In the previous article, we have already learned about the various applications of artificial intelligence in commercial banking. We have also studied the two main types of artificial intelligence-based lending and the difference between them. We now know that a large segment of the commercial banking industry is likely to adopt artificial intelligence-based lending in the near future.
However, we are not really sure about the advantages which make artificial intelligence-based lending a compelling proposition. In this article, we will have a closer look at the various advantages which are offered by this technology. Some of the most important features have been listed below:
- Scalability: The biggest advantage of artificial intelligence-based corporate lending is that it is scalable. This means that this technology gives commercial banks the ability to underwrite more or fewer loans as per the market demand. Hence, when the market demand increases, the commercial bank can immediately give out more loans if they have funds available. Their ability to lend will not be artificially restricted by the number of underwriters who are available at that point in time. Also, the process of making loans becomes highly standardized.
Individual underwriters can have unconscious biases which hinder their decision-making. However, an artificial learning-based system is able to make rational decisions based on underlying data.
- Lower Operational Costs: Another important factor that makes artificial intelligence-based corporate lending viable is that it allows banks to lower their lending cost. In reality, artificial-based intelligence does not really lower costs. Instead, it replaces fixed costs with variable costs i.e. it increases the operating leverage of commercial banks.
This means that if the commercial bank makes a lot of loans, then the administrative cost per loan is lowered. However, at the same time, if fewer loans are disbursed, then the per loan cost increases.
- Faster Turnaround Time: One of the most important advantages of an artificial intelligence-based approach is that it is automated. Since the process is largely automated, it can happen at a faster speed. Earlier, corporations had to wait for a long time to know the decision of the commercial bank when it came to lending funds.
However, now, thanks to technological advancements, the process can be expedited. This faster turnaround time helps commercial banks increase their customer satisfaction to a large extent since it allows borrowers to pick up more projects based on the availability of loaned funds.
- Creation of Credit Profile: We have already mentioned that commercial banks have been very stringent in lending to corporations. They only lend money to corporations that have a stellar track record and wherein their cash flows have been properly documented in the form of tax statements or audited and verified financial statements. This creates a problem for a large number of corporations whose finances are not so well documented by either auditors or tax authorities.
Up until now, commercial banks were unable to lend to such corporations. However, with the advent of artificial-intelligence-based banking, commercial banks are now able to create a rough credit profile based on the information that they have and are able to make loans accordingly.
The quality of these loans has also been empirically proven to be of the same quality. Hence, artificial intelligence is allowing commercial banks to access newer segments which they would have otherwise not been able to do.
- Reduced Credit Risks: Artificial intelligence-based systems are more equipped to gauge the credit risk of proposed loans as compared to humans. Artificial intelligence-based systems can implement data mining techniques and use the large database of loans that they have on hand to identify hidden patterns and characteristics which separate good loans from bad loans.
Hence, when the system decides on whether or not the loan should be made, the decision is much more rational and data-driven as compared to the decision made by an individual. Also, artificial intelligence-based systems can easily track the overall loan portfolio of the bank in order to determine whether or not the new loan being made is in line with the overall risk profile of the bank.
- Better Regulatory Compliance: Commercial banks are subject to a lot of regulations when they make loans. There are a lot of factors that need to be taken into account before a loan is made by such banks. Considering all these factors is very difficult for a human being. However, artificial intelligence-based systems can easily take such factors into account. Hence, commercial banks have been able to ensure better regulatory compliance once they have moved on from a human-based underwriting system to an artificial intelligence-based underwriting system for commercial loans.
- Better Fraud Detection: Commercial banks have been sharing data about fraudulent loans with each other. Artificial intelligence tools can be given access to these centralized databases. They are then easily able to identify the trends and patterns which underlie these fraudulent loans.
Artificial intelligence-based lending programs have a higher accuracy rate when it comes to detecting fraudulent loan applications as compared to human underwriters.
The bottom line is that artificial intelligence-based underwriting is the future of the entire financial services industry and commercial banking cannot really be an exception. Since there are a lot of advantages to using this technology, commercial banks will be happy to adapt to the same even if it means significant outlays in the initial period.