By Xav Harrigin

Artificial Intelligence (AI), particularly its subset, Generative AI, has been a prominent subject of interest in 2023, as noted by McKinsey, Congress reports, and the World Economic Forum. Generative AI refers to AI systems, especially those using machine learning and trained on large volumes of data, that are capable of generating new content. This contrasts with other AI systems that primarily analyze or process existing data. Generative AI can create a wide array of outputs, from writing text and code to creating videos and 3D simulations. The potential of generative AI is vast, with its ability to automate, augment human or machine tasks, and autonomously execute business and IT processes.

In the banking sector, generative AI is driving significant transformations. It’s been a few months since the release of OpenAI’s ChatGPT, and already, the banking industry is seeing the benefits. Generative AI is reshaping customer service, risk assessment, and personalized banking experiences. According to a Gartner research paper, as of April 2023, only 7% of banking executives reported no plans to incorporate generative AI into their business, a steep decline from 46% just a few months prior.

However, the implementation of AI in banking is not without its challenges. One of the main obstacles preventing banks from deploying AI capabilities at scale is the lack of a clear strategy for AI implementation. Banks need to transform to become AI-first, but this requires a significant shift in mindset and operations. Another challenge is the risk associated with AI. The use of AI can lead to new types of risks, such as algorithmic bias and data privacy issues, which banks need to manage effectively.

The future of generative AI in banking is promising, with potential applications that could revolutionize the industry. For instance, generative AI could be used in Know Your Customer (KYC) and Anti-Money Laundering (AML) operations, where it could have a significant impact. The real holy grail in banking will be using generative AI to radically reduce the cost of programming while dramatically improving the speed of development, testing, and documenting code.

However, the adoption of generative AI in banking is not without challenges and ethical considerations. Organizations must prioritize the responsible use of generative AI by ensuring it is accurate, safe, honest, empowering, and sustainable. There are concerns about security risks and biased outcomes. For example, the risk of harm when a generative AI chatbot gives incorrect instructions is much higher in a banking context than in other scenarios. If not designed and deployed with clear ethical guidelines, generative AI can have unintended consequences and potentially cause real harm.

Government Regulations and Their Impact on AI in Banking

Government regulations play a crucial role in shaping the future of AI in banking. As reported by CNN, The Register, and PBS, lawmakers worldwide are recognizing the need for swift action to regulate AI technologies. US Senate Majority Leader Chuck Schumer has called for ambitious bipartisan legislation to maximize the benefits of AI and mitigate significant risks. The proposed legislation aims to protect US elections from AI-generated misinformation, shield US workers and intellectual property, prevent exploitation by AI algorithms, and create new guardrails to ward off bad actors.

In Australia, the federal government has outlined its intention to regulate AI, stating that there are gaps in existing law and new forms of AI technology will need safeguards to protect society. The government is considering whether to adopt AI risk classifications like those being developed in Canada and the EU. The proposed system would classify AI tools as low, medium, or high risk, with increasing obligations for higher risk classifications.

These developments indicate that government regulations will play a significant role in shaping the future of AI in banking. Banks will need to navigate these regulations while leveraging the benefits of AI. The regulations aim to ensure that AI technologies are used responsibly and ethically, minimizing risks such as data privacy issues, algorithmic bias, and potential misuse.

Navigating Government Regulations in AI-Powered Banking

Navigating government regulations in AI-powered banking involves understanding and complying with these regulations while leveraging AI’s benefits. Banks need to develop a clear strategy for AI implementation that aligns with regulatory requirements. This strategy should include measures to manage the risks associated with AI, such as data privacy issues and algorithmic bias.

Banks can leverage AI in compliance and risk management. For instance, AI can be used to automate compliance tasks, reducing the risk of human error. AI can also be used to analyze large volumes of data to identify potential risks, enabling banks to take proactive measures to mitigate these risks.

The Future of AI in Banking Amid Government Regulations

The future of AI in banking is promising, but it requires a careful balance between innovation and regulatory compliance. Despite the challenges, banks recognize the potential of AI to revolutionize the industry. With the right strategy and approach, banks can navigate the complex landscape of government regulations and leverage the benefits of AI to revolutionize the industry.

Introducing Ashley. 

A year ago, the 33-year-old college-educated professional was navigating the financial landscape with an annual income of $61,000. Like many in her demographic, she was balancing bills, rent, and loan payments while saving for a down payment on a home. Despite receiving enticing advertisements for “affordable mortgage rates”, her limited financial literacy became a roadblock to her home-ownership aspirations.

The journey from renting to owning a home is often filled with complex financial jargon and intricate processes, posing a challenge for first-time home buyers. However, the emergence of data analytics has revolutionized the mortgage lending industry. This technology empowers lenders to simplify and clarify the transition process for potential homeowners.

Today, Ashley is presented with a personalized 30-year fixed mortgage plan for a home valued at $250,000, with a down payment of 3%. The plan meticulously details the specifics of the loan amount and the mortgage rate in simple language. It further dissects the monthly principal and interest payment, along with estimated tax and insurance payments. Additionally, Ashley is extended a second loan that covers the majority of the down payment and closing costs. Despite her initial lack of financial knowledge, she now finds herself informed and confident, ready to transition from a renter to a homeowner. The innovative deployment of data analytics in mortgage lending has effectively demystified the process, propelling her towards her dream of home ownership.

The 2023 Mortgage Lending Landscape: A Paradox

The Mortgage Bankers Association has unveiled a unique trend in the mortgage sector. In 2022, the average loan balance for first mortgages escalated to an unparalleled high of $323,780. Yet, this increase was contrasted with the most significant contraction in issued mortgage loans since 2014. The first quarter of 2023 has witnessed a stagnation in list prices for homes across numerous metropolitan areas. However, this plateau is eclipsed by the ascent in mortgage rates, overarching economic uncertainty, and burgeoning household debt. These elements intertwine to further complicate the already intricate process of transitioning from renting to homeownership, particularly for first-time home buyers such as Ashley.

Data and Analytics: The Catalyst for Mortgage Lending Transformation in 2023

Deloitte’s 2023 banking and capital markets outlook underscores a growing demand among retail banking customers for more proactive guidance during challenging times. This sentiment is mirrored in a 2021 internal report by McKinsey & Co, which indicates a customer preference for a decision within ten days of submitting a mortgage application. The augmented availability of diverse data sets – including credit data, loan performance data, economic data, and behavioral data – is empowering lenders to meet these expectations. With the integration of big data and analytics into the marketing and offer process, lenders are better equipped to comprehend market dynamics, formulate effective strategies, identify and deploy innovative solutions that home buyers can benefit from. For instance, insights into borrowing behaviors and trends derived from consumer credit data can inform lending decisions and portfolio risk assessments.

First-Time Home Buyers: Navigating the New Landscape

The integration of personalization technologies driven by big data analytics has revolutionized the mortgage marketing and lending processes. These algorithms can analyze a buyer’s financial situation and preferences, providing recommendations for the most suitable mortgage options. This innovation simplifies the process of comparing different loan products, enabling first-time buyers to make more informed decisions. Furthermore, lenders can now present complex financial data in an accessible and meaningful manner, allowing consumers to understand the factors influencing their mortgage eligibility and interest rates, as well as the long-term financial implications of their mortgage choices. For first-time home buyers like Ashley, this evolution in the mortgage process has transformed a once daunting labyrinth into a user-friendly experience, significantly reducing the stress associated with such a significant financial commitment.

In the previous deposits-focused article, we discussed how to detect and immediately act on anomaly deposits to keep those deposits from exiting the financial institution’s balance sheet.  In this article, we’ll discuss asking existing customers/members for deposits held elsewhere, programmatically, because that’s always the first order of business.

The most obvious sources of deposits held elsewhere by existing customers/members are the direct deposits being made by your customers/members to other institutions.  The financial institutions we serve have typically established a direct deposit relationship with fewer than 25% of their total customer/member base, leaving a lot of room for growth.   The lack of a direct deposit relationship with so many customers/members reduces the deposit base and increases attrition.  For example, past attrition studies we have published demonstrate that holding all other variables constant, a customer with direct deposit has 0.42 times the odds of leaving the financial institution versus a customer/member without direct deposit*.   For example, if the odds of attrition of a customer without direct deposit averages 10%, the odds of attrition of a customer with direct deposit average 4.2%.  This metric won’t surprise anyone in retail banking, the direct deposit relationship is king**!

So, a simple way to improve both deposits and retention is to programmatically ask your customers/members without direct deposit to establish direct deposit with you like this (this particular example is for loan customers):

Figure 1

The “other” button enables the user to describe exactly what it would take, sometimes surprisingly!

Figure 2

Summarily, use technology to ask your customers what it would take to move their direct deposit relationship, then get the direct deposit relationship to increase deposits and cut attrition risk.  You’ll probably be the only financial institution that ever asked.

In our next installment, we’ll talk about how to:

• Attract customers who can make large deposits.

*Study of 779 customers lost over 2 months out of a total of 67,424 customers total), 283 of which were deemed “profitable.” by the bank.

** “Holding all other variables constant, each additional e-service (e.g. bill-pay, debit card, e-statements) a customer takes multiplies the odds of churn by 0.73.”

By Devon Kinkead

As Ron Shevlin of Cornerstone Advisors likes to say, checking accounts have become “paycheck motels” – that is, temporary places for people’s money to stay before it moves on to bigger and better places.

Given the all-out war for deposits right now by competing financial institutions, we see this temporary cash housing problem as a serious but preventable threat to the financial well-being of our client financial institutions and their respective customers and members.

Nothing New to Micronotes

We’ve been helping financial institutions increase deposits for years using our proprietary microinterview engagement technology targeted by machine learning.

Quoting Tom Novak, VP and Chief Digital Officer of Visions Federal Credit Union in a 2021 Q2 case study, “…Micronotes is a conversational AI tool, digital marketing tool, where we use machine learning on the backend to more effectively target and curate offers and messages to our digital banking members. One of the best outcomes we experienced a couple years ago, before COVID hit, was when we were in a little bit of a liquidity crunch. We needed to tell our members that we had great deposit rates, and that they could bring those deposits to us and we’d reward them with nationally leading interest rates – or dividend rates, as we call them on the credit union side.  We developed that through Q2’s SDK (software development kit), which is part of the Innovation Studio. It let us curate those messages and integrate them into the digital experience. In a few short months, we brought in over $8 million in deposits, retaining those deposits on our books.”

Our strategy for increasing deposits for our clients is:

1. Hold on to the deposits you have!
2. Ask for deposits held elsewhere, programmatically.
3. Attract customers who can make large deposits.

Watching Deposits Check-Out

How often has a customer or member parked a large sum of money in her checking or savings account while deciding what to do with it next? Did the banking institution reach out to discuss investment or new mortgage options for that big deposit? Probably not.

So what happened next? She probably moved the money elsewhere and 3 months later saw a billboard advertising great CD rates from her banking provider; too little, too late, and way too slow.

A better strategy is to detect deviations from an average account balance, deploy Micronotes and start a mobile or online banking conversation with your customer/member about investment opportunities and/or new mortgage/loan options; with a personal approach.

For example, look at these 10 real checking account balances that are 1-2 months apart (table 1):

Table 1

These 10 accounts all show anomalies given the balances at time 3, which are all North of ten times the average balance over the previous two periods.   Given the net interest margin advantage of having large deposits sitting in low-yield accounts, the risk of losing the deposit is now the key question.

The risk of losing an anomaly deposit can be computed by looking at anomaly deposits that exited the balance sheet within 30 days of the deposit and is a value from 0-1, 1 being 100% probability that the deposit will exit the financial institution balance sheet in the next 30 days.

However, this computation is unnecessary because the anomaly deposit represents a low-cost automated opportunity to learn about the large depositor’s life and needs. For example, a personalized microinterview with the mobile banking customer can be automatically triggered to uncover important information as shown below in Figure 1.

Figure 1

From this one question, we use branch and skip logic to pinpoint the depositor’s situation and needs and direct her to the right banker for options to retain the deposit.

The application of this simple method of detecting anomaly deposits, triggering a discovery conversation in mobile/online banking to understand context and intention, and connecting that customer to the right banker in your organization is a simple but powerful way to reduce the probability that your financial institution becomes a large deposit motel where deposits check-out at noon.

In the next installment, we’ll go through how to:

• Ask for deposits held elsewhere programmatically
• Attract customers who can make large deposits.

Nearly every financial institution has “deepening customer/member relationships” high on the customer relationship management priority list but, with most FIs hovering around two products per customer, not all execute well against the mandate.  Here’s what we’ve found to be the most effective methodology to deepen customer relationships.  Not surprisingly, these recommendations track well to deepening any human relationship.

Step 1: Measure your Net Promoter Score

It’s nearly impossible to do more business with customers or members who are unlikely to recommend your financial institution to a friend, colleague, or family member.  So, before you start any cross-selling initiative, measure your Net Promoter Score and verify that it’s above 40, slightly above the historical average for retail U.S. Banks.  If it’s below 40, focus on improving your score before you waste time and money asking customers or members to do more business with an institution they themselves wouldn’t recommend.  In either case, you’ll need a continuous improvement effort to move that score Northward.

Step 2: Reviews

One output from the Net Promoter interview process is the identification of “promoters”, or brand ambassadors — who enthusiastically recommend your financial institution.  About 20% of these promoters will leave a review, like a Google Review, for you, if asked.  So ask, because, these reviews can represent the bulk of your positive reviews.  See this blog for an example with the numbers.

Step 3: Measure and Prevent Churn

You can’t manage what you don’t measure so, if you want to reduce churn, typically measured as accounts closed per month, you’ll need to measure it. Once you have that measure, use predictive analytics to determine which of your customers are likely to close their account and leave the financial institution and, if they are attractive long-term prospective customers, incentivize them to establish a direct deposit relationship with you because very few direct deposit customers leave the bank.

The use of e-services, like bill-pay, mobile deposit capture, and credit card management services also reduce the probability of churn so, make sure you are continuously discussing the benefits of these free and powerful services with your customers or members.

Step 4: Surface and Serve Life Events

Most financial service acquisitions are won or lost within 90 days of a life event so, you’ll need to be continuously working to spot and service life events like buying a home, getting married, paying college tuition, or retiring.  At any one time, about a third of your customers or members are anticipating or going through a major life event and if you don’t know about it, you won’t be able to help them and the opportunity will be lost… so ask, systematically!

Step 5: Prescreen and Refinance

Americans hold over a trillion dollars in overpriced debt, that is — loans with an interest rate that is materially greater than current prevailing interest rates.  Modern automated pre-screening technology can legally find and surface mispriced debt your customers or members hold elsewhere by comparing your current lending rate to their rate and automatically presenting a firm offer of credit to refinance, including the dollarized savings tables for each customer/member, via email, mobile, and online banking thereby making it easy to lower customer or member borrowing costs.  It’s a good idea to have a continuous process for updating customer or member contact information to reduce direct mail costs to undeliverable email firm offers of credit. And don’t be shy about offering aggressive rates to touch, move, and inspire your existing creditworthy customers to refinance debt held elsewhere with you; these are net new loans!

Step 6: Accumulate Deposits

If your customer is refinancing debt held elsewhere with you, they are saving money.  So, don’t miss the opportunity to help your customers use those savings to achieve a lifetime goal by surfacing the goal and establishing an automatic deposit of those savings.  Moreover, make sure that you have a trigger program in place to spot extremely high balances in checking or regular savings accounts so you don’t miss the opportunity to keep those deposits.  Stories abound of hundreds of thousands of dollars sitting in checking or savings accounts following a home sale that just disappear to a competitor’s CD without a single ask for the deposit business by the primary bank or credit union holding the funds.

Step 7: Prescreen for New Loans

Lastly, regularly prescreen your customers for new loans and use predictive analytics to ensure that each customer who is likely to be in the market for a loan, knows that they are pre-qualified or pre-approved for the loan they are predicted to need with their primary bank or credit union.

And, don’t forget to make it fun.  Several of our clients run educational microinterviews with small prizes given to those who come up with the correct answer.  Some of these campaigns, all of which are delivered digitally (mobile and online banking, email, SMS) achieve a 30-40% click-through rate!

Shallow relationships won’t survive the inevitable mishaps of any long-term business relationship so start conversations, develop relationships, and build trust in all your relationships.

Digital reviews like the ones on Google have the power to create or destroy customer relationships. As all banking providers become online banking providers, it’s crucial to have your digital banking system working on the “create” side of the equation.

According to Forbes, you need to give your online banking customers a reason to rave. “If you want good reviews, give your customers a good experience. If you do nothing else, make your customer happy when it matters most — before they leave your branch, your website, or hang up the phone.”

Micronotes clients systematically connect mobile and online banking customers to review sites by asking them to leave a review, and it works. For example, one campaign by one of our community bank clients ran for one month. It generated 30% of all Google Reviews for the bank (6 of 20), all of which were positive and remarkably similar in

Digital reviews like the ones on Google have the power to create or destroy customer relationships. As all banking providers become online banking providers, it’s crucial to have your digital banking system working on the “create” side of the equation.

According to Forbes, you need to give your online banking customers a reason to rave. “If you want good reviews, give your customers a good experience. If you do nothing else, make your customer happy when it matters most — before they leave your branch, your website, or hang up the phone.”

Micronotes clients systematically connect mobile and online banking customers to review sites by asking them to leave a review, and it works. For example, one campaign by one of our community bank clients ran for one month. It generated 30% of all Google Reviews for the bank (6 of 20), all of which were positive and remarkably similar in language and tone.

• The staff at XXX Bank are very friendly and helpful and always call me by my first name when I walk in or come through the drive-through. Great staff!
• The staff at XXX are so friendly and helpful; it makes banking so fun and easy. Also, you get the latest banking news with Todd by listening to the mighty 920 on Monday mornings. So fun! Good listening!
• The staff at XXX are always so friendly and considerate. We have had nothing but positive results with all our banking needs at XXX.
• I could not be happier with the experience at XXX Bank. The staff is wonderful!
• Everybody has been great, excellent customer service, whether I’m opening a new account, getting a loan, or dropping off a deposit. Sending home the dog treats when our old dog couldn’t make it in really made our day, not to mention our dog’s day when we got home.
• We love dealing with XXX Bank. The staff is very friendly and helpful. They always know who we are and call us by name. Excellent customer service. 🙂

Consumers are talking about your financial institution 24/7, and in today’s world, they aren’t just limited to their neighbor – they have the whole web at their fingertips. Amazon and Google have taught us many things, not the least of which is to check the reviews before making any purchase decision.

The banking industry is not exempt from this trend and needs to be proactive in managing its brand on the web. That’s why it’s important to continuously connect your brand ambassadors in your high-traffic digital banking channels to review sites to shape and amplify your brand message positively.

Micronotes.ai helps financial institutions leverage account, transaction, credit, and Microinterview® response data via the digital banking channels to start conversations, develop relationships, and build trust — which can be amplified via positive reviews automatically. So it’s time to get and stay on the creative side of the review equation.

It’s time for retail banks and credit unions to apply “teaser rate” thinking to refinance more customer/member loans held elsewhere in a manner fully consistent with Fair Lending Laws. Offering attractive refinancing rates to acquire more loans customers/members hold elsewhere rewards loyalty by lowering their borrowing costs.  For the financial institution, acquiring more loan assets customers/members hold elsewhere increases assets, reduces attrition risk, and generates goodwill… a powerful trio.

Increasing Refinancing Pool Size

All else being equal, the lower the rate, the more likely a given pool of creditworthy customers will qualify for savings from refinancing debt held elsewhere.  Here’s an example from a recent campaign and the impact of rate on a single prescreen auto loan refinancing campaign.

Prescreen loan offer volume can increase by up to 40% by lowering refinancing rates by 75 bps.  While profit per loan will diminish, the net new loans will always add revenue and reduce customer churn.

Retention

All else being equal, the odds of bank customer attrition are multiplied by about 0.42 with a direct deposit relationship and 0.73 with each additional product or service added.  For example, suppose the odds of attrition are 1% per month for the overall customer base. In that case, the odds of attrition for direct deposit customers is 0.42 x 1% or 0.42% and correspondingly 0.73% for customers with one additional service compared to the average customer, who may have 2 products.  And these attrition risk multipliers are cumulative. “If a customer adds both direct deposit and an additional loan, holding all other variables constant, her risk of attrition is now 1% x 0.42 x 0.73 = 0.31%, or one-third the attrition risk of the average customer.” says Devon Kinkead, CEO, and Founder of Micronotes. “Aggressive refinancing rates increase the odds of underwriting more loans and reduce the risk of churn for creditworthy customers. That’s smart business when the competition is intensifying efforts to get your creditworthy customers’ loan business.”

Goodwill

Micronotes’ AI-driven engagement and cross-sell solutions combine machine learning with the closing power of sales interviews to turn the digital banking channels into revenue generators. Imagine the goodwill created by systematically finding and lowering your customers’ borrowing costs. For example, a happy and energized customer who just saved $70/mo refinancing a loan with your bank can automatically be encouraged to write a review on social media, driving more new customer acquisition.

Summarily, aggressive refinancing rates should be part of any prescreen campaign to find and refinance mispriced loans held elsewhere. As total prescreen loan offer volume increases, more loans are written generating more revenue, more assets, reducing churn, and creating goodwill. It’s time to sharpen the pencil and get aggressive for everyone’s benefit.

Unfortunately, a traditional prescreen marketing campaign’s cost, complexity, compliance, and labor requirements can be daunting, particularly for community financial institutions. As a result, these financial institutions either do credit marketing infrequently or not at all.  That’s now changing.

It’s a race to the finish for consumer loan business and debt refinancing. Fintech and alternative lenders are targeting bank and credit union customers for their loan business. Traditional lenders are now fighting back with technology that finds and refinances mispriced debt existing customers and members hold elsewhere.

There are almost as many different ways for a financial institution to use artificial intelligence machine learning to connect with their digital users as there are banks and credit unions in the United States.

When it comes to connecting with customers who seldom visit branches, it’s essential to realize that the online and mobile engagements between bankers and their digital users—which, for some larger institutions, can number in the thousands per month—likely never would have happened if they required a branch visit.