IBM Aims Watson at the Financial Services Industry

By Markets

Image source: IBM.

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Artificial intelligence (AI) has become the next great buzzword in the technology industry. It seems like every tech company under the sun is embracing AI. Software giant Microsoft recently formed a new AI research group, comprised of 5,000 computer scientists and engineers, in an effort to bring AI to all of its applications and services. Cloud computing, at its annual Dreamforce conference, introduced Einstein, a set of AI features that will be integrated into its platform. And carmakerTesla has long touted its AI-driven Autopilot driver-assistance system as a key selling point for its electric cars.

International Business Machines (NYSE: IBM) is taking a more focused approach. Watson, the company's cognitive-computing system, has been aimed at some very specific problems. In the healthcare industry, Watson is being used to improve the quality of decisions and diagnoses while freeing healthcare professionals from tedious tasks. The system can churn through a massive amount of data, including medical records, research journals, and textbooks, providing doctors with information and guidance in an effort to drive better patient outcomes.

From healthcare to finance

The financial services industry is the next big target for Watson. In September, IBM announced that it planned to acquire Promontory Financial Group, a risk management and regulatory compliance consulting firm, for an undisclosed sum. Promontory's 600 professionals will train Watson to help its clients navigate an increasingly complex regulatory environment.

What the healthcare industry and the financial services industry have in common is an astronomical quantity of data. According to IBM, more than 20,000 new regulatory requirements were created in 2015, and by 2020, the total catalog of regulations is expected to surpass 300 million pages. More than 10% of all operational spending at major banks, roughly $270 billion per year, is related to regulatory compliance.

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This high level of compliance spending represents a concrete problem that Watson aims to solve. The acquisition of Promontory accomplishes two things. First, it accelerates the process of training Watson to tackle the regulatory burden facing financial companies. Like any machine-learning system, Watson is not plug-and-play. The system needs to be specifically trained for each task, a process that requires both time and expertise.

Second, it furthers IBM's transformation into a cloud and cognitive-solutions company. The rapid growth of cloud computing has forced IBM to transform itself, but the company is still focused on serving enterprise customers and solving specific problems for its clients. IBM will never be the largest cloud computing provider. Instead, the company focuses on areas where it can offer differentiated solutions and build a competitive advantage. The healthcare industry is one such area, and the financial services industry is another.

One important takeaway from IBM's acquisition of Promontory is that artificial intelligence systems like Watson are nothing without highly skilled people. In the healthcare industry, Watson is a tool for doctors, not a replacement. Watson helps doctors make better decisions, but it's nowhere near the point of being able to make those decisions on its own. In the financial services industry, Watson will augment the expertise of Promontory's professionals. Again, Watson will act as a tool for better decision making.

With that in mind, IBM's strategy of acquiring companies with deep knowledge in specific areas makes a lot of sense. Earlier this year, IBM announced the acquisition of Truven Health Analytics, a deal that brought with it both a massive amount of data and thousands of highly trained employees. The acquisition of Promontory fits the same mold, bringing deep knowledge in-house in an effort to apply Watson to new areas.

IBM has big goals for Watson: The company has previously stated that it aims to turn the system into a $10 billion business by 2020. IBM may have been overly optimistic, but the potential for Watson to become a major source of revenue is very real. IBM has yet to disclose how much revenue Watson brings in, likely because the number is not yet very impressive. But the strategy of targeting concrete problems in specific industries, while certainly a slow process, is sound. The acquisition of Promontory is a step in the right direction.

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Timothy Green owns shares of IBM. The Motley Fool owns shares of and recommends Tesla Motors. The Motley Fool owns shares of Microsoft. The Motley Fool recommends Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.