How AI Will Challenge Small Banks to Innovate

New research suggests that small banks will have a tough time adapting to the new world of AI, but more innovative players have an opportunity to thrive and win underserved customers.

Artificial intelligence promises to change customer relationships with banks. As more customers bring devices such as Amazon’s Alexa and Google Home into their residences, forward-looking banks can offer automated services to help users perform tasks such as requesting an address change or submitting an application for a credit card or personal loan.

In a recent report on the projected impact of AI on the banking and finance industry, the World Economic Forum warns that small and midsize banks struggle to find their footing in this rapidly changing environment. Firms with fewer assets now lag behind larger investment firms when it comes to AI and digital transformation, according to the report, “The New Physics of Financial Services,” which cites a survey by Digital Banking Report that found that 48 percent of banks with more than $50 billion in assets have already deployed an AI solution. That’s compared to banks with $1 billion to $10 billion in assets, of which only to 7 percent have an AI solution. One reason: Mid-tier firms have tighter investment budgets and rely on third-party technology vendors, which results in limited internal capacity for innovation and less agility.

The report offers some additional insights on smaller banks’ adoption of AI and related technology:

There’s hope for some unique organizations. Agile and niche players can capture underserved customers by optimizing offerings using algorithms and targeting unique needs, such as specialized insurance or investments. That could present opportunities for nonbank entrants such as technology companies themselves, which have become big players in everything from marketing to autonomous cars. Why not banking?  

Many smaller banks struggle. Midsize firms may continue to struggle to make the investments necessary in AI to remain competitive. As incumbent firms increasingly offer AI-based services, firms that do not have the capacity to build similar offerings eventually may face a tough time adapting.

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Smaller Banks and Credit Unions Can Tap AI, Too

While he agrees that larger players clearly have an advantage in terms of their ability to finance and deploy new AI tools, IDC’s Marc DeCastro says that does not mean that community banks and credit unions will not offer AI.

DeCastro, a research director for IDC Financial Insights, says smaller institutions will start slow, first setting up systems to provide customers with simple account information through conversational banking through devices such as Amazon Alexa or Google Home. Others will incorporate AI into chatbot features that allow customers to make name and address changes or other services often handled by a bank employee. In the near future, DeCastro says, an automated system could notice that the bank has not received a copy of a credit applicant’s driver’s license and ask them to take a picture and send a copy in order to complete the application.

“Providing actionable advice where the bank will do research for the customer is closer than one thinks, and it truly is an omnichannel approach in using AI,” DeCastro says. “The likelihood is that smaller banks will remain conservative and take a ‘wait and see’ approach, but they will not be far behind the larger banks and will rapidly catch up.”

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Oct 02 2018

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