Witness the Revolution
The Fourth Industrial Revolution (4IR) has reshaped industries worldwide, including core decision-making processes in the financial services industry. The 4IR started in the late 20th and early 21st centuries, triggered by the integration of Artificial Intelligence (AI), automation and digital technologies that were enabled by advancements in computing capabilities.1 Within financial services, the 4IR has thus far materially impacted three distinct areas: credit/lending, asset management, and insurance.
Credit/Lending
In credit and lending, the 4IR spurred the automation of decision-making processes, allowing banks and other credit providers to utilize AI tools to quickly and accurately assess lending decisions. This shift reduces reliance on human intervention, enables faster responses to customer inquiries and enhances efficiency. For example, AI-driven credit scoring models incorporate a multitude of factors, that were not part of traditional credit assessment methodologies. Key examples include social media behavior and online shopping habits.
AI-driven decision-making has also transformed the risk assessment process for banks and other credit lenders, departing from the traditional, time consuming and error-prone, manual underwriting methods. AI algorithms excel in capturing credit history, income, and spending patterns to accurately gauge an applicant's creditworthiness.2 For example, through the analysis of online behavior and payment history, AI algorithms can pinpoint responsible (or irresponsible) financial patterns, resulting in a comprehensive approach to credit assessment. This allows lenders to make better informed, data-driven lending decisions, reducing default risks and extend credit to responsible borrowers, even in the absence of an extensive credit history.
Adopting AI tools allows banks and other credit providers to offer customers near-instant responses to loan applications, significantly improving the customer experience. This quick turnaround benefits both borrowers and lenders as it streamlines the overall lending process.3 Some cutting-edge AI-powered online lending platforms can process loan applications and disburse funds within a matter of minutes. This efficiency makes it possible for individuals facing financial emergencies, such as medical bills or unexpected repairs, to gain access to funds instantly, alleviating financial stress and enhancing overall customer satisfaction due to the potentially predatory and prohibitively expense nature of such loans.
In the past, many credit providers have run afoul of applicable fair lending laws because they incorporated prohibited factors such as race, religion, national origin, and religion in their underwriting standards. AI-driven decision-making has the potential to reduce bias in lending decisions, by eliminating prohibited factors and arrive at unbiased, purely data driven lending decisions. 2 AI models, if properly designed and trained will only consider based on an applicant's financial data and behaviors, ignoring factors irrelevant to arrive at a final credit decision. This promotes fairer and more equitable access to financial services and avoids fines and other sanctions for violations of the fair lending practices.
Asset/Investment Management
Customized asset management services have historically only been available to upper-middle-class or high-income individuals. Deploying chatbots equipped with Natural Language Processing (NLP) capabilities has opened up asset management services to investors with more modest means. Handling and understanding customer inquiries has been vastly simplified by financial firms’ automated agents that provide human-like responses on a real-time basis. By automating investment advice, financial planning tools have become available for a broader range of individuals, revolutionizing the way people manage their finances. Deploying automated investment advisor copilots allows investment advisors to quickly offer customized financial plans, construct investment portfolios, and provide investment research to their clients. AI supported tools further assist customers in understanding their overall financial health during automated coaching sessions. This allows customers to continuously track their status versus their long-term financial goals.
Insurance
Generative AI tools can produce a wide range of insurance options by incorporating behavioral data, individualized data, and customer segments into an analytical stream, personalizing quotes for customers seeking different kinds of insurance plans. Insurance companies can bolster their marketing strategies by enabling them to better serve customers at a more personal level. Generative AI, which is capable of compiling complex and data-intensive risk summaries, can be utilized to support underwriters at insurance companies, sourcing data from a myriad of different systems. This allows for substantial time savings and enhanced productivity in a field where often experienced professionals are hard to come by.4
Conclusion
A new era of automated decision-making in the financial sector has been ushered in by the 4IR. The power of AI is being harnessed by banks and credit lenders to assess lending decisions swiftly and accurately, providing customers with faster responses and improving overall efficiency. Not only an enhancement in the customer experience but also increased fairness and a reduction in lending biases has been brought about by this transformation. The further democratization of banking practices will be reached because of the scalability of generative AI, also leading to high-quality products and services becoming ubiquitous for all customer segments. As the 4IR continues to evolve, it is likely that the future of finance will be shaped by the significant role that AI-driven decision-making will continue to play.
About Bip.Monticello
Bip.Monticello Consulting Group is a global management consulting firm supporting the financial services industry through its deep knowledge and expertise in digital transformation, change management, and financial services advisory. Our proven understanding of the competitive forces reshaping business models in capital markets and digital banking helps our clients drive innovative change programs to be more competitive and gain market share in new and existing businesses.
Sources
1. https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-are-industry-4-0-the-fourth-industrial-revolution-and-4ir
2. https://www.weforum.org/focus/fourth-industrial-revolution
3. https://www.ey.com/en_us/digital/four-things-to-know-about-the-fourth-industrial-revolution
4. https://webinar.gartner.com/499907/agenda/session/1167684?login=ML