AI in Financial Services: Enhancing Risk Management and Personalised Banking

The finance and banking sector has a new player on the block: artificial intelligence (AI).

AI has become a powerful tool in the finance and banking sector, helping them streamline their operations and offer personalised services to customers. It has already proved the potential to transform how we experience banking, assess risks, and identify fraud practices.

This article explores the many ways AI is impacting finance and banking, such as:

• Advantages and disadvantages of AI in banking and finance
•  How AI is changing the industry
• Use cases of AI in finance and banking
•  What the future holds for AI in finance and banking

AI in Banking and Finance

The fourth annual State of AI in Financial Service Report for 2024 by NVIDIA revealed that AI technologies are significantly embraced in the financial industry. The report revealed that around 91% of financial companies are either evaluating AI or already integrating it into their operations.

From enhancing customer experience to optimising operations, managing risks, and tailoring products, AI in financial services is redefining the possibilities within banking and finance.

Benefits of Using AI in Finance and Banking

The following are some benefits of AI in finance:

Enhancing customer experience

The rise of conversational AI, like chatbots and virtual assistants, represents a significant advancement in customer service. These AI-driven solutions are both responsive and predictive, offering personalised assistance and advice around the clock.

Additionally, AI-powered financial tools and budgeting apps have revolutionised personal finance management. They provide users with comprehensive insights into their spending habits and financial well-being, thereby helping customers make informed financial decisions.

Cracking down on risks and frauds

Thanks to AI, spotting fraud and assessing risks has become a whole lot easier and more effective. By crunching through huge amounts of data, AI systems can identify anomalies that might signal fraud before it happens. Likewise, in the world of lending, AI models dig into all sorts of data, even non-traditional sources, to better predict who can pay back loans, thus reducing defaults.

 Instant monitoring

AI keeps an eye on transactions and market trends non-stop. This means banks can spot problems as soon as they arise and deal with them right away, making risk management super effective.

Streamlined compliance

AI in finance can be used to ensure that banks stay on the right side of the law. It cuts down paperwork, ensures everything is done correctly, and keeps risks low.

Supercharged data analysis

Banks have a lot of data to analyse, from financial reports to customer info. AI can help them to find valuable insights to manage risks and make smart decisions.

Making smarter decisions

AI's knack for processing mountains of data has transformed decision-making in finance. Insights from AI algorithms help finance and banking sectors create better strategies, design products that hit the mark, and offer services that customers truly need.

AI Applications in the Banking and Finance Industry

AI-powered applications in banking and finance bring together different types of smart technology to spot, size up, minimise risks effectively, and increase the efficiency of the finance and banking process.

Artificial intelligence (AI)

AI makes systems smart enough to handle tasks humans usually do. In the finance and banking sector, AI can help in documentation, analysing data, spotting dangers, catching fraud, and making sure rules are followed.

Machine learning (ML)

ML teaches computer programmes to learn from information and make smart choices. These programmes can identify fake transactions, figure out if someone is suitable for a loan, predict where markets are headed, and flag things that break the rules.

Natural language processing (NLP)

NLP helps analyse info from customer reviews, rules, and news. It's like a language detective, finding hidden clues about new risks, customer complaints, or changes in the rules.

Big data analytics

Big data analytics mixes bank records with outside information like market trends or social media buzz to see risks from all angles.

Robotic process automation (RPA)

RPA puts software robots to work, handling boring tasks fast and error-free. In risk management, it speeds up data work, checks information, and makes reports, keeping things running smoothly and safely.

How is AI Used in Risk Management?

In 2023, banks saved an astonishing total of $447 billion. That is a ton of cash, thanks to AI!

Therefore, it is no surprise that the finance and banking sectors are finding different ways to use artificial intelligence. Whether it is spotting risks or catching fraudsters, AI is changing how banks do their process, making everything run smoother and safer.

AI plays a big role in keeping risks in check in banking and financing. With AI on their side for risk management, banks can keep risks under control and make smarter moves, keeping your money safe. Here are some ways it helps:

Fraud detection

AI can spot fraudsters by scanning tons of transactions and identifying anomalies in their patterns.

Credit risk assessment

Wondering if someone’s good for a loan? AI can dig into information, from bank records to market trends, to make smart lending calls.

Anti-money laundering (AML)

Banks can leverage AI to combat money laundering by identifying potentially risky transactions.

Cybersecurity

AI can keep an eye out for digital threats, using smart algorithms to spot and stop cyber-attacks.

Market-risk analysis

AI scans the web, social media, and other data sources to predict market moves and spot potential dangers. This helps banks make smarter decisions.

Operational risk management

AI helps banks identify weak spots in their operations, using past data to predict problems and offer helpful advice.

Use Cases of Risk Management in Banking and Finance

• JP Morgan upgraded its fraud-fighting tech with AI, using smart tricks to read messy data and catch any fraudulent transactions.
• Bank of America now uses AI to predict if a company might default on a loan by analysing earnings and call transcripts. The Bank of America's virtual financial assistant, Erica, has engaged with clients over 1.5 billion times since its 2018 launch, addressing more than 56 million requests monthly, demonstrating AI's potential to elevate customer engagement.
• Google Cloud’s AML AI helps banks like HSBC find real risks faster, cutting down on false alarms and saving time.
• Qatari banks are using AI systems like Tessian and Expert System to tackle email-based cyber-attacks.
• Deutsche Bank and NVIDIA are teaming up to use AI to spot issues in financial transactions faster.
• Goldman Sachs and its Marcus platform use AI to offer personalised loan and savings products, a move that's attracted a whopping $60 billion in deposits. It's proof that smart data analysis can lead to big wins in finance.
• Visa's Advanced Authorization technology checks over 500 risk factors to slash fraud rates by 30%.
• AI-driven robo-advisers, such as Betterment and Vanguard in the US and finance app Revolut in Europe, are democratising investment by providing professional financial insights and portfolio management to everyone.

Personalising Financial Services with Artificial Intelligence

AI is changing banking and investments, making it more customer-oriented through personalisation. Research shows that 62% of people are happy to share personal info if it means getting more relevant communications. Clearly, there's a big demand for financial services customised to individual needs. Here’s how:

• Personalised financial advice: Using smart predictions, AI suggests the best way for you to invest and save, making sure your money works for you based on your goals.              Understanding you better: AI looks at your banking history and how you spend money to figure out what you like and how you handle finances.
•  Products made just for you: Banks use AI to study your info and offer products and services that fit your needs perfectly.
• Fair pricing: AI helps banks set prices that match your risk and what’s happening in the market, making sure you get a good deal every time.

Challenges of AI Implementation in Banking and Finance

Using AI in finance and banking has its advantages, but some risks in artificial intelligence need to be looked at:

• Protecting your privacy and data: Banks must ensure your personal information stays safe when they use AI. They use methods such as encrypting data and storing it securely to keep it away from prying eyes. This helps build trust and follows the rules about data protection.
• Following the rules: Using AI in finance must play by a lot of rules. Banks need to interact with regulators and ensure their AI use complies with legal standards. This keeps everything lawful and protects your money.
• Keeping a fair perspective: Banks must continue training AI with lots of different data and ensure it is fair to everyone. This keeps customers happy and makes sure everyone gets a fair deal.

Therefore, to tackle these challenges, banks and financial services need to mix smart tech with careful planning.

The Future of AI in Financial Services

AI is becoming a big deal in finance and banking and is only getting bigger. It helps make loan approvals more accurate, spotting fraud in real-time, and gives customers personalised services. AI is making banking faster, safer, and more about you.

However, with all the advantages Artificial Intelligence brings to banking and finance, there are some factors to think about too. How do we make sure it is fair and follows the rules? What about keeping your information private?

We need to figure out these tricky bits to make sure AI in finance is not just high-tech but also fair, safe, and open to everyone.

Overall, the integration of AI in finance, financial services is leading to a new era of data-driven decision-making, improved efficiency, enhanced security, and a more personalised customer experience.

Are you passionate about the dynamic world of banking and finance?

The London School of Business and Finance (LSBF UK) offers reputed executive education programmes and focused short courses such as Financial Planning and Analysis. These programmes can be your ideal pathway to a rewarding career in the finance sector.