The transformation of the banking industry through the implementation of AI

Artificial intelligence (AI) is a key technology that can transform entire industries. The technology is already established in companies, but how do companies communicate the use of AI technologies and how does the technology influence customer benefit? As part of my part-time master's thesis, I asked the follow-up research question and took a close look at the transformation of the banking industry. In this blog post, I would like to give a brief insight into the research results and highlight the opportunities and risks for banking institutions and their employees, as well as the perspective of bank customers.

How does the introduction of AI in the banking industry affect customer benefit?

Challenges for the banking sector

The banking sector is considered a central economic sector in Germany and plays a central role in people's everyday lives. Services such as payment transactions, online banking, access to the capital market or lending are handled by banks and influence private individuals and companies alike. In order for banks to offer these services and thus support their customers in all financial circumstances, a secure, efficient and convenient payment system is necessary.

Cost pressure in the banking sector

For years, bank branches have been merged for cost reasons. By 2021, around 2,400 branches will have closed throughout Germany. A forecast from the same year assumes that a further 9,000 branches will be affected by closures by the end of 2027. This would reduce the number of branches from around 24,100 (early 2021) to around 12,700 (end of 2027), halving the German branch network within a very short period of time. This is a consequence of the ongoing consolidation and upheaval in the German banking system. The restructuring of the branch network is largely influenced by excessive branch operating costs and changes in the use of banking services. A large proportion of bank customers already carry out their banking transactions independently via online banking.

FinTechs

The business models of banks have also changed in recent years as a result of digitalisation and the low interest rate policy, leading to talk of a ‘disruption of the business models of traditional financial institutions’. Growth is a crucial factor for the positioning of companies, as growth interacts with market shares and competitive pressure. One aspect of growth is innovation, which is not just about developing innovative products or services, but also about increasing customer benefit. Traditional banks are facing competition from technology start-ups in the financial sector known as FinTechs (Financial Technology).

Competition for banks from new and technology-driven start-ups is fierce. In addition, the innovative strength of fintechs is significantly higher than that of traditional banks, which is mainly due to the structures and digitalisation strategies of the companies.

Skilled workers in the banking sector

In 2013, more than 600,000 people were employed by a bank in Germany. By 2023, the number of bank employees will have fallen to 510,085. It is predicted that almost a quarter of the 190,000 employees currently working for German savings banks, or around 45,000 employees, will leave the industry in the next 10 years. Although digitalisation in banks continues to advance and processes are being optimised, it is predicted that up to 100,000 new employees will be needed in the 350 German savings banks over the next 10 years.

Can artificial intelligence be the solution to these challenges?

Various AI applications are already being used in the financial sector. These include chatbots, predictive analytics and robo-advisory. The technology offers opportunities, but also entails risks for companies, employees and bank customers.

The following opportunities can be derived from the results of the analysis: time savings for bank employees and bank customers through automated processes that are virtually indistinguishable from human results, optimisation and improvement of the service centre in the form of chatbots, automation of business processes, real-time analyses taking into account large amounts of data and relieving bank employees of routine tasks.

However, the risks, especially the risks of cyber attacks, should not be underestimated. The literature research shows that the situation in Germany with regard to IT security is tense. The ethics of AI must also be regulated to ensure that AI systems do not generate discriminatory or disadvantageous results. Furthermore, faces and voices, for example, can be imitated by AI to track criminal activity. At the same time, AI systems are already being used to detect criminal activity, for example, to distinguish between imitated and real voices. This is hardly conceivable for humans without technical support, since the virtual voices sound deceptively genuine.

The results of the sample also show that more than half of bank customers do not see themselves as the bank's main focus. Here, banks must use technology to help them put the customer at the centre in the long term. The results of the sample show that communication with bank customers is important in terms of technology. Currently, banks hardly ever inform their customers about the AI technologies they use, so they usually do not know whether the bank they use already has AI tools in place.

One of the most important findings from the results of the sample is that the participants prefer the hybrid form of technology in combination with human bank employees. In the opinion of the author, wrong decisions made exclusively on the basis of AI systems should be reviewed by human intelligence so that bank customers can build trust in the combination of humans and technology. In addition, 57.66 per cent of respondents state that they are in favour of supporting the bank advisor with technology.

When considering the individual aspects, the focus should always be on customer benefit. The literature and the sample show that attractive conditions and low costs, in particular, but also quick feedback and processes, as well as trust and transparency, represent added value for bank customers. By using AI, the aspects defined above can be addressed and customer benefit increased. The technology can support and expand the traditional business model of banks, leading to long-term cost savings, margin increases and profit maximisation. It is important to note that bank customers must feel the direct added value of the technology. One way in which banks can achieve this economic transformation is by implementing chatbots, predictive analytics, robo-advisory and other AI applications in their existing processes to actively support bank employees in advising customers.

Conclusion

In summary, it can be said that the introduction of AI not only offers a groundbreaking opportunity for positive change in the banking sector, but also brings numerous advantages. It should be emphasised that the technology can increase customer benefit and thus put the bank customer at the centre of the bank's attention. In addition to the advantages already mentioned, it should be emphasised that AI can be used to defend against cyber attacks and criminal activities, which significantly increases security in the banking sector. Furthermore, the technology can help to counteract the shortage of skilled workers and thus attract a new generation of employees to the industry.

Relevance in practice

adesso supports numerous partners as a trusted advisor in implementing innovative AI use cases in the banking environment. With its broad portfolio, adesso covers all relevant topics in the industry and contributes extensive expertise in areas such as payment transactions, lending and securities. adesso provides more than 80 banks in Germany with customised IT solutions that are specifically tailored to their requirements. With a wide range of applications, such as precise customer analyses, optimised KYC processes, improved customer interactions and the automation of routine activities, adesso actively supports its customers during the digital transformation and helps them to increase their focus on customer benefits.

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