Artificial intelligence (AI) is taking nearly every corner of the business world by storm, and companies are finding new ways to use AI in finance.
Artificial intelligence plays a role in the algorithms and quantitative modeling companies use to manage money, and fintech companies are using a wide range of applications of AI in finance to make their businesses more efficient and better service customers.
Upstart (UPST -3.78%), for example, uses AI models to screen borrowers and establish forecasts on creditworthiness that it considers to be more accurate than credit scores.
Other fintech companies are also embracing AI as a way to differentiate themselves from legacy institutions like banks, and even banks have embraced artificial intelligence for things like customer service, fraud detection, and analyzing market data.
With ChatGPT setting off a new revolution in AI, we could just be seeing the start of AI in the financial industry as these companies find new ways to use this breakthrough technology.
What is AI?
If you're like many investors, you probably have a sense of what artificial intelligence is but have trouble defining it.
Generally, artificial intelligence is the ability of computers and machines to perform tasks that normally require human intelligence, such as identifying a type of plant with just a picture of it.
Artificial Intelligence
Machine learning, which means the ability of computers to teach themselves things using pattern recognition from the data they sample, might be the best-known application of artificial intelligence. This is the technology that underpins image and speech recognition used by companies like Meta Platforms (META +0.03%) to screen out banned images like nudity or Apple's (AAPL -1.66%) Siri to understand spoken language.
Other forms of AI include natural language processing, robotics, computer vision, and neural networks. Natural language processing and large language models (LLM) form the basis of chatbots like ChatGPT.
Examples of AI in finance
In finance, natural language processing and the algorithms that power machine learning are becoming especially impactful. Here’s where AI is already making a measurable impact in the finance industry.
1. AI in lending
One of the most common applications of artificial intelligence in finance is in lending. Machine learning algorithms and pattern recognition allow businesses to go beyond the typical examination of credit scores and credit histories to rate borrowers' creditworthiness when applying for credit cards and other loans.
AI lending platforms like those of Upstart and C3.ai (AI -3.67%) can help lenders approve more borrowers, lower default rates, and reduce the risk of fraud.
C3.ai says its smart lending platform helps financial institutions streamline their credit origination process and reduce borrower risks. For example, it promises a 30% reduction in the time required to approve a loan applicant. It's also achieved a $100 million increase in application volume and loan acceptance yield.
After the stock plunged once the pandemic ended, Upstart rebuilt its business and is delivering strong growth, backed by an improved model that has improved conversion rates and delivered superior returns for its partners. The company expects to be profitable in 2025 on a generally accepted accounting principles (GAAP) basis. Considering it's just starting to tap into massive loan markets like auto and home, Upstart still has a long runway of growth ahead of it.
4. AI in customer service
Customer service is crucial in the banking industry, and good customer service can often differentiate one institution from another and retain valuable customers, including high-net-worth individuals.
Banks use AI for customer service in a wide range of activities, including receiving queries through a chatbot or a voice recognition application.
If you've contacted your bank recently, there's a good chance you've engaged with an AI chatbot or a voice recognition system.
AI chatbots help companies respond quickly to customers, and they also have the potential to be used for new products, including product recommendations, new account sign-ups, and even credit products.
In addition to chatbots, banks use AI to help recommend products for customers and manage money.
Chatbots
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Will AI change the world of finance?
The financial industry encompasses several subsectors, from banking to insurance to fintech. It's a highly competitive industry, as banks and other operators constantly seek an edge over one another.
That explains why artificial intelligence is already gaining broad adoption in the financial services industry through chatbots, machine learning algorithms, and other methods.
While finance will always require a human touch and human judgment for some decisions and relationships, organizations are likely to outsource more work to AI algorithms and other tools like chatbots as the technology improves.
The cost-saving potential of artificial intelligence only adds to its appeal to banks and other financial companies. If you're looking for an investment opportunity, consider some of the stocks above, as well as other AI stocks or AI ETFs, if you're looking for a broad-based approach to the sector.
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