AI in Financial Services8 min read

AI in Financial Services8 min read

Reading Time: 6 minutes

Introduction

In the post-COVID world, disruption through AI in the financial services industry has occurred faster than is generally believed. Age-old industries such as financial services and banking, which saw a lot of transformation with the advent of technology, started aiming for exponential growth to keep pace with the changing landscape in the world of business and the world at large.

With the widespread availability of business data in recent times due to the mainstream adoption of modern technologies, teams’ ability to process large sets of data using accessible algorithms and analytic methods, and improvements in connectivity tools and platforms, the time for digital transformation in the financial sector is ripe.

Today, finance teams are expected to provide real-time, data-enabled decision support. Finance leaders and CFOs must adapt to the needs of the modern consumer or risk falling behind other functional groups in the organization and other companies in the industry whose digital transformations are already underway.

Among the flurry of new technology solutions, the tools finance leaders are betting on are AI and data. 57% of financial service organizations believe that AI will give them a competitive edge over their peers, according to a report by PWC.

As industries continue to transform themselves digitally, let’s look at the market for financial services in the near future.

The Finance Industry Over the Years

Over the past few decades, the financial landscape has witnessed a sea of changes. The advent of the internet and mainstream technologies has pushed the finance industry into the era of information technology or IT-enabled operations.

The introduction of credits in the 1950s and automatic teller machines in the 1960s kicked off the advent of technologies that either improved the consumer experience, lifetime value, and market share of financial organizations or enhanced operational agility.

Decades later, as we enter the age of wholly digitized retail financing services, the core tenants for technology-enabled transformation are still based on these key pillars of enhanced user experience and improved services through automation.

Today, customers can download several value-added apps on their smartphones, from banking apps to investment apps and trading tools. Financial advisors and investors are empowered by technology to advise clients through AI-powered chatbots and much more.

As finance leaders work towards redesigning their organizations to provide more accessibility and convenience to their consumers, it is integral for them to learn from other industries such as retail, healthcare, and ed-tech that are more mature in their adoption of modern technology.

In recent years, financial institutions have invested significant capital in digital transformations. The leading drivers for this? Improved customer and operational experiences across mobile and web channels.

Despite these investments, most banking institutions cannot meaningfully engage with their audience, who are not only well-acquainted but have come to expect the superior experiences offered by consumer-tech companies.

Engaging with financial services on a virtual device is still considered intimidating by the millennial and Gen-Z user base, and considering they make up a significant part of the current and future workforce that is the target audience for these services, not transforming might be catastrophic for the banks over time.

With organizations across industries heavily investing in curating hyper-personalized user experiences, consumer expectations of financial service companies are at an all-time high. 

Traditional banks themselves are slowly morphing into lifestyle and consumer-tech organizations. As a result, banks must either adapt to the evolving expectations and deliver or get left behind.

Today, 91% of financial institutions are leveraging AI to drive business outcomes across the board.

The Bank of the Future

The Bank of Tomorrow is designed to serve consumers who wish to manage their lives substantially through a single agency, i.e., the bank. With banks expanding to integrate financial services into traditionally non-financial platforms, embedded banking is gaining prominence as the model of the future. 

Embedded finances enable businesses in MSME, B2C, and B2B segments to increase their customer lifetime value and vertically scale their product offering. Today, the players involved in embedded finance can be categorized into three groups:

• Containers: brands and service providers who control the customer relationship
• Providers of financial services and products: This includes both incumbents and challengers
• Enablers: FinTechs connecting Containers with Providers

The financial model of the future will be an integration of all these three under one roof.

Here’s what the Bank of the Future offers:

• Hyper-local: Banks are adapting to wherever the consumer chooses to be, whether in their home or other travel locations.
• Operations through personally preferred gadgets: Transactions between a bank and consumer have been digitized to enable omnichannel experiences through mobile, tablet, and even wearables.
• Telemetrics reporting: Signals collected for consumers are designed to build personalized experiences for every consumer based on their individual/family objectives and goals.
• Lifestyle elements: Today, banking interfaces have expanded to allow the purchasing of lifestyle items such as groceries, utilities, clothing, entertainment, travel, and more within the same ecosystem.
• Multi-modal: Consumers are enabled to carry out meaningful operations with financial institutions by themselves, with the help of intelligent virtual assistants, or through human assistance.

The Key Drivers for this Transformation

• Inorganic growth avenues: Services through the acquisition of new ventures and products, banking ecosystems now encompass a wide variety of product offerings.
• Fintech explosion: With the influx of fringe competition, niche product offerings, and competition that is tech-first, banks need to be tech-agile in order to beat the competition.
• Digital Transformation: The evolution of technology, the demand for seamless omnichannel experiences, and the impact of COVID-19 have pressed banks to transform digitally.
• Regulatory and compliance: Tighter data and privacy regulations (GDPR, FATCA, etc) & the risk of fraud have forced banks to prioritize security and privacy as their main objective.
• Evolving customer journeys: Consumers have access to more information and choices and as a result, banks need to deliver clear lifestyle advantages and differentiators in order to stand out.

AI in Financial Services

30% of banks state that AI has increased their annual revenue by more than 10% while over 25% believe that AI has reduced their annual spending by more than 10%.

Additionally, a McKinsey survey of US retail banking customers revealed that the banks with the highest degree of reported customer satisfaction grew deposits 84% faster than the banks on the lower end of the spectrum.

The data above demonstrates the rapid adoption of AI across financial services which necessitates banks to invest in enterprise AI strategies and infrastructure.

As competition for consumers and their financial data continues to intensify across incumbent banks, fintech, big tech, and big-box retail, AI-led operations have become mission-critical for organizations in the financial services industry. Banks are increasingly investing in AI to not only fast-track their digital transformation but also go one step further to power truly differentiated user experiences through highly individualized and contextualized user preference data and reap the benefits that come with analytics-driven decision-making.

AI Adoption Curve for Financial Services

The curve above categorizes the AI landscape based on the level of AI adoption across various organizations in the finance industry and the average time they take to achieve that level of adoption.

AI in the Financial Services Industry in 2023

30% of banks state that AI has increased their annual revenue by more than 10% while over 25% believe that AI has reduced their annual spending by more than 10%.

In a recent survey, banks that have adopted AI said that these were the benefits they saw after integrating AI into their systems and processes.

Additionally, a McKinsey survey of US retail banking customers revealed that the banks with the highest degree of reported customer satisfaction grew deposits 84% faster than the banks on the lower end of the spectrum.

The data above demonstrates the rapid adoption of AI across financial services which necessitates banks to invest in enterprise AI strategies and infrastructure.

Today, the share of financial service organizations adopting AI-powered use cases has grown by an average of 300%. Here are the top use cases finance leaders are betting on this year.

Investing in AI and harnessing the power of these intelligent systems has enabled financial institutions to maximize human potential and significantly improve operational efficiency, and here’s where it gets even better – the more the AI learns, the better it performs and optimizes overall performance.

And here are the use cases the industry will continue to invest in going forward.

While financial institutes still have a long way to go before they are truly consumer-first and AI-led, here is what finance leaders are investing in in the coming months.

• Hire more AI experts
• Provide AI training to staff
• Engage third-party partners to accelerate AI adoption
• Spend more on infrastructure
• Identify additional AI use cases

Successfully deploying an AI strategy will enable these firms to achieve higher revenues, lower operating costs, greater customer satisfaction, and an overall competitive edge in the industry.

In Conclusion…

We live in the era of new technology where the survival of institutions and services is quite literally in the hands of well-informed users. They have easy access to businesses that serve tailor-made experiences and solutions suited to their needs, and businesses cannot afford to be poised in a situation where they are dispensable.

Intelligent Digital Transformation is not a choice anymore – it is a necessity. Are you ready to build the Bank of Tomorrow?