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Why banks are splashing the cash on artificial intelligence

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Why banks are splashing the cash on artificial intelligence

By Dr Vinod Vasudevan, CEO, Flytxt

Artificial intelligence was once the sole domain of sci-fi novels and movies, where supercomputers took over the world and conscious robots interacted on a daily basis with humans – just think of the 1927 classic ‘Metropolis’.

Today, though, we live in an AI-enabled era, where artificial intelligence has the potential to impact every facet of our lives, from driverless vehicles to virtual assistants such as Alexa and Siri. But what about banking? How far has an industry once averse to technological change embraced the AI revolution?

For many of us, we associate technological advances in financial services with security, such as facial recognition to log in to your banking app. But what if it could do much more than that. What if, for example, AI-driven software was deciding the right interest rate for you or advising you whether or not to buy a new car or make an investment?

In fact, artificial intelligence is making a significant impact on financial services in just such areas, and many more, from product selection to investment advice and fraud or market tampering. Financial institutions, like other sectors such as telecoms and retail, are using AI to increase the value of customer interactions, building deeper relationships and, ultimately, increasing revenue and profitability.

AI can even give customers contextual financial advice, empowering them to take up relevant services, such as insurance, credit card or a mortgage, based on their stated goals and life events, such as marriage or changing career. This is achieved through a combination of machine learning and predictive analytics combined in human-like interactions.

Like most industries, the AI-conscious firms can be split into two categories – those already reaping the benefits of artificial intelligence and those still figuring out what to do with it. The former can see that AI enables the automation of previously manual tasks, completing them in a fraction of the time and on a scale that humans simply can’t match. The result, personnel are freed up to do what AI can’t, such as developing new products and services.

Rather than a costly team of people wading through stacks of papers to decide which ‘band’ of customers should be targeted for a particular product or service, for how much, and at what rate, AI can do this for millions of people and taking into account all kinds of available data – creating the exact offer that matches the bank’s risk and reward and the customer’s expectation. In theory, no one would slip through the gap and no information would be ignored. This is a huge competitive advantage in an industry where margins are tight, and competition is fierce, since it allows them to lend in greater volume and at lower risk. And, it is better for the consumer as well since theyare receiving the financial services they need, and, of course, do not have to wait for a human underwriter to make the decision.

It seems like a win-win situation for banks – cut costs and churn, thereby increasing net revenue. But there are considerations to take in to account as well, especially when it comes to the legalities of financial institutions deploying AI.For example, companies need to ensure that AI processes are not violating data privacy laws, particularly with the playing field shifting thanks to the introduction last month of GDPR. Most large financial institutions operate across multiple regulatory jurisdictions, so it is vital that they understand how laws such as GDPR will affect their ability to gather, store, and use data.

Equally, if institutions are using AI to automate decision making, such as approving loans or investment advice, then they need to make sure they do not breach fair lending laws or market rules.

And, of course, there is the prickly issue of jobs. There has been much debate about the impact of AI taking over jobs currently performed by humans, as we are seeing to some extent in the banking industry.

An often-quoted 2013 paper by Oxford University academics Carl Frey and Michael Osborne predicted nearly half (47 percent) of jobs in the US were at high risk of being automated. But more recently, this view is being challenged. For example, analysis by OECD, an inter-governmental group of high-income countries, found that only 14 percent of jobs in OECD countries – which includes the US, UK, Canada, and Japan – are “highly automatable”, i.e. their probability of automation is 70 percent or higher. Indeed, analysts Gartner expects artificial intelligence to become a positive job motivator by 2020.

And, finally, there’s uncertainty. AI is, after all, still at a relatively early stage, so what happens if an algorithm is flawed or malfunctions. What might the potential impact be?

Despite these concerns, one thing is sure – AI is going to be an integral part of the future of the financial services industry. In fact, in a survey of 424 senior executives in financial services by Baker McKenzie just 18 months ago, 70% of respondents named either big data and advanced analytics or artificial intelligence/machine learning as the technologies most important to their organisation over the next three years.

What’s clear is that the financial services industry is all set to cash in on AI – so, look out for that loan product you didn’t know you needed.

Dr Vinod Vasudevan,CEO of leading intelligent customer engagement technology firm Flytxt,has more than 20 years’ experience in neural networks and artificial intelligence. The company produces artificial intelligence-driven marketing automation product NEON-dX and has offices in United Arab Emirates, The Netherlands, and India.

Banking

Banks in EU to publish world’s first ‘green’ yardstick from next year

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Banks in EU to publish world's first 'green' yardstick from next year 1

By Huw Jones

LONDON (Reuters) – Banks in the European Union would have to publish a groundbreaking “green asset ratio” (GAR) as a core measure of their climate-friendly business activities from next year, the EU’s banking watchdog proposed on Monday.

As the trend in sustainable investing gathers pace, regulators want investors to get more reliable information on a bank’s exposures to climate change as storms and other weather events affect the value of their assets and liabilities.

The European Banking Authority (EBA) said the ratio, put out to formal public consultation on Monday, will measure the amount of climate-friendly loans, advances and debt securities compared to total assets on a lender’s balance sheet to reach a percent figure.

“I believe it’s the first time regulators are asking for a green asset ratio,” said Piers Haben, EBA’s director of banking, markets, innovation and consumers.

“The numbers may well be single digit for banks at first and that’s why context will be important. When a bank talks about where it wants to be in 2030, that is going to be really interesting on the green asset ratio.”

The new EU “taxonomy” would be used to define which assetsare environmentally sustainable.

EBA said that many stakeholders have a legitimate interest in the physical and transition risks that banks are exposed to from climate change.

Banks are likely to face pressure from investors to show what steps they are taking to increase their GAR over time, though few lenders are expected to reach 100%.

The watchdog was responding to a request from the EU’sexecutive European Commission on how to implement upcomingrequirements on climate-related disclosures by banks.

The GAR would published in a bank’s annual report, starting from 2022 based on data up to Dec. 31, 2021.

Banks will also have to publish three other indicators showing the extent to which fees from advisory services, major trading operations and off-balance sheet exposures are derived from climate-friendly activities.

(Reporting by Huw Jones; Editing by Ana Nicolaci da Costa)

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Banking

SoftBank’s internet business to invest $5 billion to resist overseas tech giants

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SoftBank's internet business to invest $5 billion to resist overseas tech giants 2

By Sam Nussey

TOKYO (Reuters) – SoftBank’s internet subsidiary Z Holdings outlined plans on Monday to invest 500 billion yen ($4.7 billion) in technology over five years to resist an onslaught from larger overseas rivals.

The announcement follows the merger of its internet business Yahoo Japan with chat app operator Line, creating a $30 billion domestic internet heavyweight.

Z Holdings said it is targeting sales of 2 trillion yen and operating income of 225 billion yen in three years, as the COVID-19 pandemic boosts demand for online services.

Following a complex transaction, two thirds of Z Holdings shares will be owned by a new holding company, A Holdings, owned 50:50 by SoftBank Corp and South Korea’s Naver Corp.

Z Holdings remains a consolidated subsidiary of SoftBank. Naver was the previous majority owner of Line.

The CEOs of Z Holdings and Line, Kentaro Kawabe and Takeshi Idezawa respectively, become co-CEOs of the combined entity, reflecting the hybrid origin of the firm which straddles e-commerce, payments, advertising and chat.

Kawabe pointed to the breadth of those services, many of which are deeply embedded in the lives of Japanese consumers, as its defence against rivals like Google parent Alphabet and Amazon.com and their larger research budgets.

In an early indicator of efforts to save on costs, Z Holdings said it was looking to integrate Line’s QR code payment service Line Pay into peer PayPay, which SoftBank has promoted aggressively to attract consumers away from cash, in April 2022.

Z Holdings retains its listed status, one of a number of such firms among SoftBank’s domestic holdings, despite calls for Japanese firms to unwind such structures.

Z Holdings also controls online fashion retailer Zozo Inc and office supplies firm Askul Corp.

($1 = 106.5600 yen)

(Reporting by Sam Nussey; Editing by Kirsten Donovan, Christopher Cushing and Raju Gopalakrishnan)

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Banking

Strong second half limits Bank of Ireland 2020 loss

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Strong second half limits Bank of Ireland 2020 loss 3

DUBLIN (Reuters) – Bank of Ireland limited its underlying 2020 loss to 374 million euros ($452 million) after a return to profitability in the second half, the bank said on Monday.

Ireland’s largest bank by assets also announced the closure of one-third of its branches in Ireland.

The bank set aside 1.1 billion euros to cover possible loan defaults due to COVID-19 disruption, the bottom of its forecast range that it expects to capture the majority of credit impairment risk associated with the pandemic.

An underlying 295 million euros second half profit limited the damage as lending and business income improved.

Chief Financial Officer Myles O’Grady said those trends continued into 2021, although Ireland was in a long lockdown again.

“It’s clear that there is some impact from this lockdown but the signals overall are encouraging. We do think (the second half) will be a return to a more normalised level of activity,” O’Grady told Reuters.

The bank cut it costs by 4% year on year in 2020, meaning it achieved its 1.7 billion euro annual cost target one year early. It set a new goal of cutting costs further to 1.5 billion euros by 2023.

That will partly be achieved by the branch closures with its Irish network cut to 169 from 257 and Northern Irish presence more than halved to 13. It struck a deal with the Irish post office to offer customers access to banking services at An Post locations.

Bank of Ireland’s core Tier 1 capital ratio, a key measure of financial strength, stood at 13.4% versus 13.5% at the end of September. The bank said it expected capital to remain broadly in line with those levels in 2021.

Analysts at Davy Stockbrokers said the results were “better across income, costs and, notably, impairments.”

($1 = 0.8272 euros)

(Reporting by Padraic Halpin; Editing by Edmund Blair)

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