5 Ways Fintechs Use Artificial Intelligence (With Examples)

As the demand for digital and mobile financial services increases, more fintechs are deploying artificial intelligence (AI) technologies to support the expanding market. Mordor Intelligence predicts that the fintech AI market will grow at a CAGR of 25.3% from 2022 to 2027. The driving forces behind this growth include:

  • Increased Fraud.
  • Improved Customer Service.
  • Lower Operating Costs.
  • Enhanced Security.
  • Added Payment Processing.

So how are fintechs using AI?

Fraud Detection and Protection

Card-issuing and transaction-processing fintechs are developing solutions to address the rising number of fraud attempts. Instances of synthetic identities, account takeovers, and card-not-present schemes continue to increase. It’s not enough to detect fraud after it occurs. Fintechs need solutions that prevent it from happening.

Artificial intelligence and machine learning can help. As companies gather more information on their customer’s buying habits, they can deploy AI solutions that ingest that data and compare a profile with current activity to decide whether the transaction is potential fraud.

For example, a transaction authorization request is received from a sporting goods store in California. The AI-powered solution determines that the cardholder has not purchased sporting equipment in a year and is residing in New Hampshire. The solution can deny the transaction or notify the cardholder and wait for confirmation.

paypal maching learning

PayPal is an iconic fintech that has operated since 1998. Part of its success has been the implementation of advanced technologies such as AI. Their current solution assists online merchants and customers in detecting potentially fraudulent transactions.

Improved Customer Experience

It seems that every website has a chatbot. These software applications conduct conversations with people using text or text-to-speech. They can improve the customer experience through reduced wait times. Chatbots are expected to lower operating costs by as much as $7.3 billion globally by 2023.

Successful chatbots use artificial intelligence to emulate a more human-to-human experience. While traditional banks such as Bank of America and HSBC use chatbots to answer questions or offer advice, fintechs are looking at innovative ways to deploy the technology.

According to McKinsey, insurers with consistent customer service have 30% higher profitability than those who do not. Part of that consistency depends on digital technologies. Clients are looking for faster response times for onboarding and claims resolution. For example, long wait times to speak with an agent are a consistent consumer complaint.

lemonade ai insurance

Lemonade is a fintech offering insurance products in different countries. Its chatbot Maya uses AI technology to customize insurance policies and handle claims — no brokers or agents are required. Chatbots can address multiple customer requests simultaneously, eliminating the need for long wait times. Eliminating or reducing a call center lowers expenses, enabling the company delivers its services at a flat rate.

Lowered Operational Costs

Highly regulated industries such as the financial services sector often have significant back-office tasks to complete. Whether it is compliance reporting or exception processing, financial institutions and fintechs continually work to streamline processes for improved profitability.

intelligent automation

Technologies such as intelligent automation (IA) allow organizations to automate more complex processes. IA combines automated technologies such as robotic process automation (RPA) with artificial intelligence and business process management (BPM) to reduce operational costs, reduce risk, and improve customer satisfaction.

For example, RPA use rule-based software to address routine tasks. For example, a lending fintech uses RPA to assess credit risk for online applicants. When an individual answers yes to the question of every filing for bankruptcy, the software rejects the application. With AI, the software has learned that bankruptcy does not automatically disqualify an applicant. It knows to ask questions related to the circumstances to gather more information.

Based on the added information, the intelligent solution can forward the application to underwriting for further review or direct consumers to different loan products that meet their needs. With AI, the fintech not only reduces the cost of loan processing, but also provides an alternative solution. Several insurers have used fintech solutions to expedite claims processing, customer onboarding, and compliance reporting.

More Secure Transactions

Security is a primary challenge for any organization in the financial services sector. A recent study found that over 40% of consumers said PayPal was the most trusted provider of digital financial services, followed by their primary financial institution. The study concluded the following:

  • Consumers blame the financial institution or fintech for breaches.
  • Almost half of US consumers would switch providers over data privacy policies.
  • Consumers are more ethically and environmentally conscious.

These conclusions indicate a growing concern — especially among younger consumers — that financial institutions use their personal information in an ethical manner.

Nearly half of financial executives believe that blockchain and artificial intelligence will be the driving factors for improved data security in both the fintech and traditional banking sectors.

secure transaction illustration

Blockchain technology assumes a distributed ledger that tracks transactional activity between multiple entities. Suppose a company wants to pay its employees. It transmits a payment amount to the employee which creates the initial block of data. When the employee receives payment, a second block of data is tied to the first block creating a chain of transaction information.

Once a block is written, it cannot be altered. If corrections are required, another block of data is required. Since the two blocks of information are immutable and stored in different locations, hackers have more difficulty acquiring transaction information. Although blockchain is typically associated with cryptocurrency, the technology can be applied to any transaction-based industry.

New Types of Payments

Payment-processing fintechs are fueling mobile banking. It’s projected that over 75% of all payment transactions will be performed using mobile applications within five years. By the end of 2022, 92% of app store purchases will be made with a smartphone and over 75% of millennials will be digital bank users.

Voice-activated payments through applications such as Apple’s Siri or Amazon’s Alexa are projected to increase. Australia’s Westpac Banking Corporation offers a fintech solution that allows its customers to check balances and research transactions using Alexa. The voice option requires natural language processing (NLP) in conjunction with AI.

revolut ai

Revolut is a mobile-only fintech company that offers cross-border payments in different currencies. The company performs the currency exchange as part of the transaction. This feature allows non-banking and banking customers to send funds to family and friends in other countries. It range of services rely heavily on AI technologies.

buy now pay later

Another feature of mobile-banking fintechs is Buy Now, Pay Later (BNPL). BNPL fintechs offer online merchants another sales avenue. They allow consumers to select a BNPL option at checkout. The option is basically a short-term loan that consumers can select to pay for a purchase over time.

These alternative payment processes give consumers more options when it comes to purchasing, managing, and investing financial assets. With AI, payment processors can minimize their risk while delivering innovative payment methods.

Fintechs and Artificial Intelligence

As fintechs continue to disrupt the financial services landscape, AI will play a larger role as the sector addresses the need for more flexible solutions that minimize risk for both providers and users.

More traditional financial services providers will partner with fintech solutions to deliver digital and mobile banking solutions quickly and cost-effectively. And, fintechs will partner with financial institutions to deliver comprehensive solutions to their customers.