Abstract Artificial intelligence–powered chatbots have emerged as an important part of the digital customer service across service industries. Nonetheless, there are few empirical studies on the role played by chatbots in the formation of digital service loyalty, and the underlying processes behind this relationship. This study explores the impact of AI-powered chatbots in improving digital service loyalty among telecommunication firms through the mediating effects of AI technology trust and digital service satisfaction, and moderating effect of digital literacy. Quantitative research design was used, and data were gathered among the telecommunications customers in Jordan who have past experience in dealing with chatbots-based services. Structural equation modeling (SEM) has been used to test the proposed research model. The findings show that AI-powered chatbots have a strong and significant effect on AI technology trust and digital service satisfaction, which have a positive impact on digital service loyalty. The results also confirm the positive impact of AI technology trust on digital service satisfaction and that the two constructs mediate the relationship between AI-powered chatbots and digital service loyalty. Moreover, digital literacy strengthens the positive relationship between AI-powered chatbots and AI technology trust. This study contributes to the growing body of research on artificial intelligence in service marketing since its findings are based on empirical data about how AI-powered chatbots can affect digital service loyalty in an online service setting. The results also present practical value to telecommunications firms that are trying to use AI-based service technologies to enhance digital service satisfaction and build long-term relationships with customers.