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Small and midsize banks can’t shy away from AI

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Fear, uncertainty and doubt are tainting the banking industry’s views of artificial intelligence.

There’s so much noise about AI, it’s reminiscent of irrational fears about electricity or even the microwave — it’s going to take away our jobs, is more dangerous than nuclear weapons and will have a negative impact on our cities.

From my perspective, it’s important to be cautious when we evaluate new technologies, but I’m an optimist at heart. I believe in the power of technology to create value and transform lives.

The individuals who are responsible for AI have the capacity to create guardrails and ensure that these new approaches to data science do not have a negative impact. AI, and the machine-learning systems that power the technology, in my view, have the power to create value, expand the pie and enable greater accuracy and automation in the banking sector. The emergence of machine learning in lending will entirely reshape the banking and broader credit industry in the next decade. At First National Bank of Omaha, which has been privately owned and independent for more than 160 years, we are making a choice to be an early adopter and embrace AI, particularly for consumer lending. We recently partnered with a Silicon Valley fintech called Upstart to decrease loss rates and increase approval rates by using the platform's AI technology.

Many of the country’s biggest banks are already making large investments in AI. We’ve heard a lot about the power of AI to monitor transactions at scale to catch fraud, fight money laundering through sophisticated pattern analysis and engage with customers for instant answers and support such as Bank of America’s popular AI-driven personal assistant Erica.

But smaller regional banks are also making these investments, and we believe that the promise of AI for credit underwriting is only in its infancy today. Using AI in consumer lending allows us to pull insights from alternative data as well as traditional data. This approach leads to much higher approval rates, lower loss rates and reduced operating expenses.

There are several reasons why I’ve come to believe the AI leap will yield financial returns for any bank, no matter how big or small. The first is that credit underwriting has historically been a blunt instrument. The FICO score, which measures credit risk, is inherently a backward-looking metric that takes into account past behavior. What is unique to AI is the ability to process a large number of signals from the credit report and alternative lending data that, taken together, can reduce risk, expand access to credit and lower the overall interest rate that someone pays on a loan.

It’s also time for us to consider the mass adoption of other forms of alternative lending data to supplement traditional FICO scores. This process can help expand access to credit to more people — predictive insights can make sense of a potential borrower’s broader credit while also taking into account a greater variety of factors such as education and future earning potential. The point here is to develop more complex predictive models that more accurately align with a customer’s propensity to repay a loan.

AI will also be essential for improving customer experience. Every consumer bank is embracing digital transformation to acquire and retain customers and adapt to changing customer behaviors. Customer expectations are higher than ever before, and with new disruptors entering into the financial services space, it’s even more imperative for the banking sector to focus on creating an effortless digital experience that incorporates mobile apps, 24-hour support, fast responses and automation. With the rise of chatbots in banking and Amazon instant delivery of almost anything, we’re seeing that customers are no longer willing to wait days or even weeks for a response on anything including a consumer loan.

From a marketing perspective, it’s essential for banks to create a brand that develops intimacy with their customers. We work hard to develop long-term relationships with our existing customers and cultivate relationships with new ones. There are 76 million people in the United States between the ages of 18 and 34, which presents a massive business opportunity. If you build your brand up to be one that's making an effort to look beyond traditional lending models and expand the pool of people who qualify for loans, that message will spread like wildfire. Speak to the specific pain points of your target audience, and your brand recognition will skyrocket.

The reality is that banks who choose to fear AI run the risk of slowly sliding into obsolescence. AI is still an emerging space, but like the machine-learning algorithms that power AI, we are also getting smarter every day in our approach and willingness to tackle credit underwriting innovation. Banks, including smaller institutions, that struggle to embrace innovation, may find themselves quickly falling behind.

The views expressed here represent those of the author and not necessarily those of First National Bank of Omaha.

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