IBM's Watson won
Jeopardy, but can it win business from banks?
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[August 11, 2016]
By Olivia Oran
NEW YORK (Reuters) - International
Business Machines Corp is in an unusual fix in telling big U.S.
banks they can use its Watson software of Jeopardy-winning fame as a
cost-saving solution: bankers say they like it, but cannot afford
IBM is in a good company. Banks are in the fifth year of their
belt-tightening campaigns that began in 2011, chasing billions of
dollars' worth of savings, and vendors that offer everything from
technology to janitorial services are getting squeezed.
With persistently low interest rates hurting revenue and businesses
like bond trading hemmed in by new regulations, few on Wall Street
expect the austerity to end any time soon.
For IBM the irony lies in the fact that senior bank executives say
they believe its artificial intelligence software could help them
achieve cost-cutting goals in coming years, but are not ready to pay
for Watson today.
Several technology executives from large banks told Reuters that
while the software may have enormous potential, they would struggle
to convince top managers, laser-focused on quarterly results, to
sign off on investments that do not offer an immediate payoff.
"It requires a lot of trust that you'll get the right outcome in a
few years," said a technology executive at a large Wall Street bank.
People familiar with the matter say IBM has offered presentations of
its software to banks including Bank of America Corp, Barclays PLC
and Morgan Stanley. The software, known as Watson, got attention in
2011 for winning the game show Jeopardy. IBM says it can "learn" and
process human language, and can analyze large amounts of
unstructured data, like social media posts and digital photos.
IBM's pitch to banks is that Watson can do everything from answering
customers' questions in retail branches to detecting credit card
fraud to helping wealth managers make better investment
recommendations for their clients.
Bank technology executives said the minimum cost of using software
like Watson, including due diligence and training, could reach a few
million dollars. It is not uncommon for a full-scale implementation
to cost in the tens of millions of dollars, said the executives, who
were not authorized to talk to the media.
An IBM spokeswoman noted companies can develop their own
applications using Watson's underlying code if they do not want to
pay for a full-scale implementation. The company declined to give
details of the software's costs.
IBM does not break out revenue for Watson, but Chief Executive
Virginia Rometty said in June it is "still growing" and industries,
such as healthcare, have adopted the software with some success. On
its website, IBM said a large health insurance provider was saving
more than $11 million per year by using Watson to improve its call
Yet convincing bankers to commit to the software today is a
challenge, said Ed Harbour, vice president of implementations at IBM
"A lot of the U.S. banks acknowledge that the technology is real and
it works, but they have so many things on their plate competing for
investments," he told Reuters. "They want to get an immediate return
and they see that coming more from ways to take costs out, rather
than growing the top line."
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The sign at the IBM facility near Boulder, Colorado September 8,
2009. International Business Machines Corp. repeated that it expects
to earn "at least" $9.70 a share this year. REUTERS/Rick Wilking
Altogether, U.S. banks spent $62 billion on technology in 2015, up 5
percent from the prior year, according to consulting firm Accenture.
Most of the industry's tech spending goes toward basics like computers, servers
and IT staff, with just a fifth dedicated to "innovation," or to projects that
can grow revenue. Out of that fifth, the majority is dedicated to regulatory
compliance, consultants say.
Grainne McNamara, a principal with auditing and consulting firm PwC who has
worked with big banks for years, said the singular focus on short-term savings
could backfire in the long run.
"Banks need alternative revenue sources and there are tons of new avenues for
investment," McNamara said. "They need to be paying attention."
Because of the sheer size of their operating budgets, big U.S. banks once
represented a huge opportunity for vendors. However, the industry has
collectively cut those budgets by more than $8 billion since 2010 when they
spent $176 billion, according to Boston Consulting Group.
With profits under pressure, banks are putting vendor contracts into competitive
bidding, demanding more products and services to renew them or canceling them
JPMorgan Chase & Co, for instance, has reduced the number of vendors it uses in
its retail operation by a fifth.
Watson also has competition. Palantir Technologies and Digital Reasoning offer
rival artificial intelligence software that some banks already use for
compliance tasks, such as identifying rogue traders.
So far, Citigroup Inc is the only major U.S. bank to announce publicly it has
entered into an "exploratory agreement" to use Watson, which it announced in
2012. Citi spokesman Kamran Mumtaz declined to provide an update on its status.
Meanwhile, IBM executives are trying to woo banks outside the United States. IBM
told Reuters Banco Bradesco in Brazil and Mexico's Banorte have both signed on
to use the software.
(Reporting by Olivia Oran in New York; Editing by Lauren Tara LaCapra and Tomasz
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