Generative AI Applications in Banking

Artificial Intelligence is helping businesses and organizations achieve superior results across various domains. Generative AI is particularly creating a lot of buzz recently. In general, Generative AI or Generative Artificial Intelligence refers to a class of Artificial Intelligence that can produce new content resembling existing data. Generative AI can be used to create images, text and even music. With rapid advances in the area of LLMs (Large Language Models), generative AI can create realistic images, write engaging text and perform some even complex tasks. Generative AI has the potential to change how specific tasks have been being performed inside companies across various sectors. Across several industry sectors, generative AI is being used to improve efficiency, provide the customers with more personalized experiences, and to create new products and services.

A very large percentage of business leaders believe that Generative AI is going to prove a game changer for their businesses and industry sectors. In a survey conducted by Accenture a few years ago, 97% of business leaders accepted that Generative AI was a game changer for their business and industry sectors. A vast number of companies increased their investment in Generative AI in 2023, which proves that companies see immense potential in Generative AI.

According to a report by CB Insights, 2023 was an outstanding year in terms of AI investment. As the technology has advanced, the number of companies making Generative AI capabilities which can help businesses of various sizes improve their productivity has increased a lot. Companies like Open AI, Inflection AI, and Databricks have received solid funding in 2023. According to the report, 2023 was a breakout year for investment in generative AI startups, with equity funding topping $21.8B across 426 deals.

One of the various sectors that is expected to be strongly influenced by Generative AI in future is Banking. Generative AI, which includes technologies like Generative Adversarial Networks (GANs) and other models, can find various applications in the banking sector. According to McKinsey, Banking is among the leading sectors that will experience solid productivity gains across various functions from marketing to sales by investing in Generative AI.

How Gen AI Will Influence the Banking Sector

Here are some notable applications of Generative AI in the Banking sector:

Fraud Detection and Prevention:

Synthetic Data Generation: Generative AI can be used to generate synthetic data to train machine learning models for fraud detection. By creating diverse datasets that mimic real-world scenarios, the models can better identify unusual patterns indicative of fraud. Banks can clearly improve their fraud detection and prevention capabilities a lot using Generative AI. Over time, while the cases of digital fraud have increased, the financial impact of digital frauds has also increased a lot. Traditional methods of fraud prevention are failing since fraudsters are using more sophisticated and automated tools to commit fraud. Generative AI proves to be more efficient in this area since it learns continuously which helps it distinguish critical features to flag fraudulent transactions. Since Generative AI is equipped with the ability to process tons of data, it can easily identify hidden patterns that might easily escape the traditional fraud detection mechanisms.

Credit Scoring and Risk Assessment:

Data Augmentation: Generative models can enhance datasets used for credit scoring and risk assessment. By generating synthetic but realistic data points, these models can contribute to building more robust credit risk models, especially when dealing with limited data. Generative AI models can be used to analyze an extensive array of data sources like transaction history, account age, changes in account information etc as well as external data sources like social media activity. Generative AI can provide a more comprehensive view of creditworthiness of an individual. The traditional credit scoring methods are less reliable in this regard, offering only a limited view of the borrower’s financial health.

Anti-Money Laundering (AML):

Scenario Simulation: Generative AI can simulate various money laundering scenarios, helping banks test and improve their AML detection systems. This enables banks to stay ahead of evolving tactics used by criminals. Experts claim that Generative Ai has emerged as a key ally in the fight against Money Laundering. It has the critical ability to analyze tons of historical transaction data. Generative AI shines where the traditional methods fail to prevent money laundering and other types of financial crimes. Generative AI analyzes a vast amount of data to identify patterns that might indicate money laundering and might otherwise easily escape human eyes.

Chatbots and Customer Service:

Natural Language Generation (NLG): Generative models can power chatbots and virtual assistants to provide more human-like responses. This enhances customer interactions by addressing inquiries, resolving issues, and assisting with routine banking tasks. Chatbots are common across various sectors from tech to retail, and services industries including banking. Such generative AI powered chatbots are commonly called Copilots and are being employed widely across several sectors. They can suggest the customer service staff with the right responses by tapping into the knowledge base. These copilots can also provide the customer service staff with quicker access to actionable data and insights.

Personalized Customer Interactions:

Content Generation: Generative models can analyze customer data to generate personalized content for communications. This includes creating customized product recommendations, offers, and targeted marketing messages. Generative AI has the potential to deliver highly personalized experiences across several channels. It is easy to provide unique experiences at scale across different channels using Generative AI. It can analyze tons of data and generate responses and unique content that speaks to individual customers directly. Generative AI can create tailored content that can target individual customers based on their preferences. The best thing about Generative AI is that it can adapt in real time to changing consumer behavior and preferences. A large segment of customers also believe that Generative AI can provide them a significantly superior experience based on a study by Adobe.

Algorithmic Trading:

Market Simulation: Generative models can simulate market conditions and generate synthetic financial data. This can be valuable for backtesting trading algorithms, optimizing strategies, and assessing the impact of various market scenarios. Generative AI is equipped with the capability to analyze tons of data, which allows it to identify patterns that will easily escape human eyes. Generative AI can analyze market trends and conditions to predict future trends. The trading process for financial products can be automated using Generative AI.

Cybersecurity:

Anomaly Detection: Generative models can assist in identifying anomalies in network traffic and user behavior, helping to strengthen cybersecurity measures. By learning normal patterns, these models can detect deviations that may indicate a security threat. Generative AI can be highly useful for banks in terms of enhancing cybersecurity. It can be useful for simulating adversarial strategies and attack scenarios. Generative AI can also help identify cybersecurity vulnerabilities and help mitigate risks. Cybersecurity threat detection can also be made faster and smarter with the help of Generative AI.

Customer Behavior Analysis:

Generative Models for Customer Profiles: Banks can use generative models to create realistic customer profiles, allowing them to analyze and predict customer behavior. This helps in tailoring services and products to individual preferences. Where Generative AI outshines the traditional methods in terms of analysing customer behavior is its ability to process tons of data quickly. It can analyse customer data to provide reports related to purchase intent and churn likelihood. Such data can be especially helpful to create customer retention strategies. Generative AI can help predict consumer behavior and preferences by tapping into internal as well as external data sources to sense customer sentiment and present actionable reports.

Loan Application Processing:

Document Generation and Analysis: Generative AI can assist in the creation and processing of loan-related documents. By automating document generation and extracting relevant information, the loan application process can be streamlined. Generative AI can be used to automate several processes in the lending lifecycle from the loan origination and credit research stage to the final loan servicing and customer service stage. Generative AI can also help customers with the loan application process and support credit analysts to analyze credit scores and financial history.

Regulatory Compliance:

Policy and Procedure Generation: Generative models can aid in the generation of policies and procedures that comply with regulatory requirements. This ensures that banks stay updated with changing regulations and maintain compliance. Generative AI models are being used by enterprises to act as virtual compliance experts and make proper suggestions to aid compliance inside an organization. Gen AI can be trained to answer questions regarding regulations, company policies and guidelines. It can also be trained to check regulatory compliance automatically and provide alerts in case of potential breaches.

Voice and Speech Synthesis:

Interactive Voice Response (IVR) Systems: Generative models can improve voice-based customer interactions by synthesizing natural-sounding responses. This enhances the user experience in phone-based banking services. Advanced Gen AI based IVR systems can process natural language, which can be highly helpful in offering customers an intuitive and efficient interaction in phone banking.

Automated Financial Reporting:

Natural Language Generation for Reports: Generative models can be employed to automatically generate natural language reports summarizing financial data. This streamlines the reporting process and facilitates easier understanding of complex financial information. Gen AI models can be trained to extract important data from bank transactions and logs while also categorizing and reconciling accounts. It can also be used to automatically create financial reports like balance sheets, income statements and cash flow statements. Gen Ai can help automate a lot of tasks including financial reporting and provide more accurate and reliable reports.

Generative AI presents a range of opportunities for innovation and efficiency improvement within the banking sector, offering solutions to complex challenges and enhancing various aspects of customer service, risk management, and operational processes. However, before deploying Generative AI based solutions to improve efficiency and deliver personalized experiences, banks will need to mind a few critical things. They will need a clear roadmap for deploying Generative AI capabilities aligning with their broader business strategy. From maximizing security and risk compliance to improving customer service and offering customers more personalized experiences, Gen AI can prove to be a significant game changer in several areas for banks helping them maximize productivity while also reducing costs. There are also some challenges related to the deployment of Gen AI solutions in banking including data and tech demands as well as the requirement for talent to manage AI and a new operating model to benefit from the use of AI.