The Transformative Influence of AI on the Fintech Industry

AI or Artificial Intelligence is the technology that enables computers to reason, learn, and make decisions like human beings. It allows computers to take on complex, human-like tasks that go beyond data management and calculation. 

As early in its development as experts believe AI is, it’s already having a major impact on financial services. The financial sector has faced challenging times recently, with increased regulation, escalating customer expectations in the tech age, new competitors shaking up the landscape, and historic interest rate volatility.

The old ways of working and delivering services are no longer a guarantee of success. The industry needs innovation to improve efficiency, enable growth, enhance differentiation and risk management, and revolutionize the client experience.

As a tool for innovation, Artificial Intelligence in finance is evolving at an unprecedented rate. AI lending, operations support, risk assessment, fraud prevention, customer service enhancements and personalized advice, and product recommendations are already part of the Fintech landscape.

Applications of AI in Fintech

1. AI in transaction processing and automation

AI has the ability to crunch far more data than a human could ever evaluate and produce quick, accurate decisions based on that data.

For example, prospective borrowers can go on an AI lending platform and fill out a fairly simple application. Then, instead of waiting for a human underwriter to sift through reams of complex paperwork, AI accesses hundreds of millions of traditional and alternative data points, analyzes that data, and quickly produces an automated lending decision.

Customers benefit from a smooth application process with quick results. Automation is also a significant advantage for lenders, reducing the amount of staff time spent on repetitive standard tasks.

2. AI-driven risk assessment and fraud detection

The purpose of AI’s analysis is the same as that of a human underwriter – to evaluate a potential borrower’s financial patterns and capacity for repayment, and to assess the risk of late payments or default. Risk assessment is a critical part of formulating loan decisions and AI does it with speed and accuracy.

AI is also on the cutting edge of real-time fraud detection. Irregular patterns and anomalies can be indicators of fraudulent activity.

Older fraud detection software relies on rules written by humans to determine what transactions seem normal and permissible and which ones break the pattern and could be fraud. But criminals change their tactics often to avoid detection.

The ability of AI to process vast amounts of data, find the patterns (and pattern breaks) in that data, and even learn new patterns from new data can help financial companies manage risk and enhance security. 

3. Personalized financial recommendations through AI

AI can also upend the old one-size-fits-all model of financial products and enable financial companies to offer customers personalized access to products and services suited to their needs.

Traditional credit reports are unable to capture real-time financial behavior. But today, millions of points of data are available from consumers’ day-to-day transactions, including non-traditional credit arrangements; payments on accounts such as cell phones, utilities, and streaming services; rent payments; online shopping behavior; social media activity; and public records on education, property ownership, professional licenses, etc.

Effectively analyzed, these can provide a detailed and accurate picture of an individual’s current circumstances.

The huge amount of data AI gathers on individual customers, their lifestyles and financial behavior can help companies design loans, checking and savings accounts, and investment products and recommendations that are personalized and favorable both for customers and the business. 

Benefits of AI in Fintech

1. Enhanced customer experience and satisfaction

Satisfied customers are more likely to stay with a company and provide referrals to other prospects. Great customer service can improve acquisition and retention, both critical for healthy business growth. 

For customers, the ease of managing accounts and applying for loans online is appealing. People today don’t want to disrupt their daily routines. They want to be able to manage their finances at their own convenience, wherever they are, and get responses from their service providers equally conveniently and quickly as well.

2. Improved efficiency and cost savings

In 2018, MacKenzie noted that the average “time to decision” for small business lending was between three and five weeks in traditional banks, with the average “time to cash” at nearly three months. Personal lending wasn’t much better. Waiting months for money can be stressful for potential borrowers. 

AI lending can drive approval times down significantly – to days, hours, or even minutes depending on the type of loan – with cash in hand often in less than 24 hours. 

This is an example of the increased speed of processing possible with AI. It clearly benefits customers, but the efficiency also enables financial operations to process and service more business, supporting revenue and profit growth.

AI can also cut down on staff hours used for certain types of tasks and on human errors, which generates cost savings.

3. Better risk management and security

Traditional credit scores rely on limited data and only tell part of the story, while AI can gather and analyze additional information that illuminates a borrower’s true level of financial responsibility and risk.

AI uses many more points of data for risk assessment than conventional processes and goes far beyond the traditional scope. On a micro level, it can give lenders insights into the daily patterns of individual consumers while, on a macro level, it can take current market trends into account as well. 

This level of data analysis can boost the accuracy of default probabilities. The result can be credit for deserving but underserved families and more income opportunities with an enhanced risk profile for lenders.

AI is also making strides in improving fraud prevention with its ability to look through massive piles of information and find correlations much faster than humans.

Once it has built a model, it is also able to cross-reference new data against data it has already processed and predict when the models are likely to change. This enables AI fraud prevention systems to write and rewrite their own rules, learning and testing new patterns in real-time and helping companies block new forms of fraud before they can do damage.

AI Transformation Today and Tomorrow

AI is already having a major impact on the financial services industry. Experts believe it will become more and more integrated into traditional processes across financial sectors as its full potential to upgrade services and improve business profitability becomes clear. 

Researchers are expanding applications every day. Of the many promising applications of AI for Fintech, experts believe the ones at the head of the list for adoption include: regulatory compliance, financial crime, AI lending, credit risk modeling, and cyber risk. 

It’s likely the pace of innovation will accelerate in the future as each new step taken opens up new pathways. And the timing is right. For some time, the financial industry has been under pressure, grappling with increased oversight and consumer demands, and decreased profitability. In this environment, growth is more than a goal; it’s a necessity. New technologies are likely to lead the way.