Credit Risk Management in the Banking Sector
Artificial intelligence in credit risk management is meaningful because it is used to verify the honesty in the information given by the customer without trying to investigate physically. It reduces the time of the loan being processed. This also improves the decision-making process and makes it fast. Artificial intelligence should be upheld in the banking sector so that it can hasten loan processing. Also, many investment firms have started adopting artificial intelligence to manage their funds, know how they are progressing, and know their capabilities. Artificial intelligence is being used to manage hedge funds and pension funds. Artificial intelligence technology has a lot of benefits in the finance sector. Besides, banks using artificial intelligence technology may sometimes be risky. It may cause some problems that may take time to be solved, making the banks incur losses.
Applications of Artificial Intelligence
There are three main ways in which the banking sector can use artificial intelligence. The first way is through conversational banking, where to save on the cost is at the front office. The second way is through knowing fraud and how to manage it if one occurs and it takes place in the middle office (Bussmann, 2021, p.206). The last way is through underwriting, and it takes place in the back office. Many banks that use financial intelligence have discovered that it is improving speed and efficiency by eighty-five percent, and also, it is a way of investment in the banks. The first way where artificial intelligence is being used in the banking sector is in chatbots. It is also called a digital personal assistant. Chatbots have created good interaction with humans and simple questions that a customer needs to know rather than asking the agent (Bussmann, 2021, p.208). This has also reduced a lot of costs for many banks. The customers have also got a wonderful experience from the chatbots. Besides that, a chatbot can work for twenty-four hours without resting, and a customer can ask any question he or she wants, and it will be answered. The chatbot becomes a very efficient worker in the banking sector, carrying out duties like updating the credit card security and reducing the credit card debt. Chatbots have enabled employees to focus on complex projects.
Secondly, artificial intelligence is used in security in the banking sector. Banks should keep their customers’ personal information and money safe. This shows how vital protection in the bank is (Bussmann, 2021, p.209). The digital era has created ways for cybercriminals to steal. This makes it essential for the banks to tighten their banking security. Artificial intelligence security systems are scarce for them to be hacked. Many cases of cyber-crimes have made banks use artificial intelligence security systems (Bussmann, 2021, p.209). Artificial intelligence security systems can handle cases of fraud because they can detect any suspicious transaction made. Banks are now using biometrics where the customer of that account is the only one able to make transactions.
Another way artificial intelligence is used in the banking sector is compliance. Rules and regulations play an essential part in the banking sector. Artificial intelligence can help analyze complex data and automatize manual submission (Bussmann, 2021, p.210). Examples of these processes are “Known to Your Customer” (KYC) and anti-money laundering. The strategies enable the banker to collect information and know how a customer makes transactions. Without artificial intelligence, it makes the services be delayed hence time-consuming. Artificial intelligence can gather information in minutes, whereas a human being can take days to gather information from the clients (Bussmann, 2021, p.210). Using machine learning models can know the behavior pattern of clients and know if the bank is at any risk.
The fourth application of artificial intelligence is in the forecasting of finances. The loans the banks give their clients are where they earn interest, but people pay back their loans. Artificial intelligence helps assess the customer and know whether he or she is compatible with getting the loan. This allows the bank to come up with a decision if they give the client a loan. Artificial intelligence helps to know the customer’s credit history. It helps to know high-risk clients and low-risk clients (Bussmann, 2021, p.212). Artificial intelligence needs accurate data to know all of this, making it work efficiently and effectively. When artificial intelligence makes more decisions, they become more accurate.
Artificial intelligence is helping to reduce the banking cost. Artificial intelligence does not make errors associated with human beings, like entering information and doing paperwork (Bussmann, 2021, p.216). Artificial intelligence assistants minimize work for human beings. Artificial intelligence reduces cost almost by thirty percent. Artificial intelligence collects data, analyzes and classifies it without any human being intervening. Artificial intelligence will help human beings to be more creative and focus on more complex tasks. Artificial intelligence has helped the banking sector to be able to cope up with losses. It is through understanding the bank’s amount of capital and knowing the loss of loan reserves (Bussmann, 2021, p.216). This has been a massive problem for financial institutions, and artificial intelligence technology has solved this problem. Artificial intelligence has helped solve many issues such as fraud and economic forecasting. It has reduced some work for the employees, leaving them to focus on the jobs that require a lot of attention and creativity. It has also been able to detect risks.
Portfolio Building and Managing in Hedge funds and Pension fund
Applications of Artificial Intelligence
Artificial intelligence is becoming important in the world of technology, especially in managing hedge funds. Some top firms in the world are using artificial intelligence to know where they can invest in hedge funds and where suitable to trade this fund (Robertson, 2017, p.626). The first application of artificial technology on the hedge fund is used in the analysis of information. Artificial intelligence is used in analyzing market prices and accounting documents. It also analyzes macroeconomics information (Robertson, 2017, p.628). Artificial intelligence predicts the market price and finds the best action to do regarding market prices.
An alternative primary application of artificial intelligence on hedge funds is that it is being used in investments. The artificial intelligence model determines every investment decision made by large firms in the world (Robertson, 2017, p.629). Humans are also involved in making decisions at significant investments. The artificial intelligence analysis drives the investment decisions. They tell the investors when and which field is suitable to invest in. Many hedge fund firms have taken artificial intelligence of great importance (Robertson, 2017, p.631). The world’s largest hedge fund company called Bridge Water associates, has been using artificial intelligence since 2016, and it has a fund of 160 billion dollars under management. They have seen it helpful in their company. The third application of artificial intelligence is that it is being used in trading. Artificial intelligence is being used in the trading world’s largest hedge fund (Robertson, 2017, p.634). It uses probability to make these trades, and they are always accurate. This gives the hedge fund firms profit each time a business is completed.
Artificial intelligence is also used in pension funds. The first application of artificial intelligence in the pension fund is that it increases the client’s engagement with the chatbots. Many retiring people do not ask for professional advice on where they can invest their funds to enjoy it when they retire (Bonizzi, 2017, p.87). They could find many options of knowing where to invest their funds. This makes the retirement providers instill knowledge in them and discover new ways of their retirement plan, and with the help of artificial intelligence, they can do that (Bonizzi, 2017, p.87). The chatbots can educate them when they are at home instead of going to a professional.
Another application of artificial intelligence in the pension fund is that it is being made into a customer relationship management system (CRM). It is helping providers to collect a lot of data and store it (Bonizzi, 2017, p.88). This retirement scheme assists the providers in reading the emails and texts to know the needs of each client. Thirdly, the application of artificial intelligence in the pension fund is that it is helping in the minimization of errors and leakage of pension fees. Artificial intelligence has done it for a long time to prevent this (Bonizzi, 2017, p.89). Artificial intelligence has done it by making the workflow to be automatic. It has reduced the manual work done by the employees on filling the pension details.
An additional way artificial intelligence is being applied in the pension fund is that the fund’s diversity can be visualized (Bonizzi, 2017, p.89). Visualizing the fund’s trading data helps the manager and the client where it is suitable to invest in the fund. The fourth application of artificial intelligence in the pension fund has changed the manager’s selection. Artificial intelligence has helped inspect how fund managers invest in the pension fund (Bonizzi, 2017, p.90). It has helped the fund managers to be accountable for how they invest in the clients’ fund.
Furthermore, another application of artificial intelligence in the pension fund is that it has assisted in coordinating some of the services in the pension company. Artificial intelligence can detect a person who is retiring on a disability pension. It can also see any fraud, a person benefiting from retirement and has not yet retired (Bonizzi, 2017, p.90). Artificial intelligence has been able to improve the retirement investment strategy of the clients. This has shaped the clients and has known many ways to invest their retirement savings (Bonizzi, 2017, p.90). However, it cannot be objective because the investor cannot see the client’s financial data.
Artificial intelligence has the power to know people in the employers’ scheme, and they will be unable to retire due to having inadequate savings (Bonizzi, 2017). This will enable the officials to know which clients need to learn more about the pension scheme. Artificial intelligence technology has played an essential role in hedge funds and pension funds. First, it has enabled hedge fund firms to predict market prices and know where it is suitable to invest in high returns (Bonizzi, 2017, p.90). It also is being used in trading. The world’s largest hedge fund firms are using artificial intelligence technology to trade the hedge funds to produce high profits. Artificial intelligence technology is also being of very great importance in the pension sector.
Potential Risks in the artificial technology in the financial industry
Artificial intelligence technology has a lot of benefits in the finance sector. Besides that, banks using artificial intelligence technology may sometimes be risky. It may cause some problems that may take time to be solved, making the banks incur losses. The first risk that the financial sector may encounter is the legal risk which includes behaviors and artificial intelligence data. Artificial intelligence is all about the input of data put using computer code (Lin, 2019). Artificial intelligence needs to be trained to achieve behavior that is intelligent as an output. The General Data Protection Regulation (GDPR) ordered the implementation of artificial intelligence in financial institutions in 2018. However, the data input used by artificial intelligence is broader (Lin, 2019). To understand artificial intelligence technology, the financial institution needs to comprehend how the data is used.
Another potential risk is misusing the information. Clients have the right to know how artificial intelligence is using their data. The GDPR has given the individuals the authority to report if the financial institution breaches their personal information (Lin, 2019). The financial conduct authority has been given the mandate to observe how the financial institutions use their customers’ information. This includes artificial intelligence technology and machine models. It has enabled information not to be misused by financial institutions.
Another potential risk is biasness and discrimination from artificial intelligence. There is a high risk of artificial intelligence creating outcomes of biasness. This may lead to unfair decision-making, affecting a specific group of clients (Lin, 2019). The discrimination and biasness of artificial intelligence need to be examined by financial institutions to avoid such a thing in the future. Non-competitive conduct is another potential risk that may face the financial institutions using artificial intelligence technology. Financial institutions should check artificial intelligence to avoid non-competitive behavior (Lin, 2019). Complaints may arise from customers where the financial institutions use algorithms. Financial institutions may misuse algorithms to fix their prices. It may cause many clients to withdraw from the bank and joining other better economic institutions. Abuse of the market also affects the financial institutions using artificial intelligence. The FCA focuses on the chance that artificial intelligence is used to extend financial crime, including algorithm testing (Lin, 2019). This affects the integrity of the market. Algorithms affect the market prices, and this is the abuse of the market.
As Lin (2019) argued, product liability is a potential risk of using artificial intelligence in financial institutions. The product liability laws cover chatbots which are also artificial intelligence. It provides an order that the penalty for defective. Lastly, financial institutions should also focus on the ethical use of artificial technology. The banks should focus on how to behave besides following the laws (Lin, 2019). A significant challenge for many financial institutions is the consistency in setting ethical standards. The financial institutions have focused on the potential risks that they may face when using artificial technology, which is legal risk, misusing the clients’ information of the specific financial institution, non-competitive product, abuse of the market through algorithms, and product liability.
In summary, Artificial intelligence in the banking sector is the present and not the future. The banking sector is going through a revolution. All banks in the world need to invest in artificial intelligence because it is the way to go, and everything is becoming more of technology nowadays. Banks need to bring all their customers together, gather their processes, and collect the data to work hand in hand. If the banks do not do that, many other banks are doing it, and their customers may leave and go to other banks that are using artificial intelligence. Furthermore, artificial intelligence has played a significant role in the hedge fund and the pension fund. In the hedge fund, artificial intelligence has enabled many tremendous funds to invest and get high returns. They are also able to know the market prices. It has also played an essential role in the pension fund. Finally, the financial institutions using artificial intelligence technology need to solve these risks so that artificial intelligence technology may be perfect. This will enable the customers to know that their personal information is in safe hands.
Bonizzi, B., & Churchill, J. (2017). Pension funds and financialisation in the Europe. Union. Revista de economía mundial, (46), 71-90.
Bussmann, N., Giudici, P., Marinelli, D., & Papenbrock, J. (2021). Explainable machine learning in credit risk management. Computational Economics, 57(1), 203-216.
Lin, T. C. (2019). Artificial Intelligence, Finance, and the Law. Fordham L. Rev., 88, 531.
Robertson, J. (2017). Emergent new finance: hedge funds and private equity funds in East Asia. Journal of the Asia Pacific Economy, 22(4), 626-646.