What is Conversational AI, and how does it work?

What is Conversational AI, and how does it work?

Conversational AI enables computers and humans to interact more naturally. In this guide, we take a closer look at the technology, explain how it works, and show its real-world benefits.

From Google’s supposedly conscientious LaMDA bot to Meta’s recently launched AI chatbot that started insulting users: AI-based technology has created quite a buzz lately.

And while a computer that allegedly developed a humanlike personality and a chatbot that said mean things about Mark Zuckerberg make for good headlines, the reality of AI-based chatbots is a lot more pragmatic (albeit not less exciting!).

In this guide, you’ll learn more about the technology, its benefits, challenges, and we’ll show you how it is already being used successfully in several industries.

In this article, you will read:

What is conversational AI?

Conversational AI is a type of artificial intelligence that enables humans to interact with computers as if they were interacting with other humans. It can mostly be found in chatbots (also called bots or virtual assistants). Virtual assistants can be found in pretty much any digital space, from a live chat on a website to a bot in a messaging app on your phone, in your car, in your home on a smart speaker, or even at an ATM.

Gymbot -template
Example of an in-app gym chatbot

Conversational AI chatbots stand in contrast to conventional chatbots, your typical “click bots”.

Button bots are the most basic type of chatbots that use pre-programmed answers that they give in response to certain pre-set keywords. Let’s say a basic e-bike chatbot has been programmed to display a link to the product website if somebody uses the keyword “new e-bike”.

If a customer asks for “new wheels” instead, the chatbot will not be able to respond. Even though, to us humans, it’s clear that new wheels refer to a new e-bike, basic bots are not able to understand that it’s the same intent.

A conversational AI chatbot, on the other hand, uses natural language processing (NLP), machine learning and conversational design which enable it to have a better understanding of the humans’ intents and to answer questions more naturally. This type of chatbot will be able to understand that “new wheels” and “new e-bikes” mean the same thing.

VanMoof e-bike chatbot
Conversational AI bots understand questions with alternative phrasing.

How does a conversational AI bot work?

NLP and machine learning enhance a conversational AI chatbot’s capabilities to understand human intent. Conversational design enables the bot to answer more naturally, with more humanlike expressions.


NLP enables a computer to understand human speech and text and reply like another human would. 

For this, conversational AI chatbots use natural language understanding (NLU) and natural language generation (NLG).

  • NLU helps the bot understand the context of human language, such as syntax, intent, or semantics.
  • NLG generates text or speech in a language that humans can understand.

The better the chatbot’s NLP capabilities are, the smoother the interaction between bots and humans will be.

Read how Chatlayer’s NLP capabilities outperform big players like Google or Microsoft!

Conversational Design

Conversational design is the way in which the flow of the conversation between chatbots and humans is designed. Conversation design combines AI, NLP, user experience design, writing, linguistics, voice, and motion to ensure that the human-bot-interaction is as smooth and natural as possible.

What are real-world benefits of conversational AI?

Because conversational AI bots have more advanced interaction skills, they can take over more tasks and improve automation processes in companies and organizations.

Juniper Research estimates that the adaptation of chatbots could save the healthcare, banking, and retail sectors eleven billion US dollars per year by 2023.

It doesn’t come as a surprise then that you can already find conversational AI in many different industries and for several use cases.


E-commerce companies are one of the biggest chatbot markets. They mainly use conversational AI chatbots to support their customer service teams.

Here, they can answer frequently asked questions about products or delivery status, and thus help customers faster. But conversational AI bots in e-commerce can also increase revenue.

Conversational AI chatbots are for example very skilled at re-engaging customers that have not completed their purchases, and thus drive sales and reduce the number of abandoned shopping carts.


Current research found that the retail sector will benefit the most from chatbots. Experts estimate that by 2023 over 70 percent of chatbots accessed will be retail-based.

In fact, retailers today are already being very creative when it comes to using chatbots. French supermarket chain Intermarché, for example, worked with Chatlayer by Sinch to develop a recipe bot that inspired customers, and reached a 59 % engagement rate. In an industry where engagement levels are typically low, this made Intermarché stand out from their competitors.


The use of chatbots in HR is widespread. 92 percent of HR teams say that chatbots will be important to help employees find information. https://blog.vsoftconsulting.com/blog/the-rapid-rise-of-chatbots-why-on-demand-hr-matters

The Belgian wealth management company, Foyer, is already putting this to use in their HR department. Foyer uses a conversational AI chatbot from Chatlayer by Sinch to answer the questions of the company’s 1,600 employees 24/7 in several languages.

With its capabilities to send personalized messages to the employees, the bot has also increased employee satisfaction in the company.

Read how Foyer was able to automate their claim process


From online banking to trading apps to mobile payments: many customers enjoy the perks of being able to handle their finances online and on the go. Globally, almost 29 percent of internet users access online financial services at least once a month.

For financial institutions, it has also proven to be beneficial to automate some of their services. Rawbank, a 2.1-billion-dollar revenue bank in the Democratic Republic of Congo, works with Chatlayer by Sinch to streamline their customer support and make their teams more efficient.

The multi-intent development of the conversational AI chatbot supports over 50 use cases and handles over 4,000 messages per month.


The insurance industry was one of the early adopters of conversational AI, with very positive responses from customers. Even back in 2019, 44 percent of consumers felt comfortable making an insurance claim with a bot. 

To this day, working with AI bots to pre-qualify claims is one of the biggest use cases for chatbots in the insurance industry. Belfius, for example, is a Belgian insurance company that is servicing 3.5 million customers. They started using a conversational AI chatbot from Chatlayer by Sinch to automate their claiming process.

The bot was able to manage 2,000 claims per month and the now completely automated process delivers consistent results.


From airlines to hotels to travel agencies: conversational AI chatbots are also quite common in tourism. The bots can help customers with reservations, send booking confirmations, and provide general information to travelers.

The European Commission, for example, offers a travel program to help young people explore Europe. The program is very popular, and the organization realized soon that it became too much for its employees to handle the large number of incoming queries, especially in different time zones and in several languages.

They partnered with Chatlayer by Sinch to design a conversational AI chatbot that offered real-time support via web channels 24/7. The bot now handles 80 percent of incoming requests.

We were able to provide reliable responses to thousands of people


Electric vehicles are in very high demand right now, and e-mobility companies struggle to keep up. That’s why e-mobility providers have started using chatbots to be able to support their customer service teams, answer customer queries faster, and provide easy access to services.

Bizbike, Belgium’s biggest e-bike provider, for instance, uses a conversational AI chatbot from Chatlayer by Sinch to answer FAQs and to set up appointments for service visits.

bizbike live chat support

In its first two months alone, the bot was able to answer 54,000 messages, and save the customer service team 40 hours.


Conversational AI is also used by many education providers. With the rise of online education, it has become more common for online learners to interact with chatbots. 

This trend has been sped up by the Covid-19 pandemic. As many educational offers had to move online during the pandemic, learners found out that they enjoyed the flexibility of online classes. For schools and institutes, offering online learning helped them expand their offers to a larger target audience.

At the same time, handling online classes and online inquiries at the same time can be very time-consuming, especially if queries come in outside business hours. That’s why Yellow Class, an organization from India that offers free hobby classes for children, uses a WhatsApp chatbot to answer common customer questions.

Yellow Class WhatsApp Chatbot

With the chatbot solution, Yellow Class was able to assist more than 35,000 users and complete 150.000 conversations.


The Covid-19 pandemic has presented some of the biggest challenges to date for health care providers. High demand, shortage of staff, and supply chain issues made it very difficult for providers to offer patients prompt and personal care. That’s exactly where conversational AI has come in!

The Mexican health care organization, Salud Digna, decided to use a conversational AI chatbot on WhatsApp to answer frequently asked questions and help their patients to schedule appointments faster.

"The WhatsApp virtual assistant enables us to quickly address common questions that previously would have resulted in an in-person patient visit. Providing these highly responsive communications through WhatsApp is much faster than having to provide the same information in-person or over the phone."
Pedro Salud Digna
Pedro Josue Vidal Moreno
Digital Laboratory Manager at Salud Digna.

The bot designed by Chatlayer by Sinch was able to handle most incoming queries, and now 89 percent of their patients don’t require agent support anymore. 


The internet of things makes use of conversational AI, mainly in the form of voice assistants, like Alexa or Siri. In 2022, on average, 26 percent of internet users between 16 and 34 years used voice assistants to find information.

However, there are many other IoT use cases for conversational AI. For example, the technology can be used in navigation systems, or in wearable devices like fitness trackers.

Challenges of Conversational AI

Providing high-quality conversational AI technology is not without challenges.


Designers of conversational AI chatbots must make sure that their bots are safe and secure when handling user data. High-quality bots will have several safety features in place to make sure that user data is protected.


When designing conversational AI chatbots, it’s important to be mindful of the ethical issues around the technology. Nobody wants their chatbot to insult customers, use inappropriate language, or be biased towards a target group. It’s therefore critical to design conversational AI chatbots with ethics in mind, says Joachim Jonkers, Chief Product Officer at Chatlayer by Sinch.  

“If you want to make your bot appeal to your entire user base, you need a team that’s made up of different genders, ages, and races, locations, etc. Make sure the people building the bot reflect the people that are going to use the bot. This is the right way to ethical AI.”
Joachim Jonkers
CPO, Chatlayer by Sinch

Customer expectations

One of the biggest challenges for conversational AI are customer expectations. On the one hand, some consumers have very low expectations towards chatbots because they have only had bad experiences with very basic bots in the past. Others, on the other hand, imagine a chatbot to be a highly advanced form of self-learning artificial intelligence, and are disappointed when their expectations are not met.

Companies should make sure to set the right expectations from the get-go.

“It is very important that the chatbot introduces itself as a bot and tells a customer very clearly what it can do, and what not. That way, customers don’t mistakenly think they are talking to a human, and they know exactly what to expect from the bot.”
Céline Lémonne
Junior Conversation Designer, Chatlayer by Sinch

Status quo of conversational AI

Conversational AI has made big advances in the past years that have resulted in better-quality bots, an improved user experience, and tangible benefits for businesses and organizations.

Find out how conversational AI chatbots like the ones designed on Chatlayer by Sinch can help your business as well. Schedule a live demo with our team, and we’re happy to guide you through our product and answer all your questions.

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