How Artificial Intelligence is transforming the banking industry

28 September 2017 7 min. read

Artificial Intelligence (AI) has been touted as the next major disruptor of the financial services sector. Shankar Narayanan, Head of UK & Ireland at Tata Consultancy Services (TCS), reflects on how the novel technology is transforming the banking landscape.

Today, there is one innovation, above all else, that is shaping the future of the financial services (FS) sector through the entire value chain, whether a retail bank or a global financial institution – and this is Artificial Intelligence (AI).

It’s difficult to read any analyst or trends reports about the future of banking and FS without mentions of AI innovation. In many respects, this is because AI is a tool that’s already having a significant impact. Take Swiss Bank UBS, which recently announced that it is using robots on the trading floor in an attempt to boost traders’ performance. With AI set to continue changing the financial services landscape, it’s essential that business leaders think carefully about where AI can be integrated and how developments in this space are set to impact the banking and FS sector.

AI: Driving innovation, securely

According to a recent TCS study into AI across 13 sectors, 86% of business leaders in the banking and FS sector said they were already using this technology. Fast forward a few years and almost every executive responding believed they will have incorporated AI into their operations at some point along the value chain by 2020. It seems clear that AI will play an increasingly important role in driving change in the financial services sector.

Where banks are using AI

The sector has often been on the front foot when it comes to adopting new innovations and operating models, whether in the retail space with the introduction of the world’s first cash machine in London as far back as 1967, or the launch of contactless payments in more recent times. In the 1980s, the UK’s ‘big bang’ saw the deregulation of the sector, along with the introduction of electronic trading that fed rapid expansion and growth. But more recently, the wider FS sector has seen areas such as blockchain drive further change.

According to the management consultancy firm Oliver Wyman, one of the major ways in which technology is changing the FS industry is through automation. In a study launched at this year’s Davos, it claimed that automation would allow the sector to cut costs as a proportion of revenues by 15%. And AI was cited as central to this development.

Take how AI is being used to improve customer service at Barclays Bank. Staff are developing an AI system not too dissimilar to Apple’s iPhone personal assistant, Siri, to let customers talk to a device and get information they need for vital transactions. And when it comes to the tough decision of whether a bank can lend to customers, AI can help here too. One quarter of banking leaders responding to our study, said that AI would increasingly be used to help them decide who to extend loans to and even where to invest.

Venture capital firm CircleUp uses AI and machine learning to determine which companies to fund. Its crowdfunding online platform – Classifier – has evaluated more than 10,000 potential deals carried out by the firm’s analysts in the last five years. Since March 2014, the system has helped the firm’s investment analysts screen deals, dramatically increasing the number of possible deal evaluations. And the numbers speak for themselves. With Classifier, a team of less than 10 analysts can review 500 opportunities per month, versus the 500 evaluations done per year by the average private equity firm.

Where AI will have the biggest impact

As well as helping the banks that like to say yes, AI can help with banks that have to say no. Goldman Sachs recently invested in a startup called Kensho that uses AI to decipher unstructured data such as online articles and social media to spot trends. This can lead to banks being able to identify potential customer financial problems that might force the bank to withdraw credit.

Finally, with security being an ongoing concern for banking customers, it will come as no surprise to learn that 70% of FS executives are using AI technology to detect and deter security intrusions, according to data from our study. Perhaps more than ever before, with hackers using increasingly advanced tools, it is technology’s turn to strike back. Ahain, AI is a vital part of the battle.

The view from the boardroom: AI in the black

Investment in AI can bring support for innovative customer solutions and operational improvements, but what about its effect on profit margins? Can it drive revenue and growth? The answer is yes. In fact, based on the TCS research, banking and FS executives found that investment in AI helped them reduce production costs by 13%. Additionally, executives reported a 17% average revenue increase in the area of their AI initiatives.

It comes as no surprise that financial services staff are reaping the rewards of AI. In 2015, the average bank or FS firm spent $77 million on AI initiatives. Remarkably, four companies that TCS surveyed spent at least $1 billion. Beyond cost savings and investment, the industry must address AI’s impact on jobs. This isn’t unique to banking and FS, of course, but interestingly, executives reported in our study that AI investment will in fact lead to significant job creation. Companies will have to add new jobs in order to develop and manage these developing technologies, which will necessitate new skills and approaches.

Cost reduction from AI

The banks we surveyed said AI resulted in an average increase of 10% in jobs in 2015 in the departments using the technology. They projected that the number should increase to 13% new jobs on average by 2020, and 16% by 2025 – many of which don’t yet exist today.

The future

There is no doubt that AI is driving the banking and FS markets of tomorrow. This is according to executives who said that AI will be crucial to their ability to compete in the coming years. 59% said that this technology was highly important to drive competitiveness.

Yet, there are also challenges that must be addressed. For example, banking and FS executives admitted that managing the security risk of AI systems is of paramount importance. Other issues like the challenge of developing AI tools that were able to improve decision-making were also reported as potential buffers to the technology’s development.

Investing in the right AI technology can have a major impression on operational efficiency, but its success boils down to the customer impact above all else, and like any technological innovation, the best results will be realised only if they are improving the end user’s experience. So if AI can save time by pointing a consumer in the direction of the most appropriate financial product, then great. However, if it gets in the way of a seamless experience and frustrates end users, then there’s a problem.

Ultimately, perhaps the best lesson to take from the TCS study is that the technology’s long term success will be defined by how AI enhances a customer experience or enables a banking employee to service a customer better. The good news is that it looks like AI has the capacity to do this in spades.

Related: European banks hit rough waters in 2016 as interest bites.