Rajan Nagina, Head of AI Practice, Newgen Software, says AI is becoming the backbone of modern banking, driving efficiency, improving customer experience and shaping the next era of financial services.
As the transformative force of Artificial Intelligence (AI) gains stronger footing across industries, banking stands out as a sector that has rapidly embraced AI to enhance efficiency, reduce risk and deliver hyper-personalised customer experiences.
In 2024, nearly 70% of financial institutions experienced revenue growth driven by AI, with the majority reporting a 5-10 percent increase directly linked to their AI initiatives. The impact is evident as AI empowers banks to automate tasks, enhance security, make smarter decisions and unlock new revenue streams.
Over the next five years, AI is poised to become the operational backbone of banking, redefining how institutions engage with customers. Financial institutions that fail to adapt risk delivering poor customer experiences and falling behind in the competitive landscape.
This article explores how AI enables faster, smarter and more efficient banking, alongside the challenges that come with it.
The rise of smart customer experiences
In a high-speed digital economy, rising customer expectations are leaving no room for generic solutions. AI equips banks with the ability to analyse vast data, from income patterns to life events, to deliver highly personalised, context-aware financial experiences. It redefines customer experience with:
• AI companions, chatbots and virtual assistants
AI-powered chatbots have replaced prolonged turnaround time and tedious processes with instant, round-the-clock support. Leading banks now deploy virtual assistants to handle account queries, perform transactions and even offer basic financial guidance, freeing human agents for more complex tasks.
• Predictive banking
AI enables banks to anticipate customer needs even before customers voice them. By analysing transaction history and behavioural trends, banks can offer timely suggestions, such as increasing a credit line ahead of a major purchase or recommending tailored investment options.
Fraud detection and risk management – AI as the ultimate guardian
Beyond customer engagement, AI plays a critical role in securing financial systems against fraud and risk. A McKinsey review of 16 leading financial institutions (representing $26 trillion in assets) found that over 50% of them now follow centrally led approaches to generative AI, highlighting the shift toward structured adoption.
Here’s how AI is keeping financial institutions secure:
• Behavioural analytics: AI continuously monitors user activity to detect anomalies like unusual withdrawals or international transactions. Mastercard’s AI-based fraud detection engine, for instance, analyses billions of data points to flag suspicious behaviour in real time.
• Credit risk assessment: AI models now assess creditworthiness using non-traditional data such as utility payments and even social behaviour. New-age fintech platforms are expanding credit access by moving beyond conventional credit scoring, like FICO scores.
• Anti-money laundering (AML): AI reduces false positives in AML monitoring, cutting compliance cost by up to 30%. Leading US banks are using AI to scan millions of transactions for suspicious patterns with greater precision than manual checks.
Operational efficiency – maximising output with minimal resources
McKinsey estimates AI could help banks save up to $1 trillion globally by 2030. AI is redefining banking operations by automating tedious tasks, increasing accuracy and enhancing employee productivity.
• Automated document handling: AI extracts critical data from contracts, invoices and loan applications, reducing processing time from days to minutes and cutting manual effort by over 70%.
• Regulatory compliance: With constantly evolving regulations, AI helps banks stay compliant by scanning legal documents and identifying potential issues before they escalate.
• Enhanced workforce efficiency: AI takes over repetitive functions like data entry and verification, allowing employees to focus on high-impact, analytical work.
Challenges and ethical considerations
Despite its promise of more efficient, proactive banking, AI brings significant ethical, regulatory and operational challenges that banks must manage carefully. While regulatory frameworks like the EU AI Act and US AI Guidelines are emerging to ensure responsible AI adoption across banking journeys, leaders at financial institutions have a significant role to play by adopting balanced strategies.
• Data privacy concerns: Balancing personalisation with data protection is crucial. Banks must ensure that AI systems comply with regulations like GDPR and CCPA while handling sensitive data responsibly.
• Algorithmic bias: AI models trained on skewed or incomplete data can inadvertently reinforce discrimination. For instance, lending models may unfairly penalise certain demographics if not properly audited.
• Overdependence on automation: Not all decisions can be made by machines. Critical decisions still require human oversight. A case in point is the 2020 ZestFinance controversy, where AI models led to discriminatory lending decisions.
AI: the future backbone of banking
AI is evolving from a supporting technology to the central nervous system of modern banking.
• Hyper-personalised financial services: Real-time, AI-powered insights enable banks to adapt savings plans, spending suggestions and investment advice to individual milestones and market conditions.
• Autonomous financial advisors: Robo-advisors will soon evolve into self-directed, fully autonomous systems capable of managing portfolios and delivering personalised investment strategies with minimal human input.
• AI and Blockchain synergy: The integration of AI with Blockchain-based smart contracts promises faster, more secure transactions. Banks that harness this convergence will gain an edge in innovation and resilience.
Closing thoughts
AI is reshaping every facet of banking, from customer service and fraud detection to lending and compliance. However, to unlock its full potential, banks must confront and resolve challenges around privacy, ethics and governance.
The institutions that embrace AI decisively will lead the next wave of financial innovation. Those who delay may struggle to stay relevant in a fast-evolving digital economy.
