Although the total number of banks that use artificial intelligence (AI) to assess credit risk has tripled in the past three years, those gains have overwhelmingly been limited to the largest lenders.
According to AI in Focus: The Navigating Bank Credit Risk Playbook, compiled by PYMNTS and Brighterion, in 2018, a scant 5 percent of financial institutions (FIs) reported using AI systems in areas like credit risk management and fraud detection – but by 2021, that figure had increased threefold to 16 percent.
Moreover, the report showed that some 88 percent of FIs said the pandemic has made lending and credit more challenging, and the proportion of FIs leveraging AI has increased 200 percent over the last three years. However, that growth of AI in FinTech has been unevenly distributed among banks – 79 percent of banks with more than $100 billion in assets use AI, but only a fraction of smaller banks do.
It’s a chasm that’s on the verge of change, Brighterion’s Vice President of AI for Credit Risk Amyn Dhala told Karen Webster in a recent discussion, as bank executives across the board are now looking to increase their investment in AI for managing credit risk, pushed by the evolving needs of the market and their customers.
Consumer debt in the United States grew in 2020 at its sharpest rate in more than a decade, reaching close to $15 trillion. AI allows FIs to do two things better than they’ve been able to previously: avoid loss and boost customer engagement.
“Banks are seeing that it increases savings in terms of credit losses,” Dhala said. “On top of that, there is increased profitability and potential operational savings in terms of offering higher credit limits, new products and new product designs. It’s really starting to generate a lot of interest and banking services as well.”
Stemming Loss
Assessing risk in the current environment has been made more difficult by the number of public and private forbearance problems, as well as things like stimulus dollars flowing into consumer accounts, making it a more data-intensive process. Even so, Dhala said this period will end as the pandemic abates, and as all of the stimulus and borrower protection programs start easing off.
“These programs are ending, and basically some customers are not going to be able to pay, and it will become crucial for banks to effectively manage the credit risk and improve the customer experience at the same time,” he predicted. “Credit delinquency is a place where even a marginal improvement through AI can lead to savings of millions of dollars.”
This ability to avoid loss is boosted by AI over the course of the consumer’s credit cycle, working from real-time data sets for better decisions at origination – but also better management over time, with the enhanced ability to spot potential delinquencies months before they happen, and then intervene before losses accrue.
AI also does a better job of heading off both sides of the equation of the losses associated with transaction fraud, Dhala said, as it blocks fraudulent attempts and minimizes false declines.
All of this has the additional benefit of enhancing the customer experience – which is more secure over time, but less beset by roadblocks in the increasingly digital age we live in. And that bigger potential of AI, Dhala noted, doesn’t lie in just heading off losses, but also in actively generating profit growth.
Growing The Opportunity
AI is a tool that, at its base, gives banks a richer, more focused look at their consumers, Dhala said, which in turn gives them better insight into what to offer.
With better data interpretation, banks can boost profitability by leveraging that data for initiatives like offering new and personalized product lines. Banks can be more confident that they’re getting it right with a real-time view of customers’ behaviors, and thus be more open to extending offers to make that consumer relationship more comprehensive.
What AI offers – and what banking executives are now flocking to – is a better view of how their customers are progressing. That knowledge, when leveraged properly, is helping banks provide a higher level of personal experience that is available more quickly and is aligned with what customers want. That’s because real-time data creates an opportunity for FIs to be agile in their offers and experiences.
“There are a lot of benefits of managing credit risk across the life cycle, where the common goal is to improve the customer experience and drive up business profitability,” Dhala said. AI’s ability to deliver on both fronts, he noted, is why its growth has exploded – and, according to the data, it will only continue to skyrocket from here.