Banks: Better fulfilling customer expectations with big data and artificial intelligence

Society and the business world are experiencing a radical technological transformation, not least through Big Data and artificial intelligence. What implications do these technologies have for banks and insurance companies? BaFin’s study, “Big Data Meets Artificial Intelligence” provides answers to this question. The analysis comprises about 200 pages, and the technological and strategic prerequisites for the use of Big Data and artificial intelligence (subsequently abbreviated to BDAI) are given their own section. Implications for financial supervision are also inferred .

This article focuses primarily on the perspectives that the study identifies for banks. The prospects for insurance companies will be summarized in a later article.

The players in the financial market can be separated into three groups:

• Incumbents: traditional companies that generally have a full business permit from the regulatory authorities.
• FinTechs/InsurTechs/RegTechs/LegalTechs: relatively young, tech-oriented smaller providers offering select functions for customer interface or in a core process – in some instances, in cooperation with incumbents.
• BigTechs: large technology companies operating on a global scale which gain a competitive edge by using digital applications. Up until now, they have been inactive or operated only in a restricted capacity in the continental European financial market.

Like other industries, the banking sector is facing changed customer expectations. Many financial service providers could strongly capitalize on BDAI applications to improve their customer experience and satisfy the new requirements and customer expectations. The high investments in FinTechs that use BDAI show that adaptions to the changed expectations are already taking place. They grew by 62 percent between 2014 and 2016.

However, the traditional European banking sector is confronted with two further challenges that could impede widespread usage of BDAI: Firstly, since the financial crisis, the European banking market has been under high cost and margin pressure, which handicaps investment. However, this investment would be necessary as, secondly, outdated IT architecture obstructs innovation in customer interfaces and technology-based optimization of core processes. This is a structural disadvantage compared to new providers.

New competitors claim parts of the value chain with BDAI-driven business models or applications, which strengthens the pre-existing tendency toward the disaggregation of the value chain in the banking market. Modified regulatory standards like PSD 2 ((EU) 2015/2366, Payment Service Directive 2) accelerate the creation of interfaces that are as standardized as possible, which could also further drive this division.

The horizontal division of the value chain leads to an increasing number of providers that each specialize in one or a few products. The vertical division leads to a stronger separation between activities with direct customer contact, and those relating to the product platform in the middle and back offices. Here, customers perceive the provider as a “product manufacturer” that they directly interact with on the customer interface. This integrates other providers as subcontractors and achieves a relatively strong competitive position.

The supplier landscape is already heterogeneous today: The companies include established banks, as well as FinTechs and occasional BigTechs. Taking the regulatory standards into consideration, they could all concentrate on a particular part of the value chain and take over either the customer interface or the product platform. In addition, there can also be providers that take both over, in the way of a universal bank.

BDAI plays an important role in the customer interface, as it can contribute to fulfilling the new customer expectations. To name just a few examples: Chatbots are available to answer questions around the clock, new offers are tailored exactly to a customer’s individual situation, contracts can be made in real time and completely online.

It is expected that customers will be drawn to providers that offer them the best customer experience. Thanks to their strongly data-driven business models, FinTechs and BigTechs can now specifically address the customer interface. BigTechs in particular can benefit from collecting further customer data, since they can use this data for their core businesses outside of the banking service.

Data from transactions and account management can also be valuable for incumbents. Furthermore, their focus is often on securing customer relations. Additionally, because of the necessary investments in transforming technology, traditional banks are more highly dependent on their original business activity being profitable. Many incumbents already cooperate with FinTechs to extend their customer interface offering. This cooperation is also attractive to the FinTechs as, in doing so, they obtain access to a broad base of existing customers.

In spite of the potential of BDAI for customer interface, the authors of the study do not, however, expect that BDAI will cause the growth of the market as a whole and of the total revenues of banking services in the short term. Rather, there could be a redistribution of earnings towards providers that convince customers with their customer experience, due to increased competition in customer interface.

The study “Big Data Meets Artificial Intelligence. Challenges and Implications for Supervision and Regulation of Financial Services” is available here.

Author: Editorial team Future. Customer.
Image: ©  oatawa – AdobeStock