth managers are using AI tools to model and analyze tax and estate planning strategies. Today’s tools are powerful enough not only to analyze the most complex situations and provide optimized solutions, but they can also generate the appropriate legal documents to execute them.
3. Optimizing regulatory compliance and risk management3
With AI tools, banks can scour reams of structured and unstructured data to more accurately assess risk, enabling them to make better operational, lending, and pricing decisions.
On the compliance side, AI automates many of the processes and procedures that help banks stay on top of regulations like fraud prevention and anti-money laundering controls. In 2022 alone, regulators assessed nearly £216 million in fines against UK banks. AI promises huge savings in compliance costs alone.
4. Developing new products and services4
Perhaps surprisingly, the banking sector leads the way in AI investment, with annual investments in AI companies growing at an astonishing 15% a year between 2017 and 2022. Banks are also building complex AI ecosystems with multiple partners to boost their research, accelerator, and recruitment opportunities.
The results are impressive. Most recently, banks have secured patents for a tool that analyzes central bank communications to detect the direction of monetary policy, another that determines whether private banking clients are too heavily invested in a particular asset, and another that develops customized hedging solutions using equity derivatives and interest-rate swaps. One European bank is focusing its efforts on a tool that detects disruptions and misconduct in global capital markets.
What are the risks of AI in banking?
AI is a cutting-edge technology undergoing rapid development. Evaluating it requires access to a level of data that is currently unavailable. This makes AI inherently riskier than traditional technology that delivers a known result. With AI, there is no guarantee that a particular machine-learning project will provide the expected result. New fields like responsible AI are emerging to address some of these risks, but this will be a generational process. Lawmakers and regulators have a role here as well.
Beyond that, however, banks have a unique fiduciary duty to trade and make decisions based on reliable information. Large language models like ChatGPT are only as good as the data sources used to train them. Banks in particular must exercise caution and consider targeted, smaller models suited to their use case.
Ultimately, however, AI technology is too powerful and the rewards too great for the banking sector to ignore. The AI banking transformation is officially underway.
Sources:
1 The state of AI in 2023: Generative AI’s breakout year, McKinsey, 2023
2 Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. This material does not contain tax advice of any kind. Any tax related general information provided with this material is not a substitute for comprehensive individual tax advice. You should consult with a professional tax advisor as you deem necessary.
3 Finance Derivative, 2023
4 The Evident AI Innovation Report, Evident Insights, 2023
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