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Pawel A. Stefanski

Financial Services Sector Leader, IBM Middle East and Africa

@PawelAtIBM

The cognitive financial institution

What is Artificial Intelligence?… Machine Learning? … Cognitive computing?

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The new era of cognitive computing will transform our future

TabulatingSystems Era

ProgrammableSystems Era

CognitiveSystems Era

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Learn and improve

Cognitive systems amplify human cognition

Collate human

intelligence

Build speed and

scale

Interact in a natural

wayCognitive computing

Machine Learning

Reasoning & Decision Making

Language, Speech &

Vision Processing

Human Interface

Technologies

New Computing

Architectures

Knowledge Representation

(Big) Data – “a new natural resource”

Watson: a cognitive system

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Watson Reference Model

Developer Tooling

Platforms as a ServiceWatson Services

Data as a ServiceWatson Content

Application Tooling

Content Tooling

Software as a ServiceWatson Applications

Cloud Infrastructure

Public Private Crowd Sourced

Watson Built Apps

IBM Built Apps

3rd Party Apps

KnowledgeOrganization

Skills

FoundationalCognitiveSkills

HigherReasoningSkills

IBM

Wat

son

Mar

ketp

lace

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Watson cognitive services are grouped into three categories

Higher Reasoning Skills§Conversation§ Language Translation

Knowledge Organization Skills§Document Conversion§Retrieve & Rank§AlchemyLanguage§AlchemyData News

Foundational Cognitive Skills§Speech to Text / Text to Speech§Personality Insights§AlchemyVision / Visual Insights§Visual Recognition

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Tone Analyzer understands and helps fine tune your message

Online Dating Profile

I'mahardworkingadventurous,verytalentedmanwho'sbeencaringandhelpfulthroughoutmylife,Iliketotravel,playmyguitar,dance,andcook,Ilovethebeach,sailingmyboat,andtheoutdoors.

IraisedtwogreatkidsandnowI'mstartinganewchapterinmylife.

Thanks.

WhatI’mdoingwithmylifeWorkingtowardanewgoal,keepingfit,helpingothers,andtravelingwheneveri getachance.

I’mreallygoodatListening,enjoyingthemoment,andmanyotherthings.

ThesixthingsIcouldneverdowithout

Family,theocean,intimacy,friends,adventure,music,love.

OnatypicalFridaynightIam

Meetingwithfriends,listeningtoabandorplayingmyguitar,dancingorjuststayinghomewithsomeonespecialandenjoyingeachother.

Youshouldmessagemeif

You'relookingforarelationshipwithsomeonethatlikestosailhisboat,ridebicycles,travel,swim,gotothebeach,listentomusicandenjoyeverydaypleasurestogether.

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Emotional Analysis helps build empathetic systems

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Personality Insights – Mahatma Gandhi

For more than twenty years past I have been paying special attention to the question of Health. While in England, I had to make my own arrangements for food and drink, and I can say, therefore, that my experience is quite reliable. I have arrived at certain definite conclusions from that experience, and I now set them down for the benefit of my readers.Asthe familiar saying goes, ‘Prevention is better than cure.’ It is far easier and safer to prevent illness by the observance of the laws of health than to set about curing the illness which has been brought on by our own ignorance and carelessness. Hence it is the duty of all thoughtful men to understand aright the laws of health, and the object of the following pages is to give an account of these laws. We shall also consider the best methods of cure for some of the most common diseases.As Milton says, the mind can make a hell of heaven or a heaven of hell. So heaven is not somewhere above the clouds, and hell somewhere [Pg 2] underneath the earth! We have this same idea expressed in the Sanskrit saying, Mana êva Manushayanâm Kâranam Bandha Mokshayoh—man’s captivity or freedom is dependant on the state of his mind. From this it follows that whether a man is healthy or unhealthy depends on himself. Illness is the result not only of our actions but also of our thoughts. As has been said by a famous doctor, more people die for fear of diseases like small-pox, cholera and plague than out of those diseases themselves.Ignorance is one of the root-causes of disease. Very often we get bewildered at the most ordinary diseases out of sheer ignorance, and in our anxiety to get better, we simply make matters worse. Our ignorance of the most elementary laws of health leads us to adopt wrong remedies or drives us into the hands of the veriestquacks. How strange (and yet how true) it is that we know much less about things near at hand than things at a distance. We know hardly anything of our own village, …

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In 10 years, cognitive systems will be to computing what transaction processing is today

§ Amplify human creativity– Inspiring us to new alternatives to decision options– Bringing the breadth of all human knowledge to the tip of our tongue

§ Learn their behavior through formal and informal training processes§ Interact with humans on our terms – in the language of humans§ Demonstrate their expertise through trust and depth of character§ Evolve strategies of success – adapting to ever changing knowledge and

understanding§ Establish transformative relationships between humans and machines

Present and future of a cognitive financial institution

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6 Core Functions of Financial Services§ Transactions / Payments§ Deposits & Lending§ Investment / Wealth Management§ Insurance§ Capital Raising§ Market Provisioning

Clusters of Disruption11 clusters of innovation

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Source: June 2015 World Economic Forum, The Future of Financial Services

Established financial services institutions are acknowledging disruptive innovation

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1A.T.Kearney 2015 Robo-Advisory Services Study; 2Fidelity, 2014 Advisor Insights Study; 3BNYMellon, The Generation Game; 4Deloitte Center for Financial Studies; 5Celent, FI Survey of Digital Transformation; 6Cerulli, Advisor Metrics 2013

$2.2tr 40% 72%

93%15% 43%

Estimated AUM managed in digital advice offerings by 20201

of millennials describe themselves as self-directed investors3

of financial institutions say digital is either critical or important to strategy, yet 67% rate their firm’s offerings as undifferentiated or poor5

Advisors actively using technology had on average 40% more AUM2

of advisors in the US are over age 556Millennial financial asset CAGR from 2015-

2030, fastest of any segment. Share of 2030 HH wealth remains below 20%, with boomers at 44.5% and gen X at 31%4

Wealth Management is also undergoing significant change

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Heightenedsecurity threats

Pressureto perform

$Emboldened customers

Disruptive competition

Increasedregulation

Disruptive forces are forcing financial services industry to focus on three key areas

Improved engagement

Operational transformation

Actionable insights

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Cognitive computing enhances human skills, thereby scaling up their level of expertise and productivity

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

Operational transformation

Actionable insights

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PREDICTING CASH FLOWS &

OVERDRAFTS PREDICTING LIFE

EVENTS

94% 9PREDICTING

CHURN

different life events predicted with 95-97% accuracy

improvementover existing models

50%

accuracy a week ahead87% accuracy 4 weeks ahead

improvement, eliminating delivery of irrelevant offers to 3.6 million customers

TARGETING OFFERS

91%

Early results analyzing real-world data show significant promise

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A leading US Financial Services firm uses cognitive solution to enable ‘segment of one’ engagement’ with clients

§ Interact in natural language

§ Communicate via text and/or voice

§ Answer questions with confidence

§ Seamlessly handle processes and transactions

§ Possess context§ Offer insight-driven

recommendations § Learn and adapt

Conduct conversationsPersonalize every interaction Provide assurance

WatsonAnalytics

Improved engagement

Demonstration of Financial Advisor

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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 robots for personalized client engagement in branches

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 interaction

Improved engagement

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A Spanish bank exploits cognitive to offer insights to agents

Smart advisor

Increased accuracy

99% less response time

Widens the scope

Take advantage of its physical branches

Agents can answer a wider range of questions about foreign trade and international regulations

Answers in minutes instead of days

Scans masses of structured & unstructured regulatory data

Learns and improves with each customer interaction

Ranks most optimal responses as a guidance

Actionable insights

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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 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

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A brokerage firm in North America uses deep learning for improved customer service

Knowing Your Customer

Increased revenue

30 – 50%

Reduced churn

Through informed cross- and up-selling

Due to better targeted customer interactions

Better accuracy potential

Predicts the next generation of high-value customers

Offers advisors personalized, targeted action guidance

Improves cross- and up-selling

Actionable insights

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Pre-Built Cognitive Wealth Management Offering

Create dynamic, behavior based client segments to gain

insights on product opportunities

Prioritized list of clients requiring immediate attention

with recommended actions

Determine client life and financial events across the

lifecycle of the client relationship

Prediction of client attrition and recommended actions for

retention

Client Insight for Wealth Management provides every FA with a Predictive, Prescriptive, Cognitive Assistant

Actionable insights

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Client Insight for Wealth Management provides every FA with a Predictive, Prescriptive, Cognitive Assistant

• Identifies attrition risk, potential life events and product propensities• Indicates reasoning and recommendations

Client psychographic profile and insights

Prioritized, summarized portfolio newsPrioritized news on client interests

https://www.youtube.com/watch?v=osN07kzVg2E

Actionable insights

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Client Insight for Wealth Management has demonstrated powerful results in POCs with financial services firms

• Life Event Identification: Predicted 8 life events with ~95-98% accuracy– Predicted such life events as client marriage, birth of a child, move, divorce, job change,

retirement, and others

• Client Attrition: IBM’s dynamic model was 281% better in predicting client attrition than baseline regression models

– Provided early warning signs and offered insights on risk

• Customer Lifecycle Evolution: Time to first options trade, 42.6X lift over baseline logistical regression; 18% out of the top 1% highest ranked accounts traded options within 30 days of prediction, an event that occurs in just 0.28% of the population.

• Cross-sell Offer Propensity: Mutual fund cross-sell prediction 30 days in advance; 65% improvement over baseline logistical regression; 38% of true positives captured in top 10% of highest ranked accounts

• Dynamic Segmentation: Created client segments using behavioral segmentation and cash flow pattern identification

– Identified 12 behavior segments, 108 microsegments, and 4 cash flow types– Used to optimize offers provided to clients

Actionable insights

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A pilot concept for Financial Analysts to provide them with an objective tool to support their research

Financial Pro/Con Advisor

Provide the buy-side analyst with interpretable and conveyable supporting and opposing arguments and evidence for an investment thesis. Analyze wide

variety of sources in an objective, unbiased way

Offers advisors a decision aid

Provide justification and evidence when needed

Actionable insights

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Regulation Ingestion

Obligation Lifecycle

Management3

1

2

4Natural Language

ProcessingDocument ParsingMachine Learning

Obligation and Control Identification

& Mapping28

Operational transformation

Regulatory compliance empowered by cognitive computing

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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 concept

Due to associated loss of institutional knowledge

Elimination of manual regulatory evaluations

Identifies and predicts regulatory obligations

Maps changes across business units, IT systems and processes

Understands the cascading impact of regulatory changes

Operational transformation

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

Connecting the purposes, products and

correlations70% of reviews find errors

100% of calls are analyzed

New sales opportunities

False-positives are minimized

Because of unforeseen correlations

Compared to 3% before

Enterprise transformation

Uses NLP to examine 4,000 hours of calls, daily

Finds clues to boost sales and improve support

Identifies the purpose, products and correlations behind each call

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Cognitive Insurance Scenarios

§Transforming Online Customer Engagement

§An auto insurer deployed an agent-like, conversation-based capability to sell automobile insurance electronically

Scaling Expertise in the Call CenterAn insurer is aiding call center agents to rapidly and consistently service member requests

Improving Client Response RatesAn insurer improved the productivity of its call center by analyzing historical customer data to enhance operator training and optimize content across channels

Transforming UnderwritingA reinsurer is creating a platform that will help underwriters more quickly identify and react to emerging trends, operational issues, and other opportunities

Improving Claims Decision-MakingAn insurer is reducing claims processing times by instantly recognizing and incorporating relevant passages from policy documents and communications

Enabling Evidence-based Claims AutomationA life insurer processed claims more accurately and efficiently by analyzing medical certificates to classify medical conditions and treatments

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AI upgrade to existing robo-system is expected to lead to higher quality advice as well as improved financial behavior by clients (USD$3bn AUM)

Grapevine6 tool provides FA’s with relevant articles and digital content to grow their networks and build rapport with clients by becoming a source of information that can better help them meet financial goals.

AI capabilities analyze historical economic and market data going back to the 1960s to spot trends to make asset allocation decisions with human oversight. While a passive robot might buy more stocks when markets drop, the Responsive program may instead back out of equities and buy more bonds.

A global bank is using ENGAGE to provide Wealth Advisors with contextual insights about market events, portfolio changes, and stress tests that impact their wealth clients - enabling the bank to economically serve over 10x the number of clients, including traditionally ignored mass affluent customers to reduce churn and drive loyalty.

Cognitive analysis of social media and conversations on trading floors helps predict market closes well before they happen (>500% improvement in predictive accuracy).

Combination of proprietary AI and quantitative models delivers real-time personalised investment guidance to wirehouses, Registered Investment Advisers (‘RIAs’), and Independent Financial Advisers (‘IFAs’) in US, UK and Asia (USD$3.6tn AUM)

The LiveWealth™ Intelligent Agent framework uses cognitive intelligence to rapidly extract, aggregate and normalisedata from US and international custodians, banks and other relevant sources on a near real-time basis to deliver 360°wealth management performance analytics, allowing quicker and more informed decisions.

The GBP£150m AUM investment advisory offers free, FCA-regulated advice directly online. With cognitive algortihms, they only ask customers relevant questions in order to build their bespoke portfolio with human oversight.

Cognitive capabilities to know what sort of life events a client is experiencing, then use prescriptive analytics to determine the next best action for the advisor (USD$1tn)

First cognitive deployments in Wealth Management are here

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Alpha Modus uses cognitive capabilities to create disruptive investment technologies 80% faster

Looking for alpha in unstructured

data

Millions saved

Up to 80% faster

Drives innovation

Through cloud-based cognitive platform

Because of rapid development cycles

New offerings launched in less than 7 days

Uses AI to find alpha in unstructured data

Access to global skill pool of data scientists

Leverages cloud for rapid development

Actionable insights

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The future is already here — it's just not very evenly distributed.William Gibson, 1993