IBM Watson Financial Services: Focus on the First Line of Defence

Blog entry

Banks are spending too much money trying to comply with big-ticket regulations because the tools they are using are not efficient enough. That is the view of IBM Watson Financial Services, which is in the process of expanding its regtech portfolio based on AI and machine learning, and covering governance, risk and compliance (GRC), financial crime, and financial risk.

IBM brought Watson Financial Services to market early last year before setting up a regtech business based on the Watson artificial intelligence and cognitive computing platform. At the same time, it acquired Promontory Financial Group, a specialist in risk management and regulatory compliance, that initially trained Watson on 60,000 regulatory citations.

Considering the challenges of regulatory compliance, Michael Curry, vice president of engineering at IBM Watson Financial Services, says: “Most of the banks we talk to do not have clarity on what their complete set of obligations are for the businesses and jurisdictions in which they operate. That is a scary prospect. On the other side, we know that many of our clients are struggling to be able to comply with some of these very big-ticket regulations like AML/KYC in a cost-efficient way. They are spending too much money trying to comply. That’s because the tools that they are using are not very efficient.”

Curry notes that current risk and compliance systems are disparate and disconnected, often with varying taxonomies, user interfaces, and skills requirements. He explains: “This makes it increasingly difficult to achieve a holistic view of risk and compliance, and results in a lack of confidence in what a bank’s real-time obligations and associated responsibilities are. Most importantly, this fails to engage the first line of defence that, lacking the proper tools, is often unable to make the best and most informed decisions. We are investing in how to engage these people more efficiently. It is the people at the coal face who need to be able to operationalise the system.”

One of IBM’s regtech developments based on IBM Watson capabilities addresses the efficiency of AML processes. David Marmer, vice president within the company’s industry platforms group, says: “This is an area where all the banks we work with are struggling. Most of the clients we talk to that have an existing AML implementation are seeing 90-99% false positives in the alerts that are coming out of the systems. We believe there is a huge opportunity to improve that, which is why we are investing heavily in a machine learning approach. We are seeing the ability to cut the false positives down by 30-50% on average, so we can really make a big impact.”

Moving forward, IBM is expanding its regtech offer through both organic growth and targeted investments. In May 2018, the company acquired Armanta, a provider of aggregation and analytics software to financial services firms. The acquisition will advance the company’s capabilities in financial risk, and there is more activity on the horizon, particularly around financial crime and AML/KYC.

Curry concludes: “As exposure to risk grows, more and more data must be considered to mitigate threats and gain competitive advantage. At the same time, organisations must keep pace with the growing volume of evolving regulations and compliance issues. That’s where our solutions come in. This is an extraordinarily strategic portfolio for us, and we are seeing very strong traction in this space.”