GenAI’s impact on financial services transformation

The financial services industry is transforming due to generative AI (GenAI), which promises to enhance customer service with advanced chatbots, prevent fraud, and streamline complex tasks like code development and regulatory reporting. McKinsey Global Institute estimates that GenAI could add between US$ 200 billion and US$ 340 billion annually to the global banking sector, significantly boosting industry revenues and operational efficiencies.

However, adopting GenAI presents challenges, including addressing data privacy concerns, mitigating ethical biases, integrating GenAI with outdated legacy systems, ensuring regulatory compliance, and bridging the talent gap in AI expertise.

GenAi Financial Services -TPCI

The McKinsey Global Institute (MGI) estimates that GenAI could potentially add between US$ 200 billion and US$ 340 billion in value annually to the global banking sector. This substantial value addition, estimated at 2.8-4.7% of total industry revenues, underscores the transformative potential of GenAI.

Financial firms are swiftly recognising the transformative potential of GenAI. According to an EY report “The AIdea of India: Generative AI’s Potential to Accelerate India’s Digital Transformation,” 61% of respondents in the financial services sector believe that Gen AI will have a significant impact on the entire value chain, making it more efficient and responsive to market dynamics. 78% of survey respondents have either implemented the technology in at least one use case or intend to pilot it within the next 12 months.

The report also revealed that GenAI in India has the greatest impact on gross value added (GVA) in the Financial Services sector, with a range of 22% to 26%. As a result, GenAI  in India has the potential to add US$ 66-80 billion to the GVA by 2030.

How GenAI is transforming financial services?

According to a Gartner Financial Services Research Panel survey, the financial services industry sees GenAI as an optimisation play, with the majority (49%) of senior business executives expecting a moderate impact from the technology. Only a small percentage (2%) believe GenAI will have a disruptive impact in the short term, highlighting the importance of a step-by-step approach.

This indicates that financial institutions recognise the importance of “walking before running” and are taking a cautious approach to adoption. This measured approach aims to reduce risks and ensure that GenAI is seamlessly integrated into their operations.

Financial services organisations can use AI to automate laborious manual tasks, streamline workflows, and free up resources for more sophisticated and value-added tasks like spending more time with customers. Furthermore, real-time delivery of pertinent information and personalised customer experiences is made possible by AI-driven insights. Improved customer service increases client loyalty, which in turn spurs business expansion.

GenAI use by financial services companies_TPCI

Source: State of AI in financial services 2022 trends, NVIDIA; Percentage of respondents that used AI for these purposes

As per the findings of Gartner’s 2023 AI Survey: CIOs and Technology Leaders View, the three most notable benefits of AI are increased customer satisfaction (60%) and decreased expenses (54%), as well as increased productivity and efficiency (75%). According to Srinivasan Seshadri, Chief Growth Officer, Financial Services at HCLTech:

“AI has the potential to transform financial services. For that to happen, financial institutions must transform across all layers of their capability stack. Organisations that recognise the value of AI and technology are moving towards a product-aligned operating model that combines talent, culture, and ways of working to synchronise all layers of the stack. These institutions prioritise customer journey-led product development and bring people together to deliver solutions that customers value for sustainable growth.”

Key use cases in financial services

Financial services organisations are looking into more and more GenAI use cases. According to Gartner’s 2023 Customer Experience and Trust Survey, better security ranked first among the reasons why retail banking customers switched primary providers, followed by better interest rates in second place.

Fraud prevention is another important area focus, with 13% of institutions currently using AI tools in this domain. Moreover, businesses can use GenAI to proactively identify and stop fraudulent activity. It is critical to remember that regulatory compliance and anti-money laundering (AML) are significant factors in this field that call for specialised approaches and solutions.

For banks, customer relationship management is crucial. More individualised 24/7 services like voice command capabilities for financial app logins and facial recognition are now offered by banks to specific clients.

Additionally, banks are using AI to segment their customer bases automatically and analyse customer behaviour patterns. This allows them to focus their marketing efforts, improve customer communication and overall experience.

GenAI is transforming financial services, particularly in code creation and conversion. By automating coding processes, institutions boost productivity, reduce errors, and enhance software development quality, leading to faster application deployment.

Another area of exploration is AI-powered assistance in contact centers. Institutions aim to reduce wait times and improve customer satisfaction through effective, personalized support provided by chatbots and virtual assistants.

AI also enhances credit decision accuracy by using data to predict the likelihood of default, shifting the market from expert judgment to insights-driven lending. However, financial services must navigate compliance and customer security challenges to fully leverage AI’s potential.

Can GenAI also be a bane in financial services?

As financial institutions race to implement this technology, challenges loom large on the horizon. While successful adoption of GenAI promises tremendous value, missteps can lead to complications, ranging from the generation of false information to security concerns and issues of bias and fairness.

Implementing GenAI in financial services entails significant concerns about data privacy and security, requiring robust encryption, anonymization, and access control measures to safeguard customer data. Other major challenges include:

  1. Ethical and Bias Issues: AI models can unintentionally perpetuate biases from their training data, leading to unfair outcomes. Mitigating these biases and addressing ethical considerations is crucial.
  2. Integration with Legacy Systems: Many financial institutions depend on outdated IT infrastructure, making integration with modern AI technologies challenging.
  3. Regulatory Compliance: Financial institutions must comply with a complex web of regulations when implementing GenAI. Ensuring compliance requires continuous monitoring and adaptation of AI systems, as non-compliance can lead to hefty fines and reputational damage.
  4. Talent Gap: There is a significant talent gap in the financial services industry. Successful GenAI implementation requires specialized skills in machine learning, data engineering, and AI ethics, which are currently in short supply.

Looking ahead

Looking ahead, GenAI is expected to become more prevalent in the financial services industry. More institutions are using AI to improve customer and employee experiences and optimise operations. However, whether this technology will disrupt the industry and drive financial services firms to true business model transformation remains to be seen.

Several financial services institutions have successfully implemented GenAI in their operations. For instance, J P Morgan employs it for fraud detection through email pattern analysis, while Stripe utilises GenAI to understand customer behaviour and combat fraudulent transactions. Ally Bank enhances efficiency by transcribing and summarising customer calls, and Klarna integrates ChatGPT for personalised shopping experiences. Erste Bank provides a personalised financial services companion, aiding customers in making informed decisions and improving financial literacy.

These implementations highlight GenAI’s versatility and its potential to revolutionise financial services. Navigating GenAI implementation necessitates the expertise and support of GenAI-focused vendors. These vendors play an important role in ensuring that financial institutions stay up-to-date on the latest advancements in GenAI and can effectively explore new applications. Collaboration with such vendors enables institutions to streamline their AI adoption process and stay ahead of the rapidly changing GenAI landscape.

According to Ashok Kumar, CEO of Extell Systems, “Regulatory frameworks can be re-structured to provide clarity, flexibility, collaboration and alignment while addressing issues related to ethical considerations, regulatory compliance, data security and talent acquisition. Tackling these challenges requires a proactive response from concerned stakeholders to ensure responsible development and adoption of GenAI in India.”

A measured approach to adopting GenAI allows institutions to navigate challenges, mitigate risks, and unlock the full potential of AI in financial services. As the industry continues its exploratory phase, collaboration with GenAI-specific vendors will play a vital role in staying ahead of the competition and delivering exceptional customer experiences.

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