Cognitive technology for competitive advantage in credit risk management

Financial Services Specialist, IBM

Cognitive technology is increasingly a focus of attention among financial institutions, that are interested in the data and process efficiency, as well as enhanced predictive accuracy, derived from leveraging machine learning across an organization. While operational efficiencies and cost savings are compelling aspects of cognitive technology, it is important that financial organizations recognize the significant competitive advantages that cognitive capabilities will yield in diverse sectors of financial markets.

In the recent IBM white paper—Exploring a new frontier: Using cognitive technology to strengthen credit risk management—you can see how risk practitioners today are seeking to leverage cognitive capabilities for competitive advantage across the entire credit lifecycle. In particular, cognitive technology can significantly enhance credit risk management practices in several key areas.

Operational advantageCognitive technology for competitive advantage in credit risk management

Today, cognitive technology offers banks a significant opportunity to improve data and business processes through all stages of the credit lifecycle—from loan negotiation, through performance monitoring, to default and recovery of principal.

For example, at the loan negotiation stage, cognitive technology can help banks automate and enhance their understanding of clients’ capital structures and unique business needs, as well as the competitive environment in which the client is doing business. Moreover, Exploring a new frontier reveals how cognitive can support both risk and compliance in main areas such as, "know-your-customer (KYC) procedures, in which the ability to increase the efficiency and accuracy of credit risk research would be a significant operational advantage for many banks.”

Today, compliance with KYC requirements demand that credit professionals complete as many as 400 questions on a client company’s capital structure. According to recent research by Finextra cited in Exploring a new frontier, this onboarding process can cost up to $30,000 and four to five weeks per client—both cost and time factors being impacted significantly by KYC requirements according to 88% of banks. Cognitive technology can reduce these cost and time inefficiencies, offering banks significant operational advantages across the entire credit lifecycle.

Credit analysis advantage

Risk practitioners and credit risk professionals are increasingly looking at how cognitive capabilities can give banks a more robust and comprehensive understanding of clients’ risk status through the semantic understanding of unstructured data. For example, cognitive technology enables banks to complement internal data and KYC data with less accessible and often unstructured data from diverse external sources. These sources, ranging from court records to external ratings and reports, may indirectly indicate financial stress and so provide critical insights into the liquidity of a customer. Better, and more comprehensive visibility into customers’ liquidity strengthens the credit risk management strategy of an institution—limiting the potential for loss and enhancing overall competitive advantage.

Platforms such as IBM Algo Credit Manager are critical to capitalizing on the competitive advantages cognitive technology offers banks in areas such as credit risk management, providing the quality data necessary to establish an accurate picture of clients' credit positions.

Learn how cognitive technology enhances risk management