Riding the wave
Will the “internet of things” expand to financial services?
Siloed, unconnected and isolated. These were originally what people said about technology and computers when they started to grow in prominence in the 1970s and 1980s. Then came the modern internet revolution in the 1990s, which enabled computers and systems to interact with one another on a common network. Back then, the drive for connectivity was to achieve greater convenience and the ability to share information when possible.
Since those days of green text monitors and floppy disk technology, connectivity has rapidly advanced beyond the internet to impact every industry from manufacturing to healthcare to financial services. For financial services in particular, the increased focus on connectivity has made it easier for the everyday user to do actions such as checking their bank balances on their phone and making instant payments.
With banks around the world now looking to be part of customers’ lifestyles, application programming interfaces (APIs) are becoming more common. Banks are opening up their systems to non-bank third parties such as payment providers and even restaurant chains. This is a dramatic shift from a few years ago when most financial institutions were wary about opening up their systems to external parties.
Global and regional banks such as Citi and DBS, for instance, have opened up their developer portal systems, making it easier for third parties to integrate with the banks’ systems. Citi has combined its loyalty points system with external companies such as Hong Kong e-commerce company HKTVmall, allowing the bank’s customers to more easily use their points for shopping offers.
While this recent integration from financial firms is exciting, it just scratches the surface of what could be possible when there is full connectivity between different entities. Coupled with the drive of creating a financial ecosystem is the rapid growth of smart devices, whether it be Amazon’s Alexa, smartphones or even smart bulbs that are possibly collecting data on their users.
By the end of 2018, more than 45 million smart home devices would have been installed in homes in the US, according to market research firm Statista. This represents an annual growth rate of 22% for the home automation industry.
The combination of further financial industry integration and data collection is a powerful one that could represent a new form of connectivity beyond the data transfers we have seen in the past. Enter the “internet of things” (IoT), which is often referred to as the next step of connectivity.
Under the IoT concept, different devices communicate with each other without the need for human interaction. The objective is that the virtual and physical worlds are able to interact with each other.
“Billions of devices are connected to each other and in doing so, become an intelligent systems of systems. When these intelligent devices and systems share data on the cloud and begin to analyze, they can transform our business, our lives and our world – in countless ways,” states a white paper from Infosys titled “IoT-Enabled Banking Services”.
The interaction between the virtual and physical world can have a number of positive implications. For example in healthcare, if a doctor prescribes medicine with warnings about dosage, that data could be communicated to the patient’s home system including his fridge, which could provide reminders including when to take his medication.
This may sound like science fiction considering the amount of data that needs to be transmitted, but the development of 5G networks could make this hypothetical scenario reality sooner than later. Market analyst firm Machina Research predicts that IoT will account for one-quarter of 41 million global 5G connections by 2024.
IoT in financial services
In the financial services context such as healthcare, IoT has a number of potential benefits. For instance when it comes to insurance, firms could find it easier to get a better understanding of their policyholders and generate relevant coverage policies from analysis of their lifestyle with smart devices collecting information on their habits.
One example is automobile insurance calculated after tracking the driving habits of a customer whose vehicle communicates directly with the insurance company. US car insurer Progressive is doing just that using a Zubie device to monitor behavior.
IoT applications could have a significant impact on banking and lending services in an attempt to prevent fraud. With the use of sensor and monitoring devices, banks can keep track of any changing circumstances that may affect the parameters of a particular loan.
“Using IoT from sensor devices installed at the borrower’s warehouse, banks can track raw materials and inventory stocks. By using this tracked data, banks can deduce the account balance and ensure that a loan is paid when inventory is sold. This helps banks reduce overhead costs of tracking and also stops borrowers indulging in fraudulent practices,” states the Infosys. Standard Chartered, in an effort to provide accurate supply chain finance, has relied on geofencing via satellites to deploy financing when certain goods have made it from the manufacturer to the dealer.
This location tracking ability has a strong impact on the credit card sector, which frequently uses special promotions and discounts to get their cardholders to spend more. Under an IoT-focused type solution, cardholders could be informed of special deals and cash rebates with retail outlets in their general vicinity during the course of their day.
Back in 2016, Visa embarked on its IoT journey when it partnered with Honda and ParkWhiz to provide cardholders with information about gas station deals nearby if they were driving and their car was low on gas. More recently, there have been partnerships between companies like US-based bank Capital One and Amazon’s Alexa that allow the bank’s cardholders to make purchases and pay bills over the voice-activated home system.
Adhering to efficacies potentially being achieved by further IoT application, several countries in Asia are trying to enhance the spread of digital connectivity in their respective markets. China, for instance, has been touted for taking a leading role when it comes to cross-device application of data. Having already announced its intentions back in 2015, the Chinese government has made IoT a pillar in its “Made in China 2025” strategy. This has led to predictions that China will have around 4.1 billion IoT connections by 2025, equivalent to a third of the world’s IoT connectivity by that period based on GSMA data.
“These new technologies will fundamentally alter the way we live and work, intelligently connecting virtually every device, making our cities smarter and our lives easier and more productive,” comments Alex Sinclair, Chief Technology Officer, GSMA.
“China is betting big on the IoT to increase productivity and drive efficiencies by streamlining and automating manufacturing processes via internet connectivity. Backed by positive government support, China is set to become the world leader,” he adds.
But it’s not only China. Further south, in Singapore, the government has likewise responded favorably to IoT development as part of its “Smart Nation” initiative. In fact, the Southeast Asian nation has pushed for universal standards for the deployment of IoT-related solutions. Speaking last year at an IoT event, Dr. Vivian Balakrishnan, the minister responsible for the country’s Smart Nation initiative, warned against governments allowing closed eco-systems when it comes to IoT development in order “to avoid being trapped by vendors behind walled gardens”.
Unethical pipe dream?
While IoT has been praised for its potential efficiency and has received the backing of various governments, there are several technological and ethical issues when it comes to using IoT in financial services.
Firstly, on the technical side, though financial institutions are continuing to open up and share information with each other, there is still the problem of how to connect this set of financial information with an accurate amount of collected data originating from smart devices. Since there is no uniform standard around IoT smart devices, there is greater risk of getting inaccurate information about a company or an individual due to being on separate IoT networks.
Ethically there are hurdles with the most obvious one being how to safeguard information being collected and how to ensure that the transmission of sensitive data cannot be compromised.
Unfortunately, since the concept has become well-known, there have been several incidents of hackers installing malware onto smart cameras in 2016. A similar scenario could affect devices relating to financial services where criminals could get information about the financial health of a person and use that as leverage to their advantage. Understanding what personal financial data you are consenting to share has become a point of contention following the Cambridge Analytica debacle in which people were unaware their personal data and habits were being collected without their knowledge.
The question of data applicability is another uncomfortable issue around IoT particularly when it concerns whether a certain individual or business can get approved for certain financial products. There could be disputes over whether the predictive algorithm or collection devices are creditable and whether the recommendations or interest rates being offered are suitable or fair.
How accurate can using past performance or habits to predict the best financial advice for an individual be? What is the scenario when there is a dramatic change in financial circumstances e.g. winning the lottery? These questions need to be addressed before IoT can truly impact our financial lives.
A recent EY survey of banking executives found that IoT technology is currently not a major talking point for Asia-based financial institutions. When asked which technology would be the top influencer of financial services, the majority highlighted artificial intelligence and mobile applications ahead of IoT. Nevertheless, expect greater connectivity between banks or smart devices to be a part of future conversations as we move further away from a siloed, unconnected and isolated technological world.