AI and Machine Learning in Banking

• The banking industry is undergoing transformative change as neobanks challenge traditional banks with cost-efficient, technology-driven, and innovative business models.
• Traditional banks and neobanks are adapting strategies to stay competitive, meet consumer expectations, and comply with regulations.
• Recent technological advances, competitive advantages, and future innovation recommendations within the banking industry are included.

Machine Learning and AI in Banking Operations

• AI and machine learning are reshaping banking processes, enhancing efficiency, and improving customer experience.
• Banks automate routine operations, including transaction processing, fraud detection, and compliance checks, to minimize human error and cut costs.
• JP Morgan introduced LLM Suite, an AI tool for over 50,000 workers, improving productivity, decision-making, document summarization, and creative solutions.
• JP Morgan uses language models to detect fraud via email compromises.
• Mastercard developed a Decision Intelligence (DI) tool to assist banks in approving transactions, enhancing the speed and accuracy of anti-fraud measures.
• Generative AI transforms the speed and accuracy of anti-fraud solutions, protecting banks and customers from criminal efforts.

Blockchain Technology

• Blockchain technology is proving effective in addressing current banking problems, particularly in trade finance and asset management.
• BBVA (Asset Management) uses blockchain technology to tokenize funds, introducing its first tokenized money market fund regulated by the Spanish National Securities Markets Commission (CNMV).
• Digital share issuance is safer and administrative costs lowered using blockchain improving efficiency in asset management services.
• ING Bank co-founded Komgo, a platform automating financial transactions securely and enabling blockchain technology integration into trade finance.
• Blockchain technology simplifies trade finance, increasing operational efficiency and reducing fraud.

Digital Wallets and Mobile Payments

• Mobile payments and digital wallets are essential for modern banking, offering customers safe and practical ways to complete transactions.
• MB Way is a popular payment app in Portugal, integrated into retail payments, allows payments via QR codes in physical stores and secure online payments.
• MB Way is a convenient tool in Portugal for transactions between individuals or for goods and services using only a phone number, contributing to digital payments' growth.
• Revolut offers instant transfers, cryptocurrency transactions, and low-cost currency exchange.
• Revolut's ability to invest in stocks and budget savings is driving its growth and user increase.
• AI and blockchain technology enhance security, reduce operational costs, and improve customer experience, strengthening banks' positions in digital banking.
• Innovations also present challenges, including cybersecurity.

Strategic Analysis of the Banking Industry

• It is important to analyze how banks use resources and capabilities to maintain competitive advantage with the rapid growth of technologies.

Resource Based View

• Firm performance relies on unique resources and capabilities, not just the market environment.
• Key resources that drive strategic advantage are valuable, rare, difficult to imitate, and organization (VRIO Framework) (Barney, 1991).
• Traditional banks have a competitive edge in brand loyalty, capital accessibility, and financial stability, which are hard for neobanks to replicate
• Traditional banks are at a disadvantage due to high operational costs, slow AI adoption, and real-time IT systems.
• Neobanks have competitive advantages in digital-only platforms, AI-driven automation, and real-time customer data utilization, allowing scalable and cost-efficient operations.
• Building brand trust and securing venture capital can be challenging for neobanks.
• Traditional banks explore digital assets and DeFi solutions, integrating fintech into the traditional landscape and adapting resources and capabilities to advance hybrid banking practices.

Industry Structure-Based View

• Competitive rivalry in banking is increasing with traditional banks competing with neobanks, fintech startups, and tech giants.
• Market forces and competitiveness shape a firm's strategic behavior.
• Adapting to industry dynamics is focsing on the ability to compete.
• External pressures and competition are forcing traditional banks and neobanks to evolve.
• Increased customer bargaining power comes as digitalization makes switching banks easy and cost-free.
• The threat of new market entrants has grown due to open banking regulations and lower capital requirements for digital banks.
• Alternative finance solutions such as Cryptocurrencies create significant new substitution threats
• Competing traditional firms and neobanks innovate and refine products to meet customer demands to stay competitive

Competitive Rivalry in the Banking Industry

• Neobanks use a cost leadership strategy, attracting customers with branchless models and fintech operations for lower costs and rapid scaling.
• Traditional banks use a differentiation strategy, they offer personalized wealth management, mortgages, and investment advice through full-service banking models.
• Neobanks introduce premium subscriptions and cryptocurrency services to diversify revenue streams.
• The rise of digital banking shifts traditional bank expectations and investing in AI-driven personalization, fintech partnerships and mobile banking.

Institutional Based View

• Regulations on privacy, financial transparency, and security accelerate digital transformation.
• Laws like PSD2, Money Laundering Directives, and GDPR force banks to enhance cybersecurity, adopt AI compliance tools, and improve digital authentication.
• The banking industry must adopt new technologies for competitive edge and to comply with evolving regulations.

Future Competitive Landscape

• The competitive financial sector is undergoing a significant transformation as technology advances.

• Digital banking is primarily driven by AI, blockchain technology, and changing regulations.

• McKinsey suggests AI could boost annual banking revenue globally if operations are efficient and new opportunities are unlocked.

• Banks are moving away from traditional models toward technology-driven, customer-centric operations.

• Hyper-personalization through AI is a key differentiator, it enables customized product recommendations and financial insights, improving client experience.

• Financial institutions predict customer needs and automate transactions.

• Banks prepare to embrace cryptocurrency services integrating DeFi elements and regulatory changes.

• CBDC is a digital version of cash that aims to decrease cross-border costs, improve privacy and convenience, and reduce the financial risk versus cryptocurrencies.

• Many countries are researching the influence of CBDCs.

• Most central banks are considering CBDCs and expect a launch soon.

Strategic Recommendations

• Implementing CBDCs poses challenges, requiring new regulatory frameworks.
• In the digital era, banks need to implement technology while balancing security, regulations, and ethical standards.
• Digital banks like Revolut, N26, and Chime should improve cybersecurity and AI to protect customer transactions, thereby improving their trust and reliability.
• To facilitate global growth banks compliance operations must focus on maintaining continuity while avoiding legal risks by adhering to changing regional laws
• Adopting RegTech simplifies the compliance process, leading to efficiency gains, better internal alignment, enhanced accuracy, and improved risk management.
• Banks enter strategic partnerships with fintech startups to utilize fintech innovation and agility while improving service delivery, operational efficiency, and compliance measures, cutting costs and bringing new technology to market faster.
• The importance of ESG is growing, and banks are adopting sustainable and green banking practices.
• Banks must promote sustainability by offering lower interest rates on green projects, by implementing digital-only services and paperless banking to eliminate the need for paper.
• Banks must leverage AI to strengthen cybersecurity and increase efficiency.
• Institutions that balance and embrace innovation, security, compliance, and sustainable practices will lead the next era of digital finance.