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AI vs PI – Competitive or Complementary?

Posted on January 14, 2022 Published by

There is no doubt that assessing and monitoring the credit worthiness of any business can be a challenging task. Adding to the complexity and challenge is the introduction of “Artificial Intelligence” (AI) into a domain largely constructed around “Person Intelligence” (PI). Can (and will?) these approaches coexist going forward, or will PI go the way of the dinosaur? AI vs PI – Competitive or Complementary?

Artificial Intelligence Benefits

The transition to digital channels in banking (and in commercial lending, specifically) generally is driven, to create opportunity to serve more customers more efficiently. Also, to expand market share by increasing the number of customers and loan volumes at lower cost. Advocates believe that, when deployed at scale, decision-making capabilities powered by AI and machine-learning (ML) decision engines can give a financial institution a decisive competitive edge. On the surface, this approach would be best suited to institutions competing at the global or regional market level. Other “benefits” asserted is the ability for large banks to expand into small business banking. Also, expand into wider geography where they currently do not have a footprint.

The standardization provided by automated scoring has also suggested that it would make securitization of small business loans more feasible. This would be with the ability to correlate a credit score with defaults. Advocates believe that with securitization that there would be an increase in available funding for small businesses at better rates. This would be to the extent that securitization allows for broader diversification.

Useful for Community Banking Organizations?

The question for community banking organizations is whether there may be something to this “high-fillutin” technology stuff. As one of the dinosaurs that used to roam the earth in the commercial lending world (you know who you are!), there were phrases that would strike terror in my heart. This such things as “new and improved” (which generally were neither). Or “systems upgrade” (see new and improved).

Commercial Lending Customer Life Cycle Stages

In a March 2021 article by Kinsey & Company entitled “A-I Powered Decision Making for the Bank of the Future” the authors divided the commercial lending customer life cycle into five stages:

  1. Customer Acquisition
  2. Credit Decisioning
  3. Monitoring and Collections
  4. Deepening Relationships
  5. Smart Servicing

Without spending time on each aspect, a couple of areas stand out as opportunities for AI and PI to work together. Automation provides a useful way to address some of the inherent inconsistency. Also, the lack of accuracy in a manual, paper-based system which is also extremely time-consuming. Using automated approval systems for low dollar, high volume and low value applications provides a cost-effective solution in many cases. Limiting this approach to more simple and lower dollar requests will free up human resources. These will be used for more relationship-building activities and high-value client relationships.

With the improved data integrity and “data lineage” from automating the front-end actions, organizations can use this information to feed their portfolio management systems to improve client monitoring including financial statements and covenant tracking. Because of the improved reliability and consistency of the data input and data flow process, cost savings would be attainable in meeting more stringent regulatory exam standards.

Possible Opportunities for Financial Services Industry

The consistent theme is that the financial services industry needs to find ways to lower operating costs and lower credit risk (credit losses) while improving the customer experience. Few people see the use of digital channels and AI as a way to reduce “person intelligence” (PI). Instead, AI may provide institutions with an opportunity to reduce costs, both operations and credit losses. But will also retain talented lending and credit staff by allowing them to spend their time on things that matter like risk analysis and relationship building. Commercial lending still needs person to person interaction to build loyalty. In an industry that is becoming more commodity-like, it is the personal relationship that represents your institution and your brand.

 

Richard Rudolph is Senior Consultant at Enlighten Financial. They are a specialized consulting firm that focuses on loan review and risk management services to community banks and credit unions. Enlighten Financial has made it our business to shed light on the complex financial landscape. We lead clients in the right direction. We work with financial institutions and other providers to mitigate risk. To talk to Rick directly, please call: 920.445.8133.

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— Bill Beardsley, President, Michigan Business Connection
“By questioning some of our methodologies, Enlighten has helped us say, ‘Okay, this is where we need to train staff better and focus on so that they understand what they're doing better.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“The organization of the communication — before, during, and after the reporting process — was certainly better with Enlighten than what I've experienced with a lot of auditors.”
— Bill Beardsley, President, Michigan Business Connection
“The staff at Enlighten have been available for questions, in addition to the engaged work that they do. They've been very helpful as a resource beyond the major audit.”
— Meghann Kasper, Chief Credit Officer, Bank First
“Enlighten gives us a very good second set of eyes on our transactions. They're not afraid to challenge us on some of the work that we've done, which is what is needed. I don't need to pay somebody to tell me I'm good, I need to pay somebody to tell me where I've made mistakes.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“Enlighten provided industry best practices that weren’t going to show up in an audit report. They would say, ‘Hey, I noticed you do this. This is really unique, you do a really great job of it.’ And then they might add, ‘Some other clients that I have are doing something like this.’”
— Bill Beardsley, President, Michigan Business Connection
“By questioning some of our methodologies, Enlighten has helped us say, ‘Okay, this is where we need to train staff better and focus on so that they understand what they're doing better.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“The organization of the communication — before, during, and after the reporting process — was certainly better with Enlighten than what I've experienced with a lot of auditors."
— Bill Beardsley, President, Michigan Business Connection