Hani Hagras, Chief Science Officer, Temenos
COVID-19 has accelerated trends over the spectrum and nowhere has this been more evident than in banking. The shift towards digital banking, that was already in motion, has proven to be unstoppable with its capabilities being stretched to cater to increased and changing customer demands.
While much attention has centered on exciting developments in digital services for consumers, its businesses, particularly smaller businesses, where there is perhaps a greater chance of banks to shine.
It is often said that small businesses are the lifeblood of our economies and communities. At the start of 2021 there were 5.94 million smaller businesses in the UK alone, that's 99.3% from the total business. Combined they account for 99.9% of the business population (6.0 million businesses), three fifths of the employment and around 1 / 2 of turnover in the UK private sector.
But these small company have been hit hard through the pandemic with many facing financial hardship and reliant on banks and relief programs to supply urgent support. We've seen many great examples of where banks have stepped up through distribution of emergency loans, loan repayment holidays and fee free lending. But there's more that needs to be done.
Small businesses require financial products and services that are tailored for their individual needs. This fact is reinforced by the recent formation of the Banking Competition Remedies Ltd, which will administer access to lb775mn of funding for those that can demonstrate they will address their demands.
Properly servicing this market segment is mutually beneficial to banks too. Banking revenue from the SME sector is set to grow over c.7% p.a. the next seven years making the small business sector one of the largest, lowest-risk profit pools in the entire industry.
Banks have typically serviced the SME market with a blend of retail and corporate solutions, but it is widely recognised that this no longer fits the evolving needs of SMEs. Instead, there's a need for SME banking services to maneuver \”beyond banking\” to address the front-of-mind needs of SME owners. Consequently, holistic solutions involving collaborations with other, digital service providers can work together to address these challenges.
At Temenos, we see this moment like a rare opportunity to fundamentally reimagine how banks serve the SME sector. By leveraging we've got the technology that is now available, banks can use innovative design centric and knowledge driven products, and services that may transform the customer experience of SMEs in areas for example on-boarding, lending, cash flow management and trade finance. It's the digital experience and utilisation of data that will be at the heart of the next wave of SME banking services.
This is where Artificial Intelligence comes to the fore. It enables banks to leverage data from multiple sources to create faster, and more accurate decisions and provide individualised, frictionless customer experiences.
Explainable AI or \”XAI\” takes this one step further, by addressing one of the key issues for banks using AI applications; that is that they typically operate as 'opaque boxes' offering minimum discernible insight into how they reach their decisions. At Temenos we're the first to bring transparency and explainability of AI automated making decisions to the banking industry.
Take lending as an example. By looking at a small business holistically across lots of attributes, not just a credit score, banks could make better, more nuanced and fully explainable decisions that lead to 20% more positive credit decisions and much less false positives. All this can be achieved in real-time using APIs to connect to 3rd party data sources.
If financing is refused, the bank will be able to use XAI to explain why the choice was made and offer alternative products or suggest ways to improve their chances of getting a loan approved later on.
With the current increase in small business loans, including those underwritten by government to support small businesses, right now, the need to digitise making smarter decisions to alleviate underwriting pressure and drive efficiency has never been more important.
Banks can also carve out new revenue streams through XAI. Customers who may have had a service negated can instead be rerouted towards others which are more suitable for them, or for that they would qualify.
We're only just scratching the surface of what XAI can do, but as banks look at how they can leverage its capabilities it is integral of product development. The transformative abilities of XAI could truly revolutionise banking for that SME sector.