# The risks and rewards of AI in banking in 2022 Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-03-09 Category: BANKING Category URL: https://financedigest.com/category/banking Meta Title: How Banks are Harnessing AI for Innovation Meta Description: Discover how banks are leveraging Artificial Intelligence to drive innovation, efficiency gains, and seamless customer experiences. Read more from Hani Hagras, URL: https://financedigest.com/the-risks-and-rewards-of-ai-in-banking-in-2022html ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/istock-12501534102-1736815979929-compressed.jpg) _By_ **_Hani Hagras_** _, – Chief Science Officer at Temenos_ The use of Artificial Intelligence (AI) in the financial services sector has grown exponentially in the last decade. [Banks are now implementing the technology](https://www.financedigest.com/the-rise-of-biometric-technology-in-banking.html "The rise of biometric technology in banking") across a range of innovative use-cases. A new survey of IT [executives in banking](https://www.financedigest.com/bank-of-england-fines-former-tsb-executive-over-2018-it-failure.html "Bank of England fines former TSB executive over 2018 IT failure"), conducted by The Economist Intelligence Unit (The EIU) in partnership with Temenos, finds that 85 per cent have a “clear strategy” for adopting AI to develop new products and services. Heavy investments by [banks into AI also demonstrate this upward curve](https://www.financedigest.com/getting-out-of-the-static-curve-to-decide-the-growth-of-umbilical-cord-blood-banking-market.html "Getting Out Of The Static Curve To Decide The Growth Of Umbilical Cord Blood Banking Market"), with JP Morgan Chase, for example, spending US$12bn a year on technologies such as AI and machine learning. The last few years have [seen significant structural changes in the banking](https://www.financedigest.com/bank-of-canada-seen-on-hold-even-as-economy-accelerates.html "Bank of Canada seen on hold even as economy accelerates") space. It has been driven by key pressures from the climbing cost of services, increasing competition from Big Tech and start-ups, and growing [consumer pressure for seamless customer service](https://www.financedigest.com/30-per-cent-of-uk-consumers-would-use-amazon-google-facebook-or-apple-for-banking-services.html "30 Per Cent of UK Consumers Would Use Amazon, Google, Facebook or Apple for Banking Services"). In the past, AI has primarily been used to automate routine tasks. But [banks are now seeing it as a vital tool to overcome these growing](https://www.financedigest.com/bank-finance-for-cleaner-energy-grows-but-still-lags-fossil-fuels-report.html "Bank finance for cleaner energy grows, but still lags fossil fuels – report") pressures, fuel back-office efficiency gains, support product innovation and develop new business models. With the data-driven nature of the banking industry providing fertile soil for [artificial intelligence](https://www.financedigest.com/artificial-intelligence-in-banking-robo-advisors-and-beyond.html "Artificial Intelligence in Banking – Robo Advisors and beyond") – paired with the increasing recognition of AI’s breadth of application – it comes as no surprise that AI is becoming a game-changer for banks. According to a separate [global survey of senior banking](https://www.financedigest.com/global-shares-jump-but-bank-whack-a-mole-not-over.html "Global shares jump but bank ‘whack-a-mole’ not over") executives, four in five agree that unlocking value from AI will distinguish the winners from losers in the industry. As innovation in the [banking sector](https://www.financedigest.com/big-ecb-hike-adds-fuel-to-the-banking-sector-fire.html "Big ECB hike adds fuel to the banking sector fire") grows, the list of functions of AI technology symbiotically expands. The EIU survey [provides insights into AI’s key uses for banking](https://www.financedigest.com/banks-can-provide-a-protective-shield-to-defend-customers-from-cyber-attack.html "Banks can provide a protective shield to defend customers from cyber attack") operations. [Fraud detection](https://www.financedigest.com/the-clues-to-detecting-fraud-are-hidden-in-relationships.html "THE CLUES TO DETECTING FRAUD ARE HIDDEN IN RELATIONSHIPS") is the top application of AI by banks. By collecting data on transactions and authorisations, [banks payments services](https://www.financedigest.com/20-billion-in-bank-service-fees-are-you-overpaying.html " Billion in Bank Service Fees: Are You Overpaying?") provider Mastercard uses AI to predict and detect fraud more precisely and quickly. Improvements in data accuracy not only reduce financial losses but also false positive transactions and the hold-up of legitimate transactions, helping to improve [customer experience](https://www.financedigest.com/how-will-open-banking-impact-the-customer-experience.html "How will Open Banking impact the customer experience?"). Customer demands for a seamless [banking experience are becoming](https://www.financedigest.com/banks-need-to-become-a-lifestyle-brand.html "Banks need to become a lifestyle brand") the gold standard. AI [offers numerous uses to provide at-scale personalisation to anticipate customer needs and create highly tailored services through the use of individuals data](https://www.financedigest.com/aon-data-empowers-unica-to-offer-flood-insurance-for-5-2bn-canadian-peril.html "Aon data empowers Unica to offer flood insurance for .2bn Canadian peril"). This includes deploying AI within the [back office to optimise and streamline IT operations](https://www.financedigest.com/ubisoft-vows-to-get-back-to-operating-margin-above-20-in-medium-term.html "Ubisoft vows to get back to operating margin above 20% in medium term"). And improving [customer support through chatbots and innovations](https://www.financedigest.com/how-partnerships-fuel-fintech-innovation-and-help-banks-deliver-a-better-customer-experience.html "How Partnerships Fuel Fintech Innovation and Help Banks Deliver a Better Customer Experience") such as “smile-to-pay” identification to ensure frictionless transactions. Other applications include embedding AI within Buy-Now-Pay-Later (BNPL) services to offer a personalised service. This encourages responsible spending practices, tracking [consumer behaviour](https://www.financedigest.com/gumgum-powers-into-europe-as-new-research-shows-consumers-reject-behavioural-ads.html "GumGum Powers into Europe as New Research Shows Consumers Reject Behavioural Ads") to support targeted advertising. While also using machine learning techniques to analyse customer transactions in real-time to accurately calculate default risks and offer cheaper loans. However, while AI provides a breadth of opportunity, [banks understand its limitations](https://www.financedigest.com/europes-banks-brace-for-russia-fallout-while-u-s-banks-see-limited-pain.html "Europe’s banks brace for Russia fallout while U.S. banks see limited pain"). As found in the EIU report, 62 per cent of [banks agree that the complexity and risks](https://www.financedigest.com/strategies-banks-use-to-manage-liquidity-risk.html "Strategies Banks Use to Manage Liquidity Risk") associated with handling personal data for AI projects often outweigh the benefits to customer experience. Most notably, trust and bias continue to be prominent barriers. For example, Apple experienced an unfortunate AI-related incident in 2019. Its algorithms – used to decide whether to grant credit lines – ran into claims that it was exhibiting gender bias, allocating relatively fewer credit lines to [women than men](https://www.financedigest.com/bloom-uk-launches-fourth-annual-co-mentoring-scheme-the-exchange-for-senior-and-c-suite-men-and-women.html "Bloom UK launches fourth annual co-mentoring scheme, The Exchange, for senior and C-suite men and women"). This is just one example of the adverse consequences of AI-based decisions. Thus, highlighting the need for transparency to restore trust from consumers and regulators alike. With these risks at the forefront of AI technology for “high-risk” applications, such as credit scoring, [banks are likely to feel increased pressure from regulatory](https://www.financedigest.com/how-banks-can-avoid-regulatory-reporting-mistakes-with-a-good-dose-of-automation.html "HOW BANKS CAN AVOID REGULATORY REPORTING MISTAKES WITH A GOOD DOSE OF AUTOMATION") and customer influences. Specifically, the need “ “explainability”, highlighting how an AI system makes decisions. [Banks will need to establish a set of processes that allow users to understand the output created by machine learning](https://www.financedigest.com/learning-the-lessons-of-the-bangladesh-bank-heist.html "LEARNING THE LESSONS OF THE BANGLADESH BANK HEIST") algorithms. The success of AI will be enhanced with the use of explainable AI to spot and correct potential flaws and vulnerabilities in models. Looking at this through the specific example of BNPL, Explainable AI (XAI) can explain to customers why a particular BNPL package was recommended to them. This provides [customers with the transparency and information to take control of their own banking](https://www.financedigest.com/communicating-with-the-customer-is-the-future-of-mobile-banking.html "Communicating with the customer is the future of mobile banking") decisions, increasing their trust and understanding of the service. The inclusions of strong explanatory capabilities will continue to be a core requirement for AI technology to gain customers’ trust, while also ensuring [banks meet the likely tightening](https://www.financedigest.com/inflation-trumps-financial-risks-as-central-bank-tightening-set-to-continue.html "Inflation trumps financial risks as central bank tightening set to continue") regulatory requirements. EU regulators have already announced they are seeking to establish stricter rules around the use of [artificial intelligence](https://www.financedigest.com/artificial-intelligence-in-banking-magazine.html "Artificial Intelligence in Banking Magazine") in areas like crime prediction, credit scoring, employee performance management and border control systems. In particular, the bloc is seeking to [mitigate undesirable outcomes and risks](https://www.financedigest.com/mitigating-operational-risk-through-centralising-reconciliation.html "MITIGATING OPERATIONAL RISK THROUGH CENTRALISING RECONCILIATION") arising from AI-generated decisions. While AI is clearly a game-changer, [banks will need](https://www.financedigest.com/britains-digital-banks-need-support-amid-banking-turmoil-trade-body.html "Britain’s digital banks need support amid banking turmoil – trade body") to establish a holistic strategy to ensure it is safe and suitable to help improve security and trust. And by ensuring any potential biases are mitigated, society can benefit from the [market opportunities that AI has to offer in the fast-changing banking](https://www.financedigest.com/in-a-rising-market-are-banking-outsourcers-pulling-their-weight.html "In a rising market, are banking outsourcers pulling their weight?") environment. As banks continue to innovate to meet and exceed consumer demands, they will need to tread carefully to ensure [risks are balanced](https://www.financedigest.com/managing-corporate-currency-risk-the-cfos-balancing-act.html "Managing Corporate Currency Risk: The CFO’s Balancing Act") and services are future-proofed to handle the potential of AI. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---