Introduction

What is Artificial Intelligence ?

“Artificial Intelligence is typically defined as the
ability of a machine to perform cognitive functions
we associate with human minds, such as perceiving,
reasoning, learning, interacting with the environment,
problem solving, and even exercising creativity”.
However, Artificial Intelligence (AI) is actually a
combination of advanced computational technologies
in varying degrees of maturity.

Artificial intelligence was founded as an academic discipline in 1956, and in the years since it
has experienced several waves of optimism, followed by disappointment and the loss of funding
(known as an "AI winter"), followed by new approaches, success, and renewed funding. AI
research has tried and discarded many different approaches, including simulating the
brain, modeling human problem solving, formal logic, large databases of knowledge, and
imitating animal behavior. In the first decades of the 21st century, highly mathematical and
statistical machine learning has dominated the field, and this technique has proved highly
successful, helping to solve many challenging problems throughout industry and academia.
The various sub-fields of AI research are centered around particular goals and the use of
particular tools. The traditional goals of AI research include reasoning, knowledge
representation, planning, learning, natural language processing, perception, and the ability to
move and manipulate objects.  General intelligence (the ability to solve an arbitrary problem) is
among the field's long-term goals. To solve these problems, AI researchers have adapted and
integrated a wide range of problem-solving techniques, including search and mathematical
optimization, formal logic, artificial neural networks, and methods based
on statistics, probability, and economics. AI also draws upon computer
science, psychology, linguistics, philosophy, and many other fields.
The field was founded on the assumption that human intelligence "can be so precisely described
that a machine can be made to simulate it".This raised philosophical arguments about the mind
and the ethical consequences of creating artificial beings endowed with human-like intelligence;
these issues have previously been explored by myth, fiction, and philosophy since antiquity.
Computer scientists and philosophers have since suggested that AI may become an existential
risk to humanity if its rational capacities are not steered towards beneficial goals.[c] The term
artificial intelligence has also been criticized for overhyping AI's true technological capabilities
 Artificial Intelligence used in Banks

Global financial bodies and committees view emerging technologies such as AI as enablers in
the growth and customization of financial services. In 2017, the Financial Stability Board (FSB),
an international body that monitors and makes recommendations about the global financial
system, set out different applications of AI in the financial sector, such as in the verticals of
portfolio management, client due diligence, credit scoring, and regulatory compliance. The FSB
also outlined possible benefits for retail customers and small and medium-sized enterprises
(SMEs), as well as efficiency gains in back-office procedures carried out by banks. In a 2018
report, the Basel Committee on Banking Supervision (BCBS) - a committee of banking
supervisory authorities and the primary global standard setter for the prudential regulation of
banks - encouraged banks to harness emerging technologies such as AI to increase their
efficiency in responding to fintech-related risks. The Committee then commenced discussions
with regulators and the industry on risk management and AI systems, including through a
workshop hosted by its Supervision and Implementation Group (SIG) in Tokyo in October 2019.

India’s digital banking (including retail banking) and finance sector has witnessed immense
growth in the past two decades. This transformation has been primarily driven by an increase in
digital payments across sectors and industries. The country’s established financial institutions are
now deploying fintech to provide end users agile, efficient, and differentiated experiences along
the complete value chain of financial services. The rise in fintech use will bring in financial
innovations and transform India’s financial landscape in two primary ways: (i) consumers will
have a larger set of options at competitive prices, and (ii) lower operational costs can improve
efficiency at financial institutions. The Government of India’s ‘DigiDhan Mission’ recognizes
that financial inclusion remains one of the foremost challenges for India and that digital
payments promise access to formal financial services and benefits, especially to those who
continue to be excluded.20 AI models are being used to detect fraudulent accounts and improve
the efficacy of the scheme.

Use of AI in banking
AI is demonstrating a huge impact on the banking sector, impacting the working of organizations
at three fundamental levels: (i) the processes they adopt (ii) the products and services they sell
and (iii) the user experiences they offer to their customers and employees. Globally, banks are
already starting to adopt AI at a massive scale. According to a UBS Evidence Lab report23, 75%
of respondents at banks with over USD 100 billion in assets say they are currently implementing
AI strategies compared to 46% at banks with less than USD 100 billion in assets

Key use cases across these three offices in banks include:

• Front office: Customer interface; personalized insights; authentication and identification of
customers using biometrics; and wealth management

• Middle office: Payment fraud detection and risk management; Know Your Customer (KYC)
and Anti Money Laundering (AML); and credit rating services and loan decisions.

• Back office: Business and strategy insights; simplifying backend processes; and regulatory
compliance.

An important application or subset of AI is machine learning (ML), which enables a computer

system to use historical data to make predictions or take decisions without being explicitly
programmed to do so. ML algorithms use structured and semi structured data to develop models
that can generate accurate results or make predictions using this data. The adoption of ML and its
usage is spreading across different business areas in the banking sector. The figure below
illustrates the maturity in the use of ML by business area in the banking sector.

AI-based systems can help banks reduce costs by increasing productivity and making decisions
based on information unfathomable to a human agent. Also, intelligent algorithms are able to
spot fraudulent information in a matter of seconds. 

Financial organizations have a leg up in taking advantage of AI, said Martha Bennett, a principal
analyst at Forrester Research who specializes in emerging technologies. "One of the things AI
needs is lots of data, and banks have lots of data."

What are the top benefits of AI in banking?

1. Reduction in operational costs and risk
The banking industry is largely digital in operation, but it is still riddled with human-based
processes that sometimes are paperwork-heavy. In these processes, banks face significant
operational cost and risk issues due to the potential for human error. Robotic process
automation (RPA), software that mimics rules-based digital tasks performed by humans, is being
applied in banking to eliminate much of the time-intensive and error-prone work involved in
entering customer data from contracts, forms and other sources. Coupled with improved
handwriting recognition, natural language processing and other AI technologies, RPA bots
become intelligent process automation tools that can handle an increasingly wide range of
banking workflows previously handled by humans.

2. Improved customer experience

There's a reason people derided banking hours. Banks never seemed to be open when you needed
them most, such as later in the day or on holidays and weekends. Call centers of yore were
notorious for long wait times and operators, when finally engaged, often couldn't resolve the
customer's issue.AI technologies are changing that.

Chatbot on Calls : One of the big benefits of AI in banking is the use of conversational
assistants or chatbots. A chatbot, unlike an employee, is available 24/7, and customers have
become increasingly comfortable using this software program to answer questions and handle
many standard banking tasks that previously involved person-to-person interaction. "Chatbots
also aren't brand new and some banks have been using them for a while, both internally
and customer facing, and getting benefits," Bennett said. The COVID-19 outbreak
underscored their usefulness

3. Improved fraud detection and regulatory compliance

Fraud detection :
Fraud detection is an area where machines are "genuinely superior to people," Bennett said.
"They can crunch vast amounts of numbers, applying different algorithms. They don't make
mistakes, unless they're badly programmed," she said. Humans have a habit of making mistakes,
especially with repetitive tasks."
Prior to the pandemic, the U.K.-based Bennett said she could be in a different country every day
for work. Her credit card company's fraud detection had gotten so good that her card was never
declined as she traveled from one geography to another. The one instance when there was fraud
-- someone tried to buy a computer as she was buying cheese in Madrid
"What I'm saying is that companies with well-structured, good data have already been able to put
AI to good use in detecting fraud," she said. As companies improve their data collection
and algorithms become more advanced, the benefit to financial firms is growing.

Regulatory compliance :
Banking is one of the most highly regulated sectors of the economy, both in the United States
and worldwide. Governments use their regulatory authority to make sure banks have acceptable
risk profiles to avoid large-scale defaults, as well as to make sure banking customers are not
using banks to perpetrate financial crimes. As such, banks have to comply with myriad
regulations requiring them to know their customers, uphold customer privacy, monitor wire
transfers, prevent money laundering and other fraud, and so on.
Banking regulatory compliance has significant cost and even higher liability if not followed. As
a result, banks are using smart, AI virtual assistants to monitor transactions, keep an eye on
customer behaviors, and audit and log information to various compliance and regulatory systems.
Big-data-enhanced fraud prevention has already made a significant impact on credit card
processes, as noted above, and in areas such as loan underwriting, as discussed below. By
looking at customer behaviors and patterns instead of specific rules, AI-based systems help
banks practice proactive regulatory compliance, while minimizing overall risk.
4. Improved loan and credit decisioning:
Similarly, banks are using AI-based systems to help make more informed, safer and profitable
loan and credit decisions. Currently, many banks are still too confined to the use of credit scores,
credit history, customer references and banking transactions to determine whether or not an
individual or company is creditworthy.
However, as many will attest, these credit reporting systems are far from perfect and are often
riddled with errors, missing real-world transaction history and misclassifying creditors. In
addition to using data that's available, AI-based loan decision systems and machine learning
algorithms can look at behaviors and patterns to determine if a customer with limited credit
history might in fact make a good credit customer or find customers whose patterns might
increase the likelihood of default.

The big challenge with using AI-based systems for loan and credit decisions is they can suffer
from bias-related issues similar to those made by their human counterparts, an issue discussed
below under "AI risks and challenges." This is due to how loan decision-making AI models are
trained. Banks looking to use machine learning as part of real-world, in-production systems must
try to root out bias and incorporate ethics training into their AI training processes to avoid these
potential problems. Explainability is also an issue when using AI algorithms using deep learning
approaches. 

5. Automation of the investment process

Finally, some banks are delving deeper into the world of AI by using their smart systems to help
make investment decisions and support their investment banking research. Firms like
Switzerland-based UBS and Netherlands-based ING are having AI systems scour the markets for
untapped investment opportunities and inform their algorithmic trading systems. While humans
are still in the loop with all these investment decisions, the AI systems are uncovering additional
opportunities through better modeling and discovery.

In addition, many financial services companies are offering robo-advisers to help their customers
with portfolio management. Through personalization, chatbots and customer-specific models,
these robo-advisers can provide high-quality guidance on investment decisions and be available
whenever the customer needs their assistance.
 AI used in ICICI Bank
ICICI Bank, India’s second-largest private sector bank has
deployed software robotics in over 200 business processes
across various functions of the company. ICIC seems to be
referring to what is often referred to as “robotic software”
– a kind of software generally focused on automating
office work (a topic which we’ve covered in great depth
in a past interview on “white collar automation”).
The bank said it is the first in the country and among a few
globally to deploy this technology, which emulates human
actions to automate and perform repetitive, high-volume
and time-consuming business tasks.Software robots now
perform more than 1 million banking transactions per
working day, an ICICI spokesperson said.

The software robots at ICICI Bank are configured to capture and interpret information from
systems, recognize patterns and run business processes across multiple applications to execute
activities, including data entry and validation, automated formatting, multi-format message
creation, text mining, workflow acceleration, reconciliations and currency exchange rate
processing among others.

The bank has created the software robotics platform mostly in-house, leveraging AI features such
as facial and voice recognition, natural language processing, machine learning and bots among
others.

“I believe that the implementation of software robotics will herald a transformational change in
the Indian banking industry. We plan to more than double the software robots to over 500 by end
of this fiscal,” said Chanda Kochhar, chief executive, ICICI.

It should be noted that robotic software is by no means new, and is a staple in large white collar
work environments – including many US banks. That being said, we’re unable to judge ICIC’s
applications one way or another from the outside. We suspect that if ICIC will see improved
margins (and ethical concerns around job loss) if they succeed in truly pushing the boundary on
robotic software.

In February this year, ICICI Bank launched its AI-based chatbot, named iPal. Since its launch,
the chatbot has interacted with 3.1 million customers, answering about 6 million queries, with a
90 percent accuracy rate, the bank said.

Madhivanan said the services offered by iPal are divided into three broad categories, most of
which are mapped to the iMobile app.
 Category 1: It involves FAQs, which are simple questions that you may want to ask your bank
executive for which there are simple, structured answers. You ask the queries and the bot will give
you the correct response, and it learns along the way.

 Category 2: It involves financial transactions, wherein you can make fund transfers from person-to-
person, pay your bills or recharge your mobile phone bills using queries.

 Category 3: It involves helping people discover new features. These are simple how-to tasks such
as how to reset your ATM pin, which is a bit more evolved and is like interacting with your bank
executive.

The bank is currently in the process of integrating iPal with existing voice assistants such as
Cortana, Siri and Assistant. “Yes, it is a natural progression. We want to explore our ability to
interface with multiple voice assistants and that certainly presents different challenges,” 

“At ICICI Bank, software robots have reduced the response time to customers by up to 60
percent and increased accuracy to 100 percent thereby sharply improving the bank’s productivity
and efficiency. It has also enabled the bank’s employees to focus more on value-added and
customer-related functions.”
 New AI Technologies in HDFC Bank
The power of computing has grown exponentially over the years and with this, the significance
of Artificial Intelligence (AI) and Machine Learning (ML) also amplified. Since its inception in
1950, the use of AI has percolated into our day–to–day reality and disrupted the way people
experience banking and financial services.The HDFC Bank has also envisioned that AI with its
disruptive capabilities will revolutionise the way banking services are provided to consumers and
it is therefore among the few banks to have used AI to provide various services to customers.

Also, to ride on its prime objective of becoming an “AI – enabled bank of the future”, there are
numerous AI initiatives at the bank which are either live or at various stages of development.

These initiatives span across functions like customer service, banking transactions, employee
training and engagement, recruitment, operations, analytics and e-commerce, and payments.

The underlying mission of HDFC Bank is to enable AI backed services ranging from commerce
to care that can fulfill all the needs of HDFC Bank as well as Non–Bank customers.

Some of the key AI initiatives which are live include Electronic Virtual Assistant (EVA),
Intelligent Robotic Assistant (IRA) – a humanoid robot, Recruit Bot and a social commerce chat
bot on Facebook Messenger – HDFC Bank OnChat.

With these solutions, we have been able to enhance the overall user experience of not only
HDFC Bank customers but also Non – HDFC Bank customers. Our customer service chat bot –
EVA solves over 6 lakh queries on monthly basis saving 20,000+ man hours per month. This
engine has helped HDFC Bank to transform our digital customer service channel into a
competitive asset.

Innovative AI backed solutions are not limited to only EVA but we have also deployed a one–
stop chat bot solution on Facebook Messenger called HDFC Bank OnChat.

Currently, this conversational and interactive platform also has the capability to provide
personalised solutions boasts of having 3,00,000+ unique users every month.

It is the first chat bot based e–commerce and payments platform service via Social Media
Channel and has been regarded as a ‘Success Story’ by Facebook. Our efforts in channelising AI
backed solutions do not end there.

HDFC Bank is also the first bank in India to introduce IRA – a humanoid robot for branch
assistance. Launched at HDFC Bank’s branch in Mumbai, IRA services on an average 60
customers on a daily basis.
 The robot detects the presence of customers through vision sensors and answers queries/ guides
them to the nearest counter. This has not only assisted the branch staff but has also added a
delight factor to the customer’s experience at branches.

Another disruptive innovation by HDFC Bank that paved the way for effective recruitment is its
Recruit Bot. The recruit bot has the capability to identify the right candidate across functional
and personal skill sets and is ideal for large scale recruitment drives.

The solution has helped in reducing the time to hire by up to 80 per cent. Although, we at HDFC
Bank have taken a lead in implementing AI enabled solutions, AI being a new technology, will
take considerable time to mature. Improvements in AI toward it becoming more natural than
‘artificial’ will help in increasing the overall efficiency and productivity of organisations at
reduced costs.

Employees will be trained and helped on how to upgrade their skill sets to make AI a part of our
digital DNA. All customer facing roles will be enabled using cognitive customer agents whereas
back–end processes will run on advisory bots, process automation bots and expert systems.

Major internal processes that form the backbone of the bank will function on a hybrid model
comprising digital and human workforce. As Ray Kurzweil, chief engineer for Google and
famous futurist says “AI Will Not Displace Humans, It’s Going to Enhance Us”.

AI will help us manage both internal and external customers much more effectively and help
reduce our operational costs exponentially in the near future.
Conclusion :
The bank is passing its learnings to other companies within the HDFC Group. A good
example of this is OnChat. HDFC Bank started it with commerce transactions, and has
recently added the stock trading
option as well, thereby complementing HDFC Securities. It has built another interface for
the general insurance and life insurance products.