Spending a day with IBM’s Watson

As an IBM alumnus (but no longer a stockholder) I’ve gotten pretty used to seeing the company do things a certain way. And then I attended a day-long “Watson at Scale (aka Ecosystem 2.0)” event on October 7 and had a lot of my old notions upended. Watson, of course, came to prominence when it won Jeopardy in 2011. Immediately after that IBM began experimenting with a select number of industries (Healthcare, Travel and Retail) to demonstrate proofs of concept and learn what works and what doesn’t. Beginning in January of 2014, Watson expanded dramatically and is now covering 26 industries. IBM proclaims that Watson is the harbinger of a new era of computing, what they call “Cognitive Computing.” There’s just too much information being created today for any single person to digest; Watson aims to “amplify” experts’ capabilities. Doctors, salespeople, and wealth managers are but a few examples. IBM says there are four key attributes to understand:
  • Watson understands natural language (computational linguistics).
  • Watson is a voracious reader
  • Watson provides recommendations with confidence levels
  • You don’t program Watson, you teach it
Mike Rhodin, the IBM SVP who leads Watson (under an unusual board-governed structure), described the key insight about Watson: it’s not that Watson gives answers, but rather that it generates hypotheses, gives confidence intervals around those hypotheses, and provides evidence trails. It does this by ingesting enormous amounts of data, being taught by humans with a series of questions and answers, and then learning on its own as it proceeds. The more data it has, the better it performs. Watson does a better job providing recommendations for people when it knows something about them. A salesperson will sell differently to an introvert than an extrovert, as a simplified example. Watson can generate a personality profile on the basis of a person’s twitter feed or blog posts – I’m not sure how accurate it is, but the concept alone is pretty startling. Terry Jones, an entrepreneur previously associated with Travelocity and Kayak, introduced a new company called WayBlazer that uses Watson’s technology. It aims to be able to answer queries like, “I want to go on a golf trip with my buddies in October,” or, “Give me an itinerary for Costa Rica in May with my two kids.” Watson might ask clarifying questions, and then would come back with recommendations. The prototype is currently in place for Austin, but a service like this highlighted clearly what Watson has the potential to do, if implemented successfully. Another lightbulb for me was Terry’s description of Watson as a liberal arts major, not a math geek. It could do airline pricing optimization, but that’s not what you’d buy it for. WayBlazer is but one example of the ecosystem that Watson is building. Realizing there’s a shortage of skills in Cognitive Computing, IBM has teamed with ten universities to offer courses on the subject; this fall all of the classes were oversubscribed. From a standing start in January, IBM has about 100 partners and expects that to continue to grow. Watson had 1 API in January; it now has 8, with more than a dozen in development. IBM may have finally figured out how to execute at startup speed under the umbrella of Big Blue. Watson’s interest in financial services is currently very focused. Insurance is one key space, particularly around underwriting. Wealth Management is the other key area, with risk and compliance being a third. You may disagree with Watson’s prioritization, but their intentional focus is spot-on – they’ve got to demonstrate some tangible successes before they begin to branch out. Based on different discussions, Watson’s revenue will come from four sources:
  1. Consulting to investigate and establish what Watson will do for the firm
  2. Priced products (e.g., oncology)
  3. SAAS revenues from running Watson for individual projects
  4. A cut of the revenue that partners earn from Watson projects
What’s ultimately different this time? In this new IBM (a place the company has been forced to by intense competition), Watson:
  • Is playing the role of an ecosystem platform
  • Is using partners to reach consumers, realizing that IBM’s strength is as a B2B company
  • Has built a new physical space, reversing a trend of selling real estate and having employees work remotely
  • Is not trying to do this on the cheap
  • Is focused on just a few areas
What does this mean for banks and financial services firms? The IBM take is, of course, that you’ve got to be exploring Watson or you’ll be hopelessly behind. That’s overly broad, but I recommend that firms at least get up to speed on the potential of the technology and see whether it can apply to them. We’ll have to watch to see if Watson carries through on its promise, but efforts like this are a necessary (if not sufficient) first step in the right direction for IBM.  

Omni-Channel Roundtable in Toronto — the Summary

We recently held a banks-only roundtable at our offices in Toronto to discuss “New Imperatives for Omni-Channel Delivery.” With representation from Canadian and US financial institutions, we had a robust conversation around the movement from “multi-channel” (old and siloed) to “omni-channel” (integrated and mutually reinforcing). Some of the attendees had interesting – and fairly recent – titles: “Director, Multi-Channel Experience” and “Director, Multi-Channel Strategy” were two that were particularly noticeable, while two others had “Channels” in their title.  Taking an integrated view of the channels portfolio appears to be catching on in Canada! Some interesting observations surfaced.
  1. Banks are rolling out channels and touchpoints without necessarily teaching the customer how to best use them.  When ATMs (or ABMs, north of the border) first came out, bank personnel would walk customers over to them and give them a basic tutorial. There is precious little analogous activity in our new digital channels; we simply assume that customers will pick up on how to use them.  Apple has trained us to think that really good experiences need no tutorial, but that’s not necessarily the case in banking, particularly when it comes to security concerns.
  2. The session didn’t address Personal Financial Management (PFM) directly, but when we touched on it, the group took off on a twenty-minute tangent!  There’s clearly a lot of interest in PFM despite anecdotal adoption rates that continue to hover around 10%.
  3. Piggybacking off existing infrastructure, e.g., the AppStore ratings engine and comments section, is a great way to garner customer feedback. The key, obviously, is to listen and act on the comments that customers provide, and at least one bank watches its ratings assiduously and uses the feature requests and complaints as a key driver of release improvements.
  4. As in the U.S., the fate of the branch network is an important strategic issue. One component that will have some bearing on this is video banking, whether through hardpoints or consumer devices (laptops or tablets). Bankers are clearly keen to determine how video can supplement other channel experiences.
  5. A sneak peek of a Celent survey of Canadian banking customers showed their behavior to be remarkably similar to Americans’.  While there were a couple of exceptions (to be detailed soon in an upcoming report), there were no huge disconnects.  Despite some of the differences in the structure of our two banking systems (oligopolistic vs. fragmented, and cooperative on infrastructure vs. wildly independent), our consumers tend to view and use their banks similarly.
We’re looking forward to additional roundtables in 2014.  If you’ve got specific topics you’d like to see addressed, or cities you’d like us to visit, please let us know!

A Future for In-branch Self-service?

The idea of offering self-service solutions inside the branch remains a strangely controversial topic among North American bankers. This need not be. Self-service is rapidly growing across multiple retail market segments and has been a staple of Western Europe bank branches for a decade. Resistance among North American financial institutions is likely more cultural than pragmatic. As one community bank EVP stated in a recent research interview. “I’ll be damned if my customers are going to interact with a machine in one of my bank branches!”. O.K., so the topic is polarizing. But, is there a future for in-branch self-service in North America? We think so. Based on a Celent survey of North American financial institutions fielded in July 2012, in-branch self-service is destined to become somewhat commonplace – particularly among credit unions, who appear to be roughly twice as likely to adopt compared to banks. This should be a wake-up call to the curmudgeons who see no future in self-service based on the mistaken notion that consumers won’t be fond of the idea.

Credit unions are leading in in-branch self-service

From our research, when executed well using capable deposit automation and cash recycling devices, in-branch self-service can result in multiple benefits, including: • Reduced cost-to-serve • Extended service hours • Reduced cash handling costs • Fewer errors, fewer exceptions • Demonstrably improved customer satisfaction • Improved sales results ATM Marketplace posted an article extolling the virtues of in-branch self-service at BAWAG P.S.K., Austria’s fifth largest retail bank. There are, of course, many ways to skin a cat. We found the use of in-branch self-service at BAWAG P.S.K. straightforward. More interesting is its use within Austrian Post Office facilities (or is it vice versa?). Celent’s 2012 Model Bank of the Year, RHB Bank (Malaysia), was so honoured for its innovative and effective launch of Easy by RHB, which deployed multiple Retail partnerships to lower costs and deliver prime retail placement. These included partnerships with Tesco and the Malaysian equivalent of the U.S. Post Office, POS Malaysia. That concept (below) also includes in-branch self-service, but the devices are not apparent in the picture. Retail partnerships appear less polarizing than in-branch self-service in banking. Witness the thousands of in-store branches. Honestly though, most implementations are traditional and, well – boring. Easy by RHB offers an engaging and also wildly successful alternative – one deserving consideration as financial institutions struggle with branch channel costs and eroding relevance in the “new normal” of retail banking. Celent is welcoming submissions for Celent Model Bank 2013 through 30 November 2012. Submissions are made online at http://www.celentmodelbank.com.

Why Small Business RDC Matters

Celent recently completed the analysis of some small business research among a random sampling of 500+ small business owners with annual revenues up to $2.5 million. The universe of U.S. SMBs excluding those making less than $50k/year is roughly 25 million.

smb-distribution

The research underscored the centrality of check payments among small businesses – like it or not. For example, 90% of responding SMBs accepted checks compared to 70% accepting cash, 33% credit cards, 31% debit and 28% PayPal (with large variations depending on type of business). And when asked “If you could be paid the same way each time by every customer –how would you choose to be paid?” Check (38%) and cash (33%) were the two favorites. This will change over time, of course, but for the mid-term, checks will remain commonplace among SMBs.

All these checks are producing a good deal of branch activity. In the same survey, businesses were asked how often they made check deposits and how many checks were in each deposit. The results were logical – the larger the SMB, the larger the average check deposit and the more frequently they deposited. smb-deposit-frequency About two-thirds of all SMBs in the sample had less than five checks per deposit, making them suitable candidates for low-cost remote deposit capture (RDC) solutions. smb-checks-per-deposit Why is small business RDC important? At least two reasons. Approximately 20 million small businesses are accepting checks on a regular basis and depositing them at local branches and ATMs. RDC represents an obvious convenience for these businesses. The second reason is the favorable impact RDC can have on branch traffic and the resulting cost to serve these customers. Using the surveyed deposit frequency shown above, the collective activity amounts to 3.6 billion bank deposits annually. Assuming these deposits were distributed equally among the nation’s 119,000 bank and credit union branches, each branch could see 30,400 fewer deposits annually if SMBs were enrolled in RDC en masse. That averages 117 branch deposits per day, or roughly a single teller per branch based on a teller efficiency of 18 transactions per hour. Larger banks that serve the majority of small businesses would enjoy the bulk of the savings. Financial institutions would do well to leverage RDC’s popularity by offering desktop and mobile RDC freely to small volume depositors, and aggressively selling more capable solutions to the third of SMBs with more substantial check deposit volumes. This needs to happen alongside realistic RDC risk assessments and a corresponding broadening of eligibility requirements and raising of deposit limits. Otherwise, RDC will remain a niche product that under delivers customer needs as well as product revenues.

Personal Teller Machines: The Next Evolution of ATMs?

Last week NCR announced a partnership with uGenius that will result in a new NCR device adding real time video to the ATM experience. The new NCR APTRA Interactive Teller ATM, based on its successful SelfServ 32 platform will add hardware components such as a Speaker, photo ID scanner, signature capture device, microphone and handset along with uGenius software at the ATM and in the back office. The uGenius software will be installed along with NCR’s own APTRA Activate. The announcement did not commit to availability or pricing for the new personal teller machines.

Celent thinks personal teller machines will be the next evolution of ATMs for three reasons:

  • PTMs deliver improved customer intimacy with a modest cost increment over ATMs – still delivering lower per transaction costs than traditional branch transactions.
  • PTMs will broaden the transaction mix versus ATMs – thus far an unproven assertion (I think).
  • PTMs will likely show improved sales lead generation results over ATMs through the more personal interaction with a live teller.

But how and where will PTMs be used? Coastal Federal Credit Union used uGenius PTMs to fully replace traditional branch tellers in its 15 depositoy branches while extending hours of service – and at the same time reduced teller staffing costs by over 40%. An impressive feat! Coastal’s case study is available in a recent Celent report: Branch Banking in a Multichannel World Part III: Case studies in Branch Transformation. But, how many financial institutions will be so bold? We anticipate more surgical adoption such as branch vestibule self-service, mini-branches and replacement of conventional pneumatic drive-through mechanisms.
Coastal FCU's PTM

Coastal FCU's PTM

Regardless of the adoption mechanisms, the partnership is a good thing. uGenius delivered a solid concept and has the market research to suggest strong consumer acceptance of PTMs. But, it lacked the scalability and credibility to win over the larger banks. NCR changes all that. Moreover, the resulting NCR APTRA Interactive Teller ATM will be superior to the uGenius PTMs in several ways. For starters, the devices will be PCI compliant so consumers can authenticate the way they’re used to doing – using a debit card and PIN, rather than relying on a photo ID scanner. And, we expect the units will be fully Check 21 enabled and integrated with legacy teller systems. But these are window dressing compared to the primary differentiator. The new device isn’t just a PTM. It can function as a multifunction ATM or a PTM at the customer’s discretion (if so enabled by the financial institution). So, tellers may not be needed or used for the millions of consumers more than comfortable with self-directed ATM transactions. But for those in need of coaching or just plain preferring a human interaction, the PTM’s remote teller will be at your beckon call. This, in our opinion, is a natural evolution of the ATM.

Implications of the 2010 Federal Reserve Payments Study

The Federal Reserve published a summary of its 2010 Federal Reserve Payments Study this week. Predictably, the study evidenced double digit growth in debit and prepaid cards from 2006 through 2009, alongside essentially flat credit card usage. The study evidenced a continued decline in check writing of -6.5% CAGR, from 33.1 billion in 2006 to 27.5 billion in 2009. The anatomy of check usage was well reported in the study as well, with an analysis of check writing by counterparty and purpose based on a random sampling of checks processed by a small number of large banks. The results show double digit declines in C2B check writing (-11%), modest declines in B2B (-2%) and B2C (-3%) check usage and a growth in C2C check writing. In other words, businesses aren’t kicking the check habit – much.
Anatomy of Declining Check Usage

Anatomy of Declining Check Usage

The implications of these findings are many. One deserves special mention in my opinion. Less check writing alongside growing use of self-service channels is eroding branch foot traffic like never before. It’s no shocker that check volumes in the United States have been declining for most of the last decade. What appears less well understood is the long-term effect of this decline and what financial institutions should do in response. In addition to steady declines in check writing is a steady growth in self-service deposit activity taking the form of image ATM and RDC usage. The aggregate impact of these trends points to dramatic erosion in branch transactional activity – and with it foot traffic. The chart below shows a conservative Celent estimate of resulting average effect on branch foot traffic. teller-transactions This is a polarizing picture. For financial institutions with highly automated branch networks and well-trained personnel, these trends can point to significant cost reductions without compromising customer service. For other financial institutions, branch channel cost reductions will prove comparatively elusive. All financial institutions should embrace these trends as a mandate to quickly develop multichannel sales and service infrastructures to accommodate the quickly changing landscape.

The Growing Importance of Self-Service

Reg. E changes, the Credit Card act of 2009, the Restoring American Financial Stability Act – all have eroded banks ability to generate revenue. While the full extent of the damage this legislation has caused the industry remains to be seen, one clear implication is that banks must shed costs. For example, in a July 2010 Celent survey of 200+ financial institutions, two-thirds of respondents cited cost reduction as one of their top-3 retail banking priorities. Shedding cost is relatively easy. Doing so without compromising sales and service delivery is a significant challenge. Celent sees self-service becoming increasingly important in the new normal. Here are several recent examples.
  • Chase is offering essentially free remote deposit capture (RDC) solution to small business customers as long as they make a requisite number of monthly deposits using RDC. The implicit objective is to reduce the branch traffic along with its related costs.
  • Bank of America is piloting a new eBanking account which is free to customers using 100% self-service channels. Using the branch for those customers will result in an $8.95 fee.
  • Chase began offering mobile RDC capability to iPhone users of its mobile banking solution. Mobile RDC offers a low-cost self-service deposit capability that, by definition, keeps check deposit transactions out of the branch.
  • A small but growing number of credit unions led by Coastal FCU in North Carolina have extended branch hours, not by keeping the branch open longer, but by deploying vestibule personal teller machines (PTMs) that combine ATM like experience with real-time video conferencing with tellers housed in a centrally located call center. Doing so has provided extended branch hours at a fraction of the cost of keeping full-service branches open longer.
The common thread among these examples is customer pleasing service delivery at significantly lower cost than the traditional branch banking service model. Is there any doubt that the trend will continue?

Chase Quick Deposit: Finally an Investment in Client Adoption

JPMorgan Chase has apparently launched a targeted campaign to boost its Chase Quick Deposit, remote deposit capture client base with some unusually rich discounts. Specifically, Chase is offering two years of free Chase Quick Deposit (normally $50/mo, plus the $855 Panini MyVisionX scanner to power it. Total retail value = $2,055. Like any offer, there are specific requirements to this offer. — Users must deposit at least 10 checks per month — Offer is valid for new Chase Quick Deposit users only — $500 cancellation fee if discontinued within 12 months — Offer good through July 31, 2010 Some banks may balk at such aggressive pricing in the small business RDC segment. What is Chase thinking? I can guess – and they’re on to something. The minimum monthly check deposit requirement is a pretty good clue. According to its 2009 Annual Report: • Last year, 61,000 people in 5,154 Chase branches in 23 states served more than 30 million U.S. consumers and small businesses • Retail operations teams processed 700 million teller transactions • Chase added 2,400 branch sales staff last year – personal and business bankers, mortgage officers and investment representatives – to better serve its customers. What is Chase doing? It is becoming more efficient, while strategically transitioning its branch network from transaction processing centers to sales and service centers. Significantly growing its small business RDC customer base – even without associated fee revenue – can pay large dividends to Chase. How? By reducing the number of small business branch deposits. Self-service deposits are less costly to process than paying tellers to do them. The graph below depicts Celent’s estimate of declining check transaction volume in the average US branch with and without small business RDC assistance.
Declining Check Transaction in the Branch

Declining Check Transaction in the Branch

So, the robust promotion of Chase Quick Deposit reflects both a shift in RDC strategy (from PxV product revenue to a self-service reason for being) and a shift in branch strategy (from transaction centers to sales & service centers). Chase serves as a great example for other banks to follow. Celent is currently researching the evolution of North American branch infrastructure. Weigh in on the link below, and we’ll send you a complimentary executive summary of the results. http://www.surveymonkey.com/s/Branch