Can Watson Solve the Bank Regulatory Riddle?

You have probably seen recent television commercials where “Watson,” IBM Corp.’s vaunted supercomputer, chats with Stephen King about novels and Bob Dylan about songwriting. And perhaps you remember a few years ago when Watson defeated two highly accomplished past winners of the game show Jeopardy! in a three-way competition. Well, IBM is now focusing Watson’s considerable talents on bank regulatory compliance.

In September, IBM announced that they were buying the consulting firm Promontory Financial Group, which is based In Washington, D.C., and was founded in 2001 by former Comptroller of the Currency Eugene Ludwig. Promontory is considered one of the leading firms providing banks with the information needed to navigate the increasingly intricate web of regulations at all levels of government. Over the years, Ludwig has hired many former regulatory officials, some of whom headed regulatory agencies and financial companies around the world. IBM is not just going to fold Promontory into its financial services practice, however. The company is thinking much bigger than that.

IBM is going to have Promontory’s 600-plus professionals turn Watson into the world’s foremost expert on financial institution regulatory compliance. Watson will then be able to expand its base of knowledge in real time as new regulations are created and studying various scenarios and situation that have developed in real world practice. Bridget van Kralingen, senior vice president, IBM Industry Platforms, described the company’s expectations for the project saying, “What Watson is doing to transform oncology by working with the world’s leading oncologists, we will now do for regulation, risk and compliance. Promontory’s experts are unsurpassed in this field. They will teach Watson and Watson, in turn, will extend and enhance their expertise.”

This can be a game changer if it works as expected. Regulatory compliance costs are growing, and there is no sign that this trend will ever reverse. In the press release announcing the acquisition, the two companies cited a report from global consulting firm McKenzie that found “More than 20,000 new regulatory requirements were created last year alone, and the complete catalog of regulations is projected to exceed 300 million pages by 2020, rapidly outstripping the capacity of humans to keep up. Today, the cost of managing the regulatory environment represents more than 10 percent of all operational spending of major banks, for a total of $270 billion per year.”

Regulatory compliance is a very hands-on process in its current form. Humans have to dig through the data, read the reports and figure out how the new information impacts their institution. If Watson can reduce the human element of compliance, then costs will come down. This could be a huge benefit to community banks as regulatory costs, which account for a disproportionally larger percentage of their overall costs than larger banks. Some of these smaller institutions have thrown in the towel and sold their bank to larger competitors rather than try and keep up with an ever-growing burden and costs of compliance.

Ludwig addressed the potential for the use of artificial intelligence combined with his firm’s existing broad level of knowledge to reduce costs for small banks. “For community and regional banks, this is a potential lifeline,” he said in an interview. “For many banks, it is an enormous burden just to keep up. Watson offers the opportunity to have a world-class partner.”

One of the keys to making this combination work is the fact that Watson is already a known entity that has had a lot of success since “going on” Jeopardy! in 2011. Watson is being used to improve clinical diagnosis and cancer treatment in the medical world, help track water usage in drought plagued parts of California and generate product suggestions for several retailers.

Those who worry that tech giants like IBM are not going to be nimble enough to keep up with the sexy, fast changing world of fintech simply do not understand the banking industry. Bankers don’t care about being on the cutting edge of technology as much as they do having technology and technology providers that are dependable. They want vendors with strong reputations that will have the staff and expertise to deal with problems that crop up at 2 a.m. on a Sunday. In banking, reputation is everything and protecting their reputation is much more important than having a sexy technology.

This combination offers them the chance to have both. Banks that might be reluctant to use compliance programs driven by artificial intelligence from a younger, more nimble fintech firm are going to find it much easier to accept the proven technology of Watson and the support provided by an industry giant like IBM. If the combination of Promontory’s in-depth knowledge basis and Watson’s artificial intelligence do in fact reduce the time used and money spent on regulatory compliance, this will be a tough combination to beat.