The arrival of the digital age has disrupted the retail banking industry and altered the relationship between banks and their customers. Where banking once meant interacting with customers in brick-and-mortar branches, new digital banking channels like websites and mobile apps have opened an entirely new way to reach customers and do business. Online and mobile banking have allowed banks to reach customers more easily and frequently, and have given customers unprecedented access to their financial information.

However, while these advances have made banking more convenient, they come at the cost of eroding the traditional banking relationship. Current digital banking channels permit almost exclusively one-way interactions with banking customers; the onus is on the customer to reach out to their bank (either by phone, text, mobile app, or website) to get the information they want. Banks are missing out on the opportunity to respond to and initiate conversations with customers.

It’s time for banks to bring two-way, relational interactions to digital banking channels. Recent advancements in technology and shifts in mobile usage trends make it possible for banks to interact with their customers through mobile interfaces using the most natural medium … conversation.

Conversational Banking: Bots as Bankers

Conversational banking uses lightweight, AI-powered chat software (chatbots, or bots) to communicate with bank customers through familiar voice- and text-based interfaces. These virtual assistants can be programmed to ask and answer customer questions in familiar, conversational language and work within existing chat platforms like Facebook Messenger, WhatsApp, and SMS.

The use of conversational AI in banking isn’t entirely new; chatbots have been used in banking for many years with SMS banking and Interactive Voice Recognition (IVR) technology. However, these legacy services aren’t very user-friendly — restricting inputs to certain key phrases and passcodes — and still require customers to initiate the interaction.

Recent advancements in AI, machine learning (ML), and natural language processing (NLP) are enabling more sophisticated chatbots that make it easier and more efficient for banks to communicate with their customers. Leveraging the power of natural conversation, these technologies are facilitating two-way interactions, allowing banks to establish genuine relationships with their customers while providing a more seamless experience across multiple digital touchpoints.

The Exponential Growth of Messaging

Conversational banking has taken off in part due to recent shifts in mobile usage habits. As messaging platforms like Facebook Messenger, WhatsApp, Kik, and Telegram become increasingly popular, consumers are spending the majority of their mobile screen time on these platforms.

A recent Business Intelligence report found that messaging platforms have surpassed social media networks in popularity and engagement. As of July 2016, Facebook Messenger alone boasts one billion monthly active users, and the top three messaging platforms attract over three billion users daily.

Tech giants like Facebook, Microsoft, Google, and Amazon have already recognized the potential to monetize these platforms by providing easy access to brands and services. In 2015, Facebook Messenger and Snapchat built peer-to-peer payments services into their platforms, and Uber partnered with Facebook Messenger to allow users to request a ride from within a Messenger chat window. There are now more than 11,000 bots on Facebook Messenger alone, and that number is only expected to increase as conversational commerce continues to develop.

Considering this commercial opportunity, forward-thinking financial institutions have begun investing in chatbot technology. Conversational banking has already been widely adopted in several regions around the world, including China, India, Africa, and the UK.

In October 2016, Bank of America announced its AI-powered chatbot “Erica,” which will be available sometime this year. Similarly, MasterCard recently announced the launch of MasterCard Kai, an AI-powered chat banking interface that integrates with Facebook Messenger and other messaging platforms. Meanwhile, third-party fintech companies are developing chatbot technology to either compete with incumbent banks or market to those seeking to partner.

Banking on Bots

It’s easy to see why big banks are investing in chatbots. Offering improvements to both back-office and consumer-facing operations, banking chatbots are a simple, scalable solution to many of the most common digital banking problems. Banks that leverage this technology can benefit in many ways and gain a competitive advantage.

Increased Operational Efficiency

Owing to recent improvements in NLP and deep learning (DL), bots are becoming more adept at contextualizing information, detecting patterns, and accurately generating appropriate responses. Therefore, they can be used to automate mundane tasks and reduce costs, boosting efficiency of banking operations.

AI-powered conversational banking interfaces can handle a variety of basic banking tasks like answering customer questions, servicing accounts, and opening new accounts through digital channels. Maintaining physical call centers and branches to handle customer support is one of the costliest banking operations, and chatbots have the potential to alleviate this cost by automating customer support through digital conversation. This allows banks to reduce overall call center volume, freeing up staff and branch resources to deal with more complex issues.

Improved Customer Experience

Conversational banking provides a seamless digital banking experience. Because chatbots operate within existing messaging platforms, banking customers can access their bank information using the familiar interfaces they use daily. Most chatbots work on numerous platforms, allowing customers to access their bank using their preferred messaging app. Customers are incentivized to access their bank more easily and frequently, which translates to higher engagement and loyalty.

Chatbots can also make authentication easier for both banks and their customers. Because native messaging apps already know considerable insights about their users, banking chatbots that live on these platforms can securely authenticate banking customers without requiring them to log into their bank’s app.

Unique Data Insights

Banks have a mountain of customer data at their fingertips, but often struggle to understand and get value out of it. In the digital age, when customers rarely have face-to-face conversations with tellers about the intimate details of their financial lives, acquiring and understanding customer data is crucial.

Customer data is the key to establishing meaningful, personal relationships with banking customers and offering customized products and experiences. Banks need to effectively analyze this data to better know and serve their customers.

Conversational banking enables banks to acquire more nuanced customer data. By engaging customers in “small talk” through conversational interfaces, banks get insight into customer intents, desires, and concerns that are not apparent in banking app and website interactions.

Conversational AI can also help banks better understand this data. Through deep data analytics, pattern recognition, and predictive algorithms, chatbots can communicate intelligent insights about banking customers’ present and future banking needs. These insights can be used to offer more personalized banking products and services to build lifelong customers.

The Future of Conversational Banking

Banking has changed a lot in the last fifteen years. As technology has evolved, banking has expanded from branches to call centers to websites to mobile apps, continuously redefining the relationship between banks and their customers. Now, conversational banking is redefining this relationship again, bringing two-way interactions back to digital banking.

Conversational banking is in its infancy, but it’s a new industry standard that will only become more widespread and sophisticated with time and as more industries leverage this technology. Today’s banking customers expect world-class digital experiences, and chatbots not only help meet these expectations, but also give significant advantages to banks that offer them to their customers.

Through the power of conversation, banks can establish relationship banking in digital channels to better understand and serve their customers.