Each day we learn about more industries that are now being affected by AI. (Artificial Intelligence). AI is popping up in a vast dichotomy of products and services being used around the globe. You may ask if this is a good or bad thing, and my answer is it depends if the proper governances are implemented to protect not only businesses, the people of our world and the economic info-structure that supports them. Not too long ago, we heard about Fintech and their new software that will shape the financial world, but now they will be adding AI Technology to their software. Throughout this article, I will share why banks are leaning toward AI Technology, the change in how we do business with them, and the challenges of implementing it.
Centuries ago, people traded grain, wheat, barley, livestock, and other necessities before we had legal money as tender. Farmers would deposit these items in a grain or supply bank and could withdraw these or other commodities they needed for themselves and their businesses. This gave them a constant food source while their crop grew. Ludians, in 700 BC, developed a banking system consisting of metal coins and dominated currencies for centuries. The Chinese invented paper money in the 10th century because paper currency was less expensive to maintain than metal. After several financial crises in the early 20th century, the United States Government formed what we know today as the modern Federal reserve system.
When Barron, the inventor, became frustrated that he could not cash his check after the bank had closed, he created the ATM in the 1960s. John decided to invent an ATM because he saw a concept for a chocolate vending machine. Banking started with a process that took over a week to cash a check depending on its routing number, which determined its location. Thus, routing was fully automated on Oct 28, 2004, when the Check 21 Act was passed. It took the banks experiencing a tragedy from 911 when no one could cash many checks due to planes being unable to get there as air traffic had been restricted. Thus, congress created Check 21, but most changes don’t happen in the financial industry until a problem arises. The philosophy of the banking system organizations was that if it is not broken, don’t fix it. Check 21 allows a paper check to be turned into an electronic check which will clear a bank within 24-48 business hours, a far cry from the original seven-fourteen business day.
Now you may be asking why the banks want to add AI Technology to their info structure. It is to handle: Chatbots, Fraud Detection & Prevention, Cybersecurity & Fraud Detection, Better Customer Experience CRM (Customer/Client Relationship Management), Risk Management, Chatbots, & Credit Decisions, Regulatory Compliance, and Process Automation. There is also a new buzzword in the financial industry called the banking of things. They are doing this mainly because it is presumed that the tasks will be performed better and with less cost.
There are many more applications, but let us explore some of these in greater detail. Chatbots are AI-powered systems that can quickly help open, and manage accounts, replace credit or debit cards, take complaints, and promptly route them to the respective department. Until now, banks have relied on more primitive and manual processes to verify people’s identity, (AML) anti-money laundering transaction monitoring to face many false positives that often annoyed the customer and sometimes bank management. With AI, they are now adding algorithms to check evolving fraud patterns that were often undetected before. By implementing AI with CRM solutions, banks can now support facial recognition and voice verification options for faster account validations. Thanks to ML (Machine Learning) & AI, a new world of accurate predictive forecasting is now available such as revenue forecasting, stock prices, risk monitoring, and even case management.
Risk Management is always under strict scrutiny by regulators; thus, using AI to adapt and grow with the FinTech Market is critical to being competitive. Now banks are using technology to make credit decisions for loans and lines of credit.
Yes, there are many benefits to using AI in the BFSI (Banking Financial Services Industry), but there are also some things that everyone needs to be aware of if this technology will be relied upon so much. Before I get into the details, we must be aware that a series of checks and balances must be in place, starting with a human being always in the loop.
According to CNET.com, the CFPB (Consumer Financial Protection Bureau) had issued a warning saying that “generative AI chatbots being used by banks. The agency says it has received "numerous" complaints from customers who say the chatbots have failed to provide "timely, straightforward answers to their questions.” The issue is that many banks are not taking the time to craft a well-trained chatbot that can respond with timely answers instead of frustrating customers with incorrect information. Furthermore, the banks and credit card companies are failing to understand that customer is executing their legal right and not taking the appropriate measure to ensure no pi (personal information) data is leaked, which would exploit their privacy.
Per an interview on CNBC said, and I quote “Generative AI is not usually used for creating credit scores or in the risk scoring of consumers. That is not what the tool was built for,” said Niklas Guske, chief operating officer at Taktile, a startup that helps fintech’s automate decision-making. Instead, Guske noted that the most powerful applications are pre-processing unstructured data such as text files — like classifying transactions.” Thus, it is clear that many industries, not just banks, are trying to make AI a be-all-end-all for them when it is not designed for many specific applications.
Using AI in the Banking Industry is like trying to understand why Google ranks some pages higher one day and lowers their scores on others with no reason, which is far from transparent. Will we allow the banking industry to become a machine that no one knows how it operates or why?
Thus, we can deduce that the dangers of implementing an AI system in the banking industry, if not done correctly, may lead to the exploitation of privacy, biased decisions, failed regulatory compliance, cyber security risks, and potential legal implications for any one or more of these breaches described. With many things in life, there has to be a balance, and with AI, especially in banking, it’s between security & convenience. I feel that many banks are rushing to market too fast with AI and not understanding the risk they are putting themselves and their customers in.
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