Artificial intelligence and the rise of neobanks

Gartner estimates say 80% of traditional banks as we know will die over the next decade. I was speaking at the ePayment seminar Bahrain few days ago and touched upon that Bahrain has been a pioneer in banking and technology for decades but it’s time now to accept that virtual banks or what is known as neobanks are on the verge of competing with traditional and legacy banks. Several banks are investing on digital transformation journey but perhaps this hybrid model is not good enough to repulse neobanks.

Artificial Intelligence and neobanks are creating a new model with some features illustrated below:

Credit decisions: Credit scoring was one of the earliest applications of analytics as we knew it earlier. Today, with AI, more sophisticated rules can be developed which address the sparse data problems by factoring in alternate and behavioural data such as smart phone usage and payment behaviour

Risk management: Probably the single most important function in banks today, as assessing real-time risk becomes a key ingredient to avoid losses, both financial and reputational. With AI, apart from the quantitative data, unstructured data systems can be assessed for risk management. A specific use case within is has been fraud management where triggers can be created when seemingly contradictory spending patterns are observed

Trading has been another area touched by AI. Trading was anyway decision making in mere fractions of seconds. With AI, one can manage entire portfolios by identifying stock price movement trends from both unstructured and structured data sources

Personalised banking and advice: From chatbots that can manage customer queries to robo advisors that can plan wealth management goals to customised plans for savings and expense management; AI is enabling banking to be reimagined from the users’ perspective and not from the way the bank has been organised by product groups like loans and cards. According to MarketforceLive, three out of five banks already use chatbots for customer service, allowing many simple queries to be resolved without having to speak with a human agent.

Neobanks and banking as a service are emerging as a new alternative where third parties such as developers, Fintechs and non-fintechs can develop financial services without starting from scratch. It enables these third parties to connect with the core banking systems through APIs.

Since they don’t need to maintain physical branches and staff, neobanks can afford to focus on the customer experience. They may have slick-looking mobile apps and typically offer more favourable rates to their customers than traditional banks.

It is important to note that due to their status outside the mainstream banking industry, neobanks may not be fully covered by consumer protection laws.

Key takeaways

• It’s time now to accept that virtual banks  are on the verge of competing with traditional and legacy banks.
• Artificial Intelligence and neobanks are creating a new banking model.
• Risk management is probably the single most important function in banks today.
• AI is enabling banking to be reimagined from the users’ perspective.