I believe that the Internet of Things (IoT) will become a major trend in 2019. The Internet of Things refers to electronic networks on interconnected devices like sensors, smart cameras, mobile phones, etc. Eventually, any “thing” that collects and sends data which is connected to a network is a part of IoT.
One of the common misconceptions is that IoT is relevant only to industries like manufacturing, logistics or agriculture and has nothing to do with financial services. That would be a very wrong assumption which may cost business to financial services companies. To understand why let’s take a peek into the future.
The future is smart. It starts with our homes that will be equipped with more sensors to measure temperature, lights, detect motion and make our home environment comfortable and personalized while saving the energy and reducing utility bills. Robots and smart appliances help with chores like cleaning or groceries to let us focus on more important things in life. People will enjoy this comfort longer since various wearable technology will help keep our health intact. We will travel in autonomous transport and pay for services using our face or fingers instead of cash or cards.
The future is all about interconnected industries where data generated by “things” shared on distributed ledgers and networks with AI’s help to make sense of information. Financial services organization need to start thinking now where they will fit into this picture of future. This future is not too far as companies already adapting to the new paradigm.
An example of this is Hitachi’s partnership with Mizuho to digitalize supply chain financing. In this project, the manufacturer is submitting orders to its suppliers on blockchain and the bank can finance it faster because of increased transparency. The data from manufacturing and warehousing can be shared on the same ledger, which enables tracking the progress of the order in real-time thus improving risk management.
Once enough data is accumulated, machine learning models can be developed to build new credit models, automating the whole underwriting process to provide financing on demand.
Defining the trends and its benefits
There are two major trends that will accelerate the evolution of technology. The first is the rapid adoption of IoT in industries like manufacturing with smart factories and predictive maintenance; developing connected and smart cities.
The second is exponentially the growing trend of Open Banking, where banks use APIs to create new customer experiences and develop pure digital business models. Combining the two trends could result in quicker adoption of IoT-driven financial services.
IoT provides banks with the opportunity to become a true business partner by addressing its customers’ needs. There are four areas in banking that will benefit the most from this new technology paradigm. Commercial lending can benefit from IoT data by complementing traditional financial information with operational data, developing new credit models and improving risk management.
An example of this is how smart factories can now request for working capital loan via banking APIs when a new order is received, and the bank can approve it in real-time using AI models based on historical financial and operational data. Banks also can act as an advisor and help its clients to leverage this information to improve operational efficiency thus providing better customer experience.
The other area that will reap benefits is in physical asset management, including real estate or facility management. Data gathered about occupancy or building maintenance makes asset valuation more accurate and safer. Sensors can also significantly reduce energy utilization, operational costs and provide a better experience for tenants, making the asset more valuable.
When multiple smart assets are incorporated in the same portfolio, it provides investors with a higher level of control and more precise valuation creating more attractive portfolio for investors.
Trade and supply finance are two other areas where IoT adoption is accelerated. IOT data is used to track manufacturing processes, using predictive maintenance which can significantly reduce operational risk.
In trade finance, sensors can be used to track geographical location or detect any damage to shipments, increasing transparency and reducing the risk of fraud.
There are also plenty of opportunities in retail banking. All the data coming from smartphones, wearables, and smart homes allow banks to understand each customer in depth and apply this knowledge to provide them with tailored services.
This increases the banks’ ability to cross-sell and upsell ratios. Various biometric sensors simplify the payment experience and reduce fraud.
Overcoming the challenges
There are two main challenges banks need to be aware of before adopting IOT. The first is data infrastructure. A majority of existing banks are still in the process of harnessing the structured internal data they’ve collected over time.
IoT amplifies the data challenge as information comes in real-time streaming, mostly unstructured and in a variety of different formats. To address this, a modern agile data infrastructure needs to be in place to collect, process, blend and analyses the external and internal information. The second challenge relates to data privacy and data protection. There is a regulatory trend to tighten data privacy rules.
GDPR is a great example where data collected historically becomes legally unusable. It would be valid to assume that as the technology matures, the specific regulations would evolve. Data protection in another big concern, especially with recent major data breaches. As the data volume and variety grows, banks need to invest in cybersecurity and data protection to defend both external threats and internal data misuse.
IoT has the potential to completely transform the financial industry that we know it today. It promises to generate new business models, achieve great operational efficiency and more importantly, help financial service providers to integrate in customer journeys. Financial service institutions need to react now if they want to stay relevant.
There are three main areas that need to be addressed in 2019 to lay the foundation for successful IoT adoption: Opening internal systems for external eco-systems, utilizing API’s and flexible micro-services IT architectures, modernizing data infrastructure to be able to process large volumes of streaming unstructured data in various formats and gaining full control on data increase, focusing on data governance and data protection to address new regulatory changes and cyber threats.
Date: February 27, 2019
Source: Fintech Innovation