Artificial intelligence in Banking: Challenges, impact and future

By : |August 26, 2019 0

Digital transformation is redefining banking sector. The industry is adopting artificial intelligence and other disruptive technology to create value for their tech-savvy customers. Adoption of Artificial intelligence in banking sector enabling to deliver a seamless experience. But expectations are high and challenges are higher.

We spoke to Raj Nair, President of IMC Chamber of Commerce and Industry to understand the development in the segment and the impact of AI in banking.

What are the major tech challenges in Banking and finance sectors?

There are some fundamental challenges when it comes to Banking. They are often missed because of other distractions.

The raison d’etre for banking is that it is a unique institution that emotes trust which in turn, enables savers with surplus money to earn revenue by lending to those in need of money, through the Bank, which has the ability to discover and evaluate borrowers and has the ability to recover loans which the individual savers cannot on their own. Along with that very important role came huge spreads which enabled Banks to erect imposing buildings with impressive banking halls filled with well-paid managers who were recruited from respected families in each city. All these were supposed to signal trustworthiness, solidity, reliability, etc. To cap it all, the fact that all banks are regulated by a central authority added to the comfort of dealing with banks.

That uniqueness is sadly no more and challenges many-fold.

Banks all over the world have muddied the water by recruiting rogue elements who have violated risks norms or acted unethically. They have destroyed the notion that all banks can be trusted.

The big edifices are no more relevant today when technology has changed the face of banking. Trust now comes from the reliability of the banks’ IT systems and comfort comes from the technology that has moved banking from impressive Banking Halls to the customers’ smart phones and laptops. Many banks in India are found wanting in this regard because they are still basking in the success of moving to core banking software which provides anywhere banking. Much more can be done and needs to be done to survive tomorrow’s competition. That brings me to my third point.

Fintech companies have sprouted all over that have technology solutions for various processes related to saving, investing, lending and borrowing which are superior in many cases to what the majority of banks offer to their customers. If allowed to continue unopposed, these fintech companies will eat the banns’ lunch for sure. Fortunately, some banks are either acquiring or working with good fintech companies to upgrade various aspects especially those processes that touch the customer, and some are building capability in house with the help of technology vendors.

The banking customer’s journey has changed substantially due to technology which is driving expectations of customers. S/he does not go to the bank to deposit or withdraw money in banks, needs cash far less than ever before due to several other alternatives, does not seek a meeting with the bank manager in case of poor service (just shame the service provider on Social media for millions to see and to get the problem solved more effectively, etc.). Not only has the customer journey changed but the customers are empowered today (don’t have to cower in front of bank managers) and their expectations have spiralled up.

All this poses a huge HR problem for incumbent banks, especially the older ones which carry a lot of baggage which they cannot shake away. The kind of people required to service customers, handle technology and processes with substantially reduced cycle times, etc., are significantly different from those traditionally employed. Technology enables banks to flatten their hierarchy besides reducing the number of people required for each task because a large number of people are today doing multiple checking and approving work which were required in the pre-technology days. Downsizing and retraining are huge challenges facing banks because of opposition from unions and other problems.

There is another challenge that no one is talking about yet. Within the next 5 to 10 years, many countries including India will issue digital fiat currency which will be interchangeable with cash as we know it. Every country will have to wake up to the fact that the more they delay digital fiat currencies, the more settled will privately mined cryptocurrencies become (and more difficult to dislodge). These Central Bank Digital Currencies will need significantly new thinking, technology and processes. The most affected part of banking will be CASA. The HR challenges will multiply. This is a subject in itself, so I will leave it at just this.

How AI is impacting the industry and future of Banking?

Most processes in Banking are rule-based. AI is eating into most processes that require a very low level of intelligence. and have high volume, resulting not only in lower costs but more accuracy and quicker than when handled by humans. Using algorithms, AI is being deployed with great success in customer service, reputation management, risk assessment, fraud detection, etc. My company, for instance, serves the banking sector with proprietary tools based on AI to help improve customer satisfaction by understanding what customers are saying or writing, answering simple queries, cutting downtime for addressing customer issues, assessing Net Promoter Scores, do various kinds of analytics, etc. without involving humans. The banks of the future will deploy virtual assistants to guide customer, chatbots, do first-level credit appraisal, etc. thus freeing humans to do more complex work.

Fourth Industrial Revolution- Are banks prepared?

The fourth industrial revolution or industry 4.0 is here. India missed the first two and picked up crumbs in the third. Industry need not miss the fourth one because access to technology, capital and expertise already exist in India. In the last 12 months, the manufacturing sector has started adopting technologies that together help to create an intelligent cyber-physical system in which a layer of connectivity, communication and intelligence will connect and regulate the operation of men, machine, materials and materials with processes which are unified end to end in a supply chain. Indian businesses are not there yet, but I can see that happening over the next decade.

When that happens banking and financial services which need to link payments, guarantees, letters of credit to the business supply chains of the banks’ customers. Most banks in India are not ready now but it is bound to happen through the efforts of software companies who are already developing products. Like they created Core Banking products and then bank after bank implemented them.

Role of banks in enabling India to become a Ten Trillion Dollar economy by 2030?

Since money is the blood that flows through the veins and arteries of an economy and since Banks are like the heart that pumps blood through blood vessels to all parts of the body, and like the lungs that provide a means to load oxygen in the bloodstream needed by the cells to grow, they need to be healthy and functioning effectively at all times. Banks also function like the kidneys that clean up the blood and prevent toxicity than can kill the body. Right now, NPA toxicity is high, liquidity crunch are being felt because money is not reaching many parts of the economy, etc. Without a strong and vibrant banking sector, India’s journey to reach a $10 trillion GDP will be a stretch.

Opportunities and challenges in Infrastructure, manufacturing, MSME, etc

There are huge opportunities to create and fund infrastructure because India is way behind the needs of the times. The challenge to provide 15 to 25-year tenor loans for infrastructure lies in the absence of loan term sources of capital or other liability products for banks. once the Asset Liability Mismatch problems are solved, infrastructure (roads, ports, dams, bridges, etc.) will take off and in turn boost every economic activity.

There is a problem in medium-term funding of capital investments in the manufacturing sector, whether large or MSME because India has lost the ability to appraise projects with the demise of DFIs. Some DFIs like IDBI and ICICI have become commercial banks whose expertise is mainly in working capital lending and trade financing whilst State level DFIs have all but given up the ghost.

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