What opportunities and challenges does artificial intelligence offer the banking industry? Experts Piero Cipollone, David Lindberg, Max Mindt and Denis Gorbunenko share their opinions on the latest trends.
Artificial intelligence has become more than just a buzzword. It affects many aspects of our lives and banking and finance are no exception. The latest report by McKinsey Global Institute (MGI) says that the AI-driven banking sector may annually add between $200 billion and $340 billion in value globally.Banks leverage modern technologies for maximum benefit. “At the European Central Bank (ECB), our Information Systems department has become the largest business area within the institution. Information and communication technology has become key to our core tasks, from the economic models that underpin our forecasts to monetary policy implementation and the operation of market infrastructures.” Piero Cipollone, a Member of the European Central Bank’s Executive Board comments. What advantages do the banks get?Enhanced SecurityAs the recent report by Deloitte states, using AI allowed NatWest to lower its share of total fraud within the UK banking industry from 19% to 13%. Moreover, since 2019, NatWest has reduced fraud in opening new accounts by as much as 90%. Recently the bank announced it would be one of the first to participate in the Fraud Intelligence Reciprocal Exchange program in partnership with Meta.“Spotting and stopping fraudsters before they are able to target customers is the best way to address this growing problem. Partnering with Meta is an important step in tackling the epidemic of fraud. We welcome the opportunity to deepen our collaboration and ensure a cross-industry approach to fraud prevention and enforcement.” David Lindberg, CEO of Retail Banking, NatWest, said.Automation and Efficiency IncreaseAccording to Deloitte UK banks have been fully automating the loans underwriting process up to US$100,000. And the recent research by EY says Bank of America uses AI to recommend personalized investment strategies. Deutsche Bank is offering its clients a similar feature. “Anyone who has ever shopped on an online marketplace is familiar with such product suggestions,” says Max Mindt, Vice President at Deutsche Bank.Predictive AnalyticsWith AI as its engine, predictive analytics enables banks to parse a wide range of historical and real-time data to forecast future trends and behaviours, completely changing how the bank interacts with its customers.“For example, AI may analyse the client’s transaction history, demographics, and behaviour specifics and identify existing and potential demand for certain products or services a bank can offer. It may also assist the bank’s team with the expected churn rate and possible ways of customer retention, as well as loan default prediction and credit scoring”, Denis Gorbunenko, financier, and banker says.Advanced Document AnalysisJPMorgan Chase implemented an AI-powered platform for analysing legal documents and extracting important data and clauses from those documents. This platform, known as COiN-Contract Intelligence, was used to process 12,000 commercial credit agreements annually, work that would require 360,000 hours of manual effort. Similarly, several Dutch banks and insurance companies have reported adopting automated tools for document analysis.Improved Customer ExperienceUsing chatbots and virtual assistants helps to reduce client waiting time as the machine can address some specific issues that do not need human touch. These technologies are applied, for instance, by Bank of America with its virtual assistant Erica and HSBC which provides customer support in the 24/7 mode. Also, the Netherlands-based ING assisted 20% more clients during the first seven weeks of AI assistant use.RisksHowever, there is also a downside. Along with the above-mentioned benefits AI technologies also bring certain risks to the banking industry. Primarily they are related to data privacy and security. As AI applications process big volumes of personal information one of the biggest concerns is whether these systems use the data properly.“Certainly, AI can bring benefits to the table. The application of AI could allow banks to conduct more efficient risk assessments and capital and liquidity planning. But there are also risks. If new AI tools are used widely in the financial system and AI suppliers are concentrated, operational risk, market concentration, and too-big-to-fail externalities may increase. Furthermore, widespread AI adoption could heighten the potential for herd behaviour, market correlation, deception, manipulation and conflicts of interest.”, Cipollone stresses.Specifically, AI may affect energy prices as this booming sector increases the energy demand. Also, it should be remembered that if AI becomes a driver of productivity growth and lifts the level of potential output, then upward pressure on the natural rate of interest may be increased via higher capital demands that need to be invested in innovative technologies and expanding productive capacity.“But if AI leads to higher rates of labour displacement and causes rising income inequality, we may see some downward pressure on the natural rate, owing to an increase in precautionary savings and a subsequent boost to the supply of loanable funds,” Cipollone says.And, of course, one of the most burning issues is the AI’s impact on human jobs. Although experts assure that AI will not replace people, some facts raise concerns. Intesa Sanpaolo, the largest bank in Italy, is planning to cut around 10% in terms of its digital transformation.“The AI threat to human jobs is a reality. And the Intesa Sanpaolo case proves that. Bankers need to think about upskilling, reskilling, and new roles for their employees,” Gorbunenko says.As we see banks equipped with modern AI technologies have significant competitive advantages. However, they must address certain risks that may result in negative outcomes for their customers and the economy in general. But the global trend remains the same: AI secures its place in our everyday activities including banking and finance transactions.
