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Decoding data to bolster growth and transform the enterprise The cognitive bank
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§ 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
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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
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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
Source: Please see the notes section
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
Source: Please see the notes section
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
Source: Please see the notes section
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
Source: Please see the notes section
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
Source: Please see the notes section
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
Source: Please see the notes section
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
Source: Please see the notes section
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
Source: Please see the notes section
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
Source: Please see the notes section
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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
Source: Please see the notes section
What is cognitive?
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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
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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
Source: Please see the notes section
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
Source: Please see the notes section
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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
Source: Please see the notes section
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
Operational transformation
Source: Please see the notes section
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
Source: Please see the notes section
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
Source: Please see the notes section
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
Source: Please see the notes section
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
Source: Please see the notes section
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
Source: Please see the notes section
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
New analytic insights
Deeper contextual engagement
Enterprise transformation
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
Source: Please see the notes section
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
Source: Please see the notes section
Deeper contextual Improved engagement
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
Source: Please see the notes section
It also empowers banks to orchestrate powerful ecosystems of partners to satisfy customers’ everyday needs
Deeper contextual Improved engagement
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
Source: Please see the notes section
Deeper contextual Improved engagement
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
New analytic insights
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
Source: Please see the notes section
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
Source: Please see the notes section
New analytic insights
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
Source: Please see the notes section
New analytic insights
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
New analytic insights
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
Source: Please see the notes section
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
Enterprise transformation
Source: Please see the notes section
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 transformation
Source: Please see the notes section
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
Enterprise transformation
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
Source: Please see the notes section
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
Operational transformation
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
Source: Please see the notes section
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
Plan your cognitive journey
Prepare your organization
Implement and evolve continuously
Source: Please see the notes section
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
Plan your cognitive journey
Prepare your organization
Implement and evolve continuously
Source: Please see the notes section
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
Plan your cognitive journey
Prepare your organization
Implement and evolve continuously
Source: Please see the notes section
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?
Source: Please see the notes section
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]
©2015 IBM Corporation