Financial services providers are failing to successfully implement artificial intelligence, claim European fintech executives, despite growing evidence that the much-vaunted technology will increase productivity and reduce costs..
Fear of job loss, regulatory concerns and institutional inertia are among the factors preventing bankers from fully leveraging the systems underlying products like ChatGPT.
“The big banks will definitely not take it over [the technology] as fast as any other fintech company,” says Tom Blomfield, co-founder of Monzo and partner at Silicon Valley start-up incubator Y Combinator. However, generative AI will “make banks more efficient and enable them to offer the same products at a lower cost.”
According to a study by Capgemini, only 6 percent of retail banks are ready to implement AI on a large scale in their business. However, McKinsey estimates that this could add up to $340 billion in value to the global banking sector annually, which is about 4.7 percent of the industry’s total revenue.
Many believe the technology, which can answer questions and analyze huge amounts of text and numbers in seconds, can dramatically reduce costs across the industry. But there are fears the disruption could lead to job losses.
“People don’t understand that it serves as a productivity tool,” says Nasir Zubairi, managing director of the fintech accelerator Luxembourg House of Financial Technology. “They still believe it will take their jobs away.”
He added: “Traditional banks are fundamentally analogue and the transition from analogue to digital has always been a difficult thing.”
Speaking at the Financial Times’ TNW technology conference this month, Zubairi cited anti-money laundering audits as an example, where institutions typically employ staff to comb through spreadsheets looking for unusual activity.
He said that when he demonstrated to an institution how this could be improved with a customized AI model and that he estimated that this would “immediately save up to 450,000 euros in salaries per year,” it was rejected.
“People don’t like firing people,” he added. “They want to protect the function of their job, and if they have to fire people from their team who are doing those jobs, they may also be threatened as management or their power may be undermined in some way.”
According to the Bank for International Settlements, central banks have recently been encouraged to step up their efforts in the field of AI, saying that while the technology can lead to productivity gains, it also carries risks, such as the sharing of false information and vulnerability to hacking.
A common problem with large language models, the technology behind most generative AI products, is their tendency to “hallucinate,” or present inaccuracies as fact. They are also known to generate information based on the data they were trained with, raising concerns about sensitive or secure information.
“There is not necessarily a rejection of [AI]but there are concerns,” said Wincie Wong, digital director at NatWest, who called for the risks, ethics and vulnerabilities of the technology to be assessed before deployment. “Ultimately, we are one of the big banks and many customers keep their data and finances safe with us. We have to respect that.”
Customer service is one of the areas most disrupted by AI tools that can communicate and respond to queries in a human-like manner. For more than a decade, digital banks have used machine learning to prioritize online queries and often route customers to a live customer service agent.
However, LLM-powered bots can understand a wider range of requests regardless of how they are worded and execute decisions, such as ordering a bank card, eliminating the need for human intervention.
“I really believe that this will result in the loss of the vast majority of customer service jobs over the next 12 months to five years,” said Monzo’s Blomfield.
Many banks and fintechs, including Klarna and NatWest, are already using AI chatbots for customer service. NatWest’s Wong said they had made great progress with generative AI in their service AI Cora, receiving more than 11 million chats during the year, with more than half requiring no human intervention. In 2017, the service was receiving 1,000 chats per month and requiring intervention.
Swedish fintech company Klarna said its AI assistant can do the work of 700 customer service agents and resolve queries in under two minutes, compared to 11 minutes previously. As a result, the company expects to save $40 million in customer service costs this year.
But Wong said that training the models to recognize nuances is critical to success, such as understanding that an address change can have an emotional undertone, such as a bereavement in the family.
“It was really important to understand the psychology behind it. And if you don’t do it right, quite frankly, you can upset a lot of customers,” she added.
In addition, when introducing the new technology, banks had to be careful to adhere to the industry’s strict compliance rules and navigate an unfamiliar regulatory environment.
In a landmark 2022 ruling, a Dutch court ruled in favor of neobank Bunq after it sued the Dutch central bank for banning it from using AI to conduct money laundering checks.
Regulators lifted restrictions on German fintech firm N26 last month after it tightened its controls. For years, the bank had capped the number of new customers it could take on because of its poor anti-money laundering controls and had to pay millions in fines for repeatedly being late in submitting reports on suspicious activity.
Carina Kozole, chief risk officer at N26, said the company has worked closely with regulators to develop an AI model that can determine whether a new customer is a criminal, which has led to a 90 percent reduction in cases on the platform.
“If we don’t adopt AI in the industry, we won’t be here in a few years,” she added. “We need to demonstrate the benefits and how we can become compliant when we use AI.”