Five ways AI is disrupting financial services
Whether you realise it or not, artificial intelligence (AI) is taking over the world.
No need to brace for a Hollywood scripted battle like in movies such as “I, Robot” and “The Terminator”. The reality is that most AI applications do not have a physical form, but rather “live” in lines of code. The term “AI” includes all technology used to mimic human intelligence, typically falling into one of three subcategories: machine learning, natural language process and cognitive computing.
Currently, there are more than 2,000 AI start-ups in 70 countries that have raised more than $27 billion, according to Venture Scanner, a tech-centric analytics firm. The financial services industry is leading the way when it comes to both creation and adoption of AI – from managing assets to safeguarding against theft.
Below are the five traditional processes facing disruption as the banking industry rapidly adopts AI:
Robo-advisors are upending the investment landscape, with AI-powered platforms automating asset management. Introduction of robo-advisors almost entirely eliminates financial advisors from the investing process. Investors no longer have to be uber wealthy or pay hefty fees for something they might not want or need.
Now, robo-advisors collect information about an investor’s financial goals and the level of risk they’re willing to incur, then they input this data into algorithms. In turn, the results are used to offer investment advice to the individual, allowing him/her to make educated investment decisions, or, in many cases, the robo-advisor will fully automate the purchase and management of investments.
- Significantly lowers the cost of asset management.
- Opens the doors for individuals without high levels of wealth to invest – giving way to the “average investor”.
- Individuals can invest small amounts of money periodically, which was previously cost-prohibitive due to commissions.
- Eliminates human error and conflicts of interest
- Ensures regulatory compliance, including staying within the bounds of the DOL’s new fiduciary rule.
2. Customer engagement
Many banks are introducing chat bots backed by conversational AI abilities. Through big data and machine learning, these “bots” know how to respond to customer’s questions – from onboarding concerns to transaction-specific questions. Additionally, the technology is capable of managing customer requests and making product recommendations.
- Attract and engage millennials, known to prefer less human interaction when it comes to finance and more automation.
- Increases customer engagement – people are much more likely to disclose financial information and ask for help with financial difficulties when speaking to a bot, rather than a human, for fear of judgment and embarrassment.
- Provides recommendations, which appear less forced when they appear on a screen than when hearing the sales spiel on the phone. Additionally, AI-generated recommendations are more likely to be tailored to individual customers (via their ability to rapidly mine big data), rather than generic offerings human agents extend to the masses.
- It’s cheaper to develop and maintain – AI requires less code (meaning less time and money) to integrate into a banking platform than most standalone banking apps.
- Social media integration – many of these “bots” are even connecting with customers via social media platforms and through text messages – taking customer service a step further.
3. Fraud detection and risk management
AI can detect fraud before it happens. Technology can rapidly mimic the thought process of a human analyst to review each transaction in every portfolio at a bank. AI enables banks to not only be alerted to potential fraud, but also gives them a percentage that depicts the likelihood of a card ever becoming compromised.
- Reduces false positives, which plays into customer satisfaction.
- Helps banks/card providers to only replace cards that are actually likely to experience fraudulent activity – only a small percentage of cards compromised in breaches ever become fraudulent. AI-enabled technology allows banks to accurately predict if an account is at risk based on the number of times it has been compromised, along with other factors. Being able to pinpoint these accounts allows banks to save a significant amount of money on card reissuance fees, as they no longer have to replace every card involved in each breach as they were previously doing.
- Prevents customers from abandoning or closing accounts, which is strongly correlated with the number of times their cards are replace.
4. Regulatory compliance
The nuances of the ever-changing regulatory landscape can be challenging for many financial institutions. AI can “learn”, remember, and comply with all applicable laws – from KYC and anti-money laundering regulation to laws governing asset management.
- Ensures financial institutions can cross their “T’s” and dot their “I’s” when it comes to meeting regulatory standards.
- Eliminates human error from compliance.
- Detects patterns used to spot fraudulent or illegal activity, many of which may be close to impossible for humans to recognise.
5. Stock predictions
When it comes to big data and pattern recognition, humans are no match for AI. Analysts, investors and other key players on Wall Street have embraced AI as a tool for predicting market movements. AI can evaluate companies’ public remarks (such as on earnings calls), picking up on sentiment analysis (word usage, speech patterns, etc), which then is used compared with historical data to predict stock performance with near certainty.
- Even the most seasoned analyst is not capable of detecting all forms of sentiment that foreshadow market movements, but machines can.
- Big data enables comparison of data over several decades.
- Bias/human interpretation of information is eliminated from the equation.
- Wealth managers can make better decisions when it comes to investing their clients’ money.
AI’s role in finance may not attract as much attention in Hollywood, but it is likely to have a far greater economic impact than consumer tech. From extending investment opportunities to the underbanked to thwarting fraud to mitigating investment risks, AI has the potential to not only revolutionize the industry, but also to improve the financial health of millions of people in the US and across the world.
By Kevin Dinino, president of KCD PR, a financial and fintech PR agency