IBM Watson now offers software and cloud services that help financial institutions and other businesses keep on top of a complex web of changing financial regulations.

Although banks and credit unions may seem to have the lion's share of laws and regulations they must meet in order to be allowed to handle other people's money, every organization has some level of fiduciary responsibilities. Depending on what kind of business in which an enterprise is engaged, the number of rules that have to be followed varies, but the real challenge is keeping up with the ever-changing nature of laws and regulations affecting business practices. IBM is taking a step forward in this area by using Watson to help concerned businesses keep track of these obligations—and other internal activities—to improve their financial operations.

Last fall, IBM acquired Promontory Financial Group, a strategy, risk management, and regulatory-compliance consulting firm focused on the financial services industry. One of IBM's objectives was to have Promontory train some Watson systems in financial regulations, which Promontory did by inputting 60,000 regulatory citations. This exercise, among others, led to IBM's announcement last June 14 of a tool suite for financial services under the Watson umbrella, collectively called Watson Financial Services.

An Aside About Nomenclature

If you look at IBM's web page about Watson Financial Services, it will quickly become clear that the issue of whether Watson's financial tools should properly be called products or services is actually pretty hazy. To begin with, under Watson terminology, what's a Watson "product?" David Shirey's recent Tech Tip on Watson product names identifies these as Conversation, Discovery, Knowledge Studio, and Virtual Agent. The Watson Financial Services page also points to these as "products," but Financial Services is termed a "focus area," not a product at all. Yet, if you click on "Financial Services" under the Focus Area tab, you're taken to another page that says the "products" available are called IBM Watson Customer Insight for Banking, IBM Watson Customer Insight for Wealth Management, IBM Watson Customer Insight for Insurance, (all grouped together under a "customer Insight" heading) and IBM RegTech, Watson Regulatory Compliance Analytics with Watson, and IBM Surveillance Insight for Financial Services (all grouped together under a "Risk and Compliance" heading). So why aren't these products even mentioned on the Watson's official Products and Services page? According to an IBM representative, the four products Shirey mentions are "core" products, while those listed under the Financial Services tab are products too, just not "core" products. (IBM wins no points for clarity when you have to chat with a representative to decipher a web page. "It's confusing," the representative admitted.)

We'll set aside the compounding argument over whether software you install on a machine you own is a product as opposed to whether accessing it via the cloud is a service. Just so we're clear: Watson Financial Services itself is neither a product nor a service; it's a focus area under which some Watson products not mentioned on the official products page are being offered.

Under the Watson Financial Services Focus Area

So what are the products under Watson Financial Services, each of which most enterprises will consume as cloud services?

IBM Watson Customer Insight for Banking strives to help banks understand their customer better by analyzing peripheral data from transactions, payment systems, merchant data, customer interactions with the bank itself, and even social data. Predictive analytics capabilities let banks group information about customer preferences and propensities into handy dashboards. This can let analysts make targeted offers to customers based on predictions derived from spending habits, shape customer treatments based on anticipated spending, and predict other appropriate customer service options the bank could take. Ideally, these efforts will reduce customer attrition due to greater customer satisfaction, let banks become more granular in segmenting their customers, predict cash flow more accurately, and generally improve revenue. More specifically, benefit examples might include being able to offer overdraft protection, cash flow analysis, or predictive alerts to customers who don't have them but whose spending habits suggest such services might be useful.

IBM Watson Customer Insight for Wealth Management is designed for companies that offer wealth-management services to clients. By analyzing such factors as historical data and opt-in Twitter access, it helps financial consultants predict life events, segment clients by behavioral attributes and cash flows, assess the tone of their social media communications, and determine the best sales approach based on propensity for risk on the part of their clients. Aside from being a little frightening, it also helps analysts maintain an insight into market trends by providing relevant news articles and client metadata such as frequency of logins to a customer's account. The goals here are to maintain the client relationship by providing better service and personalization and to avoid client attrition. In addition to dashboards for consultants are some for consultant managers, which provides overviews of clients handled by multiple consultants and financial overviews of aggregate assets being handled by the entire company or some subset of it, and other administrative tools. As for Twitter, the client has to enable access that, once granted, is analyzed by Watson Tone Analyzer .

IBM Watson Customer Insight for Insurance is aimed even more at customer retention than the banking or wealth-management apps because, in one study, 32 percent of clients switch insurers every two years and it can cost up to seven times more to acquire a new insurance customer than it does to retain an existing one. Here, data analysis draws on multiple internal company systems, information on policies and claims, relevant news items from external sources, as well as customer preferences and lifecycle needs. This helps insurers track customer satisfaction, spot trends, and identify customers likely to seek another insurer. Data is summarized into dashboards that show, for instance, key performance indicators for customer retention, agent performance, customer groupings by selected data types, and customer histories. This enables more dynamic client segmentation than simple demographics, more personalized offers, and even more tailored customer interactions.

Risk and Compliance Apps

IBM RegTech starts off the Risk and Compliance group that Promontory helped IBM train Watson to handle and for which Promontory is front and center in offering supplemental services. RegTech's focus is on helping financial services companies and enterprises with similar functions keep track of changes in laws and regulations pertinent to their type of business, better detect money-laundering operations, stress-test their internal systems, understand their customers better, and if necessary, conduct surveillance of potentially suspicious transactions taking place in their accounts.

To get an idea of how this works, let's take the 2008 financial crisis that brought Lehman Brothers crashing down. The Basel Committee on Banking Supervision, an international standards organization for banks, undertook to avoid a recurrence of those particular circumstances by issuing the Basel Fundamental Review of the Trading Book (FRTB). Quite basically, the FRTB standard changes how banks assess the minimum capital standards for getting involved in certain activities (e.g., securities trading or mortgage fund investments), in addition to normal banking operations.

Watson Risk Management lets financial professionals use data modeling, predictive analytics, and other tools to manage market and credit risks, in particular to meet FRTB standards. Risk Management helps financial institutions model scenarios, measure and manage credit risks, and streamline the process of assessing financial risks, among other capabilities. Other features let banks measure their ability to make payments under situations where its cash flow might be stressed (i.e., test their liquidity) by running "what-if" scenarios repeatedly while changing initial parameters. These and other tools let financial organizations take a big-data approach to strategic planning for future operations.

IBM Regulatory Compliance Analytics with Watson zeroes in on making sure user organizations are better able to demonstrate to stakeholders that all laws and regulations are being followed, across all markets and jurisdictions with which the organization might be involved. Watson can analyze new laws and regulations and identify actions the organization needs to take to comply. It also summarizes information in a simple dashboard format.

IBM Surveillance Insight for Financial Services focuses on the need to conduct surveillance on employees of financial services organizations who may be acting unethically or illegally. This app surveys electronic communications between employees (e.g., email, IM, social media), analyzes employee personalities and behaviors to watch for patterns that might indicate financial misconduct, records details of trading events, and evaluates employee sentiments to alert management to possible suspicious activity.

Pick and Choose

It's important to remember that smaller organizations may find a use for individual Watson apps in monitoring and modeling their financial operations, even if they are not an enterprise large enough to use a majority of those apps.

John Ghrist

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John Ghrist has been a journalist, programmer, and systems manager in the computer industry since 1982. He has covered the market for IBM i servers and their predecessor platforms for more than a quarter century and has attended more than 25 COMMON conferences. A former editor-in-chief with Defense Computing and a senior editor with SystemiNEWS, John has written and edited hundreds of articles and blogs for more than a dozen print and electronic publications. You can reach him at ghrist@comcast.net.