Artificial Intelligence. Upon hearing this word, many will imagine a robot roasting coffee and preparing breakfast or will remember scenes from the movie “The Terminator”. In the financial sector, the applications of artificial intelligence are less futuristic but extremely influential in our lives, something we may not have realized yet. In fact, artificial intelligence has changed and will continue to change the financial industry, as more and more banks and financial groups adopt such practices in their business models. AI-driven insights can also help financial advisors to better recommend solutions that will transform financial products and services.
Credit… the cornerstone of the financial system
Credit allows consumers and businesses to access funds that they use for consumption or investment. These funds are provided by banks after first assessing the creditworthiness of potential borrowers. Traditional methods of assessing creditworthiness are quite time-consuming and costly for the bank, as they require the examination of a variety of documents by competent officials. In America and the United Kingdom, digital banks are gaining market share. Digital banks are essentially mobile applications without any physical presence. They have much lower fixed costs than conventional banks and therefore can offer more attractive charges and lower lending rates.
How do these banks evaluate the creditworthiness of their borrowers, since they do not have branches?
The answer is by applying artificial intelligence. They use data from a potential borrower’s mobile satellite as well as from social media. For example, they look at the location of the cell phone to identify where the borrower was during office hours or which restaurants the borrower goes to, based on his social media background. This big data is entered into learning machine models that have been trained with data created from thousands of different users, and consequently, give an estimate of the borrower’s repayment capacity. This process has benefits for both parties to the agreement. On the one hand, the borrower saves time from visiting a bank branch and also benefits from lower lending rates.
On the other hand, digital banking drastically reduces its fixed costs. It is noteworthy that in America, companies that lend funds to buy cars reduced their expenses by 23% on an annual basis after the adoption of similar practices. These are some of the many applications of artificial intelligence in the financial industry. But apart from companies, both the academic community and central bank research departments are particularly interested in the impact of AI-driven insights on the economy. There is an emerging literature that uses machine learning models to predict the likelihood of bank bankruptcy or possible mergers and acquisitions between financial institutions. These findings undoubtedly have a positive impact on society, as they are a reliable tool for the competent authorities regarding the timely identification and addressing of potential risks of destabilization of the financial system.
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