the cognitive bank ibm launch deck 2016

1

Decoding data to bolster growth and transform the enterprise The cognitive bank

2

§ The inescapable urgency of cognitive

§ What is cognitive computing?

§ The cognitive bank arrives

§ Becoming the cognitive bank

The cognitive bank – study structure and storyline

Executive summary

4

Executive summary

It's official, the traditions of the financial services business model are in stagnation…

Customer experience and engagement are not keeping pace with greater expectations of the rapidly evolving digital world

Sustainable profitability is a serious challenge for most of the global banking industry

Even more troubling is that operational efficiency is also in decline and attempts at tactical cost reduction are failing to achieve sustainable efficiencies

IBM's latest IBV study – the cognitive bank – categorises winners and losers by revenue growth and operating efficiency over the past three years. Data and managing it effectively is the primary source of sustainable competitive advantage

Winners have several traits in common:firstly they are reorientating their business models, by establishing, expanding, and evolving their ecosystem of partners everywhere…transforming very deep and wideSecondly, they are investing in fintechs, as partners in sustainable business models Thirdly, becoming the cognitive bank, using the latest techniques in design thinking and agile

Outperforming banks are already on their journey towards becoming the cognitive bank. We are already partnering with them to plan the journey and charter the course

Methodology

6

IBM surveyed a total of 2,009 global C-suite executives from the banking and financial markets industries

7%

South America

15%North America

35%Asia Pacific

39%

EMEA

4%Australia

Percentage of total banking executives surveyed by region

Source: Please see the notes section

7

Banking and financial markets segments were equally represented with respondents from diversified roles

Primary business(% of respondents)

Role(% of respondents)

31%

16%

16%

16%6%5%

5%5%

Others Head of Customer ExperienceHead of Business function Head of Strategy/InnovationChief Technology Officer Chief Financial OfficerChief Operating Officer Chief Executive Officer

50%

25%

25%

Financial markets

Retail/consumer banking

Commercial banking


Sample size n=2009 respondents

The inescapable urgency of cognitive

9

of banking executives believe banks can avoid commoditization1

Traditional banking functions are being commoditized and value is moving from functional capability to relationship management

43%

Banking is becoming commoditized

believe bankingis becoming

commoditized

Of banking executives surveyed1…

54%believe buying behavior of consumers is moving from products/services

to experiences

Customer demands are changing

Of banking executives surveyed2…

Only15%Source: Please see the notes section

10

Banks are struggling to deliver excellent customer experience, as customers are becoming increasingly demanding

57%

16%

61%

35%

Bankers believing that they deliver excellent customer experience Customers agreeing that they receive excellent customer experience

Bankers believe they meet customer needs while customers do not agree1…

Wealth management Retail banking

… and a new class of customers are disenchanted with banks2

53%

73%Millennials would be more excited about new financial offerings from participants such as Google or Apple, than from their

own nationwide bank

Millennials believe their own bank is offering nothing different from other

banks


11

Banks are being disintermediated and displaced

New breeds of competitors are attacking banks on all sides –incurring lower costs and offering new value to customers

Digital-only, non-bank competitors and fintechs are growing rapidly

10xIncrease in investments of fintech companies over the past 5 years1

425bpsTypical difference in operating costs between a bank and a P2P lender3

$4tnEstimated size of loans disbursed by non-banks across six lending segments2

$11bnEstimated annual profit at risk from non-bank disintermediation over the next 5+ years2


12

1%2%

3%

0%

2%

4%

6%

8%

10%

0.0

0.5

1.0

1.5

2.0

2.5

FY2011 FY2012 FY2013 FY2014 FY2015

Operating revenue YoY growth

Financial performance has plateaued with many banks struggling to pare costs further

…and profitability remains suppressedBanks revenue growth has stagnated….

Historical operating revenue and YoY growthfor global top 100 banks (by assets)1

$ tn

0%

Cost/income ratio of global top 100 banks (by assets)1

56%54%

57% 57%56%

55%

50%

52%

54%

56%

58%

60%

FY2010 FY2011 FY2012 FY2013 FY2014 FY2015


13

Leading banks are acutely aware of the challenges facing the industry

…and more likely to prepare for disruption2

Outperforming banks are much more aware of disruption1…

43%Outperformers

13%Underperformers

54%Outperformers

30%Underperformers


231%more

80%more

14

Banks are responding to the headwinds by cutting costs

The response of many banking leadersis to cut costs1…

But many now struggle to achieve additional efficiencies2

51%Improve customer engagement and experience

50%Grow revenues

49%Improve employee productivity

44%Improve strategic decision making

44%Managing risk

58%Improve operational efficiency

64% report that their bank’s operational efficiency remained the same or

declined furtherover the last 3 years


15

Leading banks have been focusing on tactical measures to reduce costs and achieve higher performance

Organizational streamlining Outsourcing/OffshoringTargeted cost savings ofUSD 1 bn by 2017 as apart of Project Streamline1

Outsourced to reduce costs,changing its hiring strategy andreducing compensation2

Accelerated cost reductiontargets 4.3 bn Francs by20183

RestructuringFormulated a five-year strategyplan with the restructuringactivities to boost profits4

Aims to cut risk-weightedassets by 20 bn euros & trim 1bn euros in costs by 20195

Budget cutsAnnounced closure of specificbusiness divisions and potential jobcuts to save costs6

Accelerated cost-cutting

Portfolio rationalization


16

But incremental change is not sufficient and banks need more radical and rapid measures to achieve the desired performance

38%

Banks are performing below targets and responding to the headwinds§ Banks are looking beyond immediate

gains to tackle the effects of disruption

§ The industry is rapidly embracing new technologies to renew growth prospects through a reshaping of the business

§ Cognitive computing is enabling banks to exploit the benefits of the data available to them by: • Providing deeper and more

personalized customer insights• Supporting more informed

decisions across the whole bank• Accelerating operational and

organizational efficiencies

10.6%

4.3%

13.1%

9.3%

Target revenue growth Actual revenue growth (2012-14)

Target RoE Actual RoE (2012-14)

Rev

enue

gro

wth

Ret

urn

on E

quity

(RoE

)

6.3ppPerformance gap

3.8ppPerformance gap

Performance of global banks compared with bankers’ own performance targets in our survey1,2


17

Creating an ecosystem of services is enabling banks to become principal gatekeeper to customers

Mobile payments

Mobile wallets

Crowd funding

P2P Lendin

g

Crypto currency

Customer

Bank

Lending

Transactions

Payments

Branches

ATMs

Trading

Investment

Savings

Marketplace

Retail

Ticketing

Banks improve performance by creating new customer value through partner ecosystems

Barclays partnered with Techstars2 to launch financial technology accelerators across the globeThrough the accelerator program, Barclays has already identified over 30 startups to partner and collaborate3

By partnering with startups-Chainalysis4 for blockchain play, Wave4

for peer to peer international trade finance etc - Barclays is creating a technology-based financial ecosystem

Building a fintech ecosystem througha global startup accelerator program1


18

Cognitive computing is enabling banks to achieve their strategic priorities in ways not previously imagined

Top 3 strategic priorities stated by the banking executives surveyed1

Top 3 benefits anticipated from cognitive computing as surveyed2

58% Improving operational efficiency

Improving customer engagement & experience

Growing revenues

51%

50%

Improve operational efficiency

Improving customer engagement & experience

Growing revenues

49%

46%

39%

Of banking executives surveyed

Of banking executives surveyed


What is cognitive?

20

Learn and improve

Cognitive computing enables systems that process and act on data like humans

Cognitive computing is based on four principles

Build speed and scaleUses machine learning to carry out complex tasks repeatedly, much more efficiently

Collate human intelligenceMakes collective knowledge accessible for reuse, trained by subject matter experts

Learn and improveImproves with each outcome, action, iteration – with each new piece of information

Interact in a natural wayAdapts to human approach and interfaces, understands context and reason

Collate human

intelligence

Build speed and

scale

Interact in a natural

wayCognitive computing

21

Cognitive computing brings three fresh capabilities to key banking functions and processes

Risk and compliance

Enabling assurance across all business processes

MonitorWealth advisor

assist

Scaling sales and service expertise

Decide

Self-service engagement

Delivering one-on-one experiences at scale

EngageCustomer service

support

Accelerating expertise on demand

Explore

Direct-to-consumer cognitive virtual agents serving,

guiding and advising via web and mobile

Employee-facing applications that

supplement service across the customer

life-cycle

Employee-facing applications that enhance wealth

management operations

Improved engagement

Actionable insights

Operational transformation

22

Analyzes context

Learns with every customer interaction Value add

Reduced waiting time and real time dialog

Improved cross-sell and up-sell

Less customer attrition, improved customer satisfaction

Reduced operating costs, more efficient interactions

The cognitive-enabled virtual agent has highly personalized conversations in direct interactions with each client

The virtual agent interacts with customers, learns from every interaction and develops its body of knowledge, adapting rapidly to the way humans think

Virtual agent or self-service

Offers optimal response

Seamless experience

cross-platform

Natural language interaction

Improved engagement


23

Value add

Greater potential for sales and closer targeting of customer

Actionable insights into client networks & personality

Focus on instant client demandsaving manual effort & time

Continuity and deeper intimacyof client relationship

The cognitive smart advisor enables relationship managers to advise clients more accurately than imagined

The cognitive smart advisor identifies the personality and risk-profile of the client, using diverse data sources to align financial objectives with each individual

Cognitive empowered

advisor

Advisor matching

Lifecycle-driven conversation

Personality insights

Risk propensity

Network value

Actionable insights


24

Value add

Highly responsive & consistent customer service

Faster & accurate query resolution

Easily scalable on-demand expertise

Savings in training costs

Improved resource utilization

Cognitive computing also offers instantaneous customer service support for efficient response time and higher call conversion rates

Cognitive computing offers a comprehensive, real-time view of the client, including personality and preferences and to specific responses

Call center agent dashboard

Complete real-time view of the client

Consistent, optimal

response

Easily scalable expertise

Actionable insights


25

Banks are also gaining greater visibility into specific business challenges and enhancing proactivity across the organization

Cognitive computing solutions are identifying imminent regulatory requirements and aligning these to internal policies, procedures and controls

Value add

Simplified compliance management & tracking

Dynamic view into the changing regulatory environment

Transparency improves across the organization

Documentation and data management efficiency

Identifies regulatory updates

Assures compliance, demonstrates with full audit trail

Documentation

Identifies regulatory updates

Finds compliance issues/ gaps



26

Cognitive computing is still nascent and currently beyond the radar for most banks

28% are familiar with

cognitive computing1

17% believe their

organization is ready to embrace cognitive

computing2

Of banking executives surveyed…

Most bankers are unfamiliar with cognitive computing and not ready to adopt yet


27

But outperforming banks have already taken the lead

…and more prepared to adopt cognitive computing2

Outperforming banks are much more aware of cognitive computing1…

52%Outperformers

17%Underperformers

32%Outperformers

11%Underperformers

191%more


206%more

28

The market for cognitive computing is expected to increase dramatically over the next three years in all geographies

0% 20% 40% 60% 80%

UK

North America

Greater China Group

India

Japan

Europe (Wester & Eastern)

MEA

South America

Australia

Asia

3–5% Above 5%

0% 20% 40% 60% 80%

UK

North America

Europe (Wester & Eastern)

India

Asia

Greater China Group

Japan

South America

Australia

MEA

3–5% Above 5%

Percentage of banks investing in cognitive computing today1

Percentage of banks investing in cognitive computing over the next three years2


29

Cognitive computing will revolutionize banking once tactical measures are overcome

Cost and a lack of cognitive IT & related skills are key barriers

Most banks have not yet adopted cognitive computing

11% of respondent

organizations have adopted cognitive

technology1

Barriers to implement cognitive computing cited by banking executives in our survey2

Cost

Lack of IT and other skills

Lack of organization buy-in

Lack of executive support

Regulatory constraints

Lack of the change management

45%

25%

43%

16%

15%

12%

12%

Lack of customer readiness


The cognitive bank arrives!

31

Outperforming banks are already convinced about the strategic relevance and impact of cognitive computing

Outperforming banks are convinced about strategic relevance of cognitive computing1…

49%Outperformers

15%Underperformers

227%more

…and believe cognitive will significantly impact business lines and functions2


58% more

43% more

57%Outperformers

36%Underperformers

60%Outperformers

42%Underperformers

…as well as significantly impact business processes2

32

Above all, the cognitive bank enables decision-making to be enhanced by dynamic learning across the whole organization

Deals with what happened− Reports− Dashboards− Visualization

Deals with what can happen− Predictive models− Scores− Forecasts

Deals with dynamic learning− Learning models− Experience based− Feedback mechanisms

Descriptive

Predictive

Cognitive

Deals with optimizing outcomes− Rules− Optimization

models− Recommendations

Prescriptive

Cognitive computing enables decision-making to be forward-looking and continuous

Levels of human interaction

Dept

h of

insi

ghts

33

Cognitive computing transforms the entire bank across three key dimensions

Dimensions

Enterprise transformation

New analytic insights

Deeper contextual engagement


Deeper contextual engagement


Cognitive bank

§ Personalizes customer engagement§ Complements human expertise§ Provides access to ecosystem

partners

§ Enables seamless dialogue with user§ Accelerates banking processes§ Provides knowledge-driven opportunities

for ecosystem partners

§ Redefines the business model§ Redefines roles and business processes§ Transforms the organization

34

The cognitive bank personalizes every engagement through continually deeper insight, context and learning

Reveals patterns, relationships and insights from diverse data sets

Customer data

Transaction history

Sentiment analysis

User journey

Develops a 360o profile, personality of a client, orchestrates insight-driven engagement

Adapts continuous learning model and leverages same in future interactions

Understands complex questions, infers the context & presents optimal responses

How does cognitive computing personalize customer engagement?

Deeper contextual Improved engagement


35

It complements human knowledge by accelerating learning, collating expertise and providing an insight-driven partnership

How does cognitive computing complement human expertise?Accelerates learning process for professionals,

widens their reach in terms of informationMaster

Time to expertise

Practice

Apprentice

Study

MasterPractice Apprentice Study

Time to expertise

Makes expertise accessible on exponentially expanding scale

Cognitive transformation

Partners - Serves as a companion for the professionals to increase their performance

Serves as an unique partner by –§ Providing far deeper research more quickly

beyond mere human capability§ Making industry expertise available to everyone§ Offering immediate actionable insights,

conversation starters/ follow-up suggestions



36

Family

Customer

Family

Work

Cognitive Bank

Trade finance

Lending

Social

Ticketing

Transactions

Payments

Investment

Trading

Mobile payments

Mobile wallets

Crowd funding

P2P Lending

Customer needs Partner ecosystem

The new cognitive bank will play an integral role in customers’ everyday life

Customers will entrust banks to manage relationships with other service providers

Loans

Payments

Ticketing

Insurance

Leasing

Crypto currency


It also empowers banks to orchestrate powerful ecosystems of partners to satisfy customers’ everyday needs


37

Understands speech, gestures and customer expressions

Collates latest information to offer market defining service channels

Learns from each client interaction and studies preferences

A bank in Japan pioneers the building of a customer service robotic platform that understands customer words and even expressions

Customer service robots

Differentiates the bank

Captures customer details

Reduces demands on staff

Takes advantage of its physical branches

Redeploys human tellers to higher-value work

Infers preferences from every interactionA cognitive robot software platform that



38

The cognitive bank focuses on more intimate knowledge of the customer and fine-tunes recommendations

Offers optimal recommendations, based on individual profile and preferences


Client journey aided by cognitive computing Business implications

Client portraits

Cross functional team of experts

Relevant actionable insights

Clients and their needs

For integrated solution

Based on insightsAct

Collaborate

Understand 360o view of customer

Continuity in dialogue across the lifecycle

Mass customization of premium services


39

The cognitive bank with its deeper knowledge base, accelerates even highly-customized business processes

Provides optimal credit solutions for each client, processing credit requests more efficiently with minimal default risk

Products suited to meet the client needs

Proactive data capture & processing

Right product for right person, at right price and

right time

Business implications

Proactive secure data capture

Documentation verification

Decision ready files

Credit scoring, key data extracts

Compressed cycle times

Minimal errors

Higher productivity

Compliance enforcement



40

The cognitive bank identifies new opportunities from the banking ecosystem and beyond

Filters and digests dynamic internal and external data including market news, analysis and trends - to identify new value creation opportunities

Captures the market DNA Unifies a view of corporate intelligence

Business implications

Data from diverse sources

Real time comparison

Emerging trends/threats

Financial performance

Industry trends

Benchmarking

Market risks

M&A or alliances

Strategic intent Peer connections

Customized, role based view

Monitor performance metrics

Uncovered connections and implications

Optimal response strategy



41

A bank in Spain exploits cognitive to trawl more data more quickly than ever imagined

Smart advisor

Increased accuracy

99% less response time

Widens the scope

Take advantage of its physical branches

Agents can answer to wider range of questions

Answers in minutes instead of days


Scans masses of structured & unstructured regulatory data

A cognitive system offering insight to agents

Learns and improves with each customer interaction

Ranks most optimal responses as a guidance


42

The cognitive bank business model consists of a holistic and dynamic mix of intangible as well as tangible assets management

Cognitivecomputing

Digitalnetwork

Enablinginfrastructure

Businessecosystems

The cognitive

bank

Partnering & Collaboration Agility Innovation

Analytics Digitization

Intangibleassets

Operational efficiency

Revenue Growth

Employee productivity

Cost reduction

Asset efficiency

Tangibleassets



43

The cognitive bank redefines roles and re-engineers business processes constantly across the whole organization

Analytics

Agility

Digitization

Innovation

Partnering & Collaboration

Automates routine, manual processes loan processing, helpdesk tasks & so on

Complements capabilities of banking professionals through deeper insights

Creates new ways of thinking and managing

Accelerates the expertise of banking professionals based on market needs

Collaborates to develop and deliver specialized banking services

Redefines roles Re-engineers business processes

Integrates banking processes across the enterprise and with the ecosystem5

Provides insight-led banking activities4

Introduces new banking products and services to market more quickly3

Configures banking processes rapidly to adapt to market dynamics2

Partners with the eco-system to orchestrate banking services1



Enterprise-wide Risk Management

44

The cognitive bank will look radically different and will change the traditional role of people, process and technologies in banking

45

A global financial services organization uses cognitive computing to manage business proactively

Cognitive enabled

compliance service

72% accuracy

Improved Productivity

Lower churn

Demonstrated during proof of concept1

Due to associated loss of institutional knowledge

Elimination of manual regulatory evaluations


Identifies and predicts regulatory obligations

First-of-a-kind cognitive compliance service

Maps changes across business units, IT systems and processes

Understands the cascading impact of regulatory changes


46

The cognitive bank is dramatically transforming and redefining traditional banking

Cognitive computing technologies will radically transform banking

Outperforming banks are already taking the lead

The cognitive bank is redefining banking

Competitive advantage

Customerexperience

§ Reach § Connectivity

Cognitive

Digital

Physical

§ Knowledge§ Relationship platform

§ Efficiency§ Accuracy

Streamline & Improve processesOptimise IT

Foundationaldigital

capabilities

Complete digital transformation

Extend business ecosystem

Apply advancedanalytics

Optimisecustomer

engagement

− Banking is getting commoditized and being displaced

− Banks are in need of an urgent resurrection of the way they operate

− Cognitive computing paves the way to fundamentally transform banking


Actionable insights

Improved engagement

− Cognitive computing impacts bankin three ways − Revolutionizes customer

engagement− Provides insights unavailable

previously− Enables operational

transformation at lower cost

− Cognitive computing is still new; presenting benefits to early adopters

− Outperforming banks are more aware of cognitive computing – 205% more

− They are also more prepared to adopt cognitive computing – 190% more

Becoming the cognitive bank

48

Next steps

Plan your cognitive journey

Prepare your organization

Assess the business case for cognitive bank and chart a course for your own cognitive journey

Implement and evolve continuously

Evaluate your current capabilities and build the foundation to make your organization ready

Use a strategic rollout for cognitive transformation, and evolve it with continuous learning


49

Assess the business case for your cognitive bank and chart its cognitive journey

Assess the enterprise-wide business case for your cognitive bank§ Identify the opportunity for cognitive § Define the scope and obtain senior

management commitment

Chart your cognitive journey (design thinking)§ Explore relevant cognitive computing solutions§ Align to them to prioritized journeys § Define clear roadmap addressing plans for

governance, deployment and benefits tracking

Prototype / pilot journeys, refine continuously§ Test and validate prioritized journeys with

business users, encourage all-level involvement§ Refine these with user inputs, gain buy-in

Ongoing executive alignment and commitment§ Communicate business value to executive

sponsors and stakeholders at all levels





50

Evaluate your current capabilities and build your foundations on cognitizing your people, business processes, data and infrastructure

Invest in specialist human talent§ Understand talent gap for cognitive deployment§ Invest in training and sourcing expertise

Consider process & policy requirements§ Assess the likely impact of cognitive solutions

on business processes and organization§ Make necessary revisions in business

processes & policies

Build and ensure quality corpus of data§ Conduct a structured data strategy assessment§ Invest in digitizing systems of records§ Collect, ingest, curate enterprise wide data,

build quality corpus

Establish cognitive ready infrastructure§ Develop infrastructure to support cognitive data

sets, volume and workloads in a secure manner





51

Rollout to drive enterprise-wide cognitive transformation and evolve with continuous learning

Apply cognitive technology§ Execute a staged roll-out (using ‘agile sprints’)§ Instrument for metrics and KPIs

Communicate cognitive vision at all levels§ Prepare people for new ways of collaborating

with technology § Manage the change

Achieve and measure outcomes§ Assess progress towards your outcomes§ Measure value realized at different phases § Set up periodic review process

Enhance and expand collective knowledge§ Periodically update functionality and training

with new content based on learnings—look for reusable knowledge





52

Key questions to kick-off your cognitive journey

• How will you identify the opportunity for cognitive in your organization?

• How will you plan your cognitive journey?

• How will you prepare your organization to become the cognitive bank?

• How will you measure the success of your cognitive bank?


Authors

54

About the authors

Jim BrillDirector, Global Industry Marketing and [email protected]

Allan HarperCognitive Banking LeaderIBM Global Business [email protected]

Likhit WaglePartner and Global Industry LeaderBanking & Financial MarketsIBM Global Business [email protected]

Nicholas DruryGlobal Banking & Financial Markets LeaderIBM Institute for Business [email protected]