How Artificial Intelligence is Being Used in Finance

How AI is Used in Finance & Banking

Artificial intelligence (AI) plays a critical role in nearly every industry–retail, marketing, manufacturing, healthcare, the list goes on. However, some of the most game-changing benefits of AI are specific to the financial services sector.

The finance and banking industry has seen its fair share of ups and downs throughout the years–from the Great Depression to the 2008 housing crisis, and most recently, COVID-19–and dealt with issues like institutional bias, fraud, and the challenge of meeting strict regulatory requirements in a multi-channel, digital marketplace.

AI examines data from multiple sources–it could be 50 or 5 million–scanning for outcomes, trends, and other patterns that could help predict future outcomes–and as such, it offers institutions, businesses, and individuals a rare opportunity to find new solutions to past problems.

AI in finance is already changing the space.

According to Deloitte, 70% of financial services firms use machine learning to detect fraud, predict cash flow, and generate more accurate credit scores.

In a 2020 survey, EY reported that AI is on the way to becoming mainstream. 85% of respondents say they use some form of AI, though the report also noted that FinTechs invest more in this area than incumbent firms.

Read on for a closer look at some of the most promising use cases for AI in the financial services industry.

Quicker and Better Credit Decisions

We’ve seen what can go wrong when lending and credit restrictions are too lax.
But we also know that the criteria banks use to make credit decisions aren’t always straightforward or fair.

The ability to make quick, smart credit decisions is a major asset to banking institutions, lenders, and credit card companies because it reduces the risk of financial loss.

Further, the expedited process allows individuals to get the credit decisions they need to make financial choices.

AI gives financial institutions a faster, more accurate evaluation of a prospective borrower at a lower cost and is capable of considering an applicant based on a wider variety of factors, allowing lenders to make a better-informed decision based on the data.

AI-powered credit scoring applies far more sophisticated rules than traditional reporting systems, helping lenders differentiate between potential borrowers with a high likelihood of defaulting and those that simply don’t have much of a credit history or have experienced a period of hardship in the past.

Additionally, machine learning capabilities can help eliminate bias during the screening process by taking the “human element” out of the equation. While we’re still dealing with the issue of biased algorithms, long-term, AI-powered screenings could eventually play a significant role in creating a more fair and equitable system.

AI in Finance Simplifies Regulatory Compliance

Lenders and banking institutions are held to certain regulations and rules.

We’ve all seen the headlines–lenders and banking institutions that fail to comply with regulatory requirements face fines, lawsuits, and reputational damage for violating consumer trust.

So, as you might imagine, one of the most valuable use cases for AI in finance is that it makes compliance much easier–even in a sprawling digital landscape where all kinds of things might go wrong.

AI can “learn” and “memorize” requirements like Know Your Customer (KYC), anti-money laundering regulations, and the Sarbanes-Oxley Act, and ensures that the institution remains in compliance.

Additionally, AI can be used to identify fraud by learning individual spending habits and behaviors, and can sense when something is awry or looks suspicious with someone’s account.

There is much attention being paid to identity and financial fraud and AI can be leveraged by financial institutions to dramatically cut down on this pervasive problem.

Improved Customer Service with AI Chatbots

While the Internet of Things (IoT) is great in many ways, one way in which many people feel it suffers is that it lacks the person-to-person communication and service that one would get in a store or office. One of the best-known applications of AI in banking is the use of chatbots to improve the customer experience.

AI-enabled chatbots give individuals a chance to chat with an institution, typically to receive answers to questions without the need to contact the bank directly and wait on hold. Done right, chatbots can go a long way in making sure individual customers feel heard, reducing friction and frustration during interactions by giving customers faster access to the answers they’re looking for.

AI chatbots are taught the answers to many potential questions, but they can also learn and, over time, supply better and more accurate and personalized responses. This saves money by reducing the number of employees–and the salaries and benefits that they require–and provides another opportunity for organizations to collect data about the customer, which can then be used to further improve service offerings.

Final Thoughts

AI in finance offers a lot of promise for institutions and individuals alike.

That said, as the technologies begin to disrupt ‘business as usual’ and reshape long-held business functions, organizations will need to start thinking seriously about AI in a broader context.

We’re already seeing artificial intelligence in banking and financial services products in the form of chatbots, personalized content, and seamless cross-channel experiences, though the industry is a long ways off from realizing the full potential offered by AI.

Organizations will need to work to transform the workforce and use AI and machine learning as a tool for building trust and transparency in an industry where those things haven’t historically been part of the deal.

Tiempo Development is a leading nearshore software development firm that provides cost-effective access to top talent, ready to help clients realize their digital transformation initiatives–whether they operate in a highly-regulated space like finance or not.
You can find out more about our people, process, and business model here.

Get Ultimate Outcomes!