More than 20 billion devices estimated to be connected by 2020. what does that mean for the financial services industry, and more specifically, banks?
The advent of Internet of Things (IoT) propelled by the boom in mobility and internet access around the world, while has opened a whole set of new possibilities, also comes with a series of questions that need to be answered, from a financial services industry perspective. Firstly, what is IoT? In essence, the Internet of Things is a term that denotes an interconnected world. Where devices, with their embedded technology know and identify each other, exchange data, and react to them appropriately.
In short, when the fridge places the order on your behalf when the fruit tray goes empty, or when the house-security lock gets alerted when a vulnerable activity is observed, it is IoT in action. In essence, this is where devices speak to each other to create an inter-connected play at work. This interaction between assets and devices results in trillions of data points that provide a pattern that could be unraveled to project a behavior, predict a need, and provide a potential to build solutions. The larger point, is this: while this has indeed opened up multiple new possibilities, what does this have in store for the financial services sector?
For starters, the discussion hovers around payments, where automated payments allow for smart-retailing, where the e-wallet can be automatically deducted as the customer walks out with the goods purchased, or geolocation enabled products and features allow for smarter collaboration with merchants to make customized offerings to the consumer. Corporate and SME financing can be expected to get smarter, with assessment of the raw material and finished goods being directly monitored, with zero manual intervention in determining working capital requirements. Agricultural lending is expected to see some interesting innovations, where assessment of weather, estimated yield and output of crops can make farm sector lending more accurate, with lesser cost of risk. IoT could enable monitoring of a leased equipment and help assess the real transaction volume or throughput, and make the bank have its ear to the ground and a far more sound credit framework.
All of the above are just a sample set from thousands of use cases that are being solved for everyday, by hundreds of fintech and technology players around the world. That being said, if you are a bank that is looking to leverage the IoT play, then there are indeed a few questions that merit a closer attention, and careful consideration.
What does it really mean from a customer standpoint?
The primary objective of any bank would be to get smarter in anticipating needs of the customer, powered by the data that is collected from the usage of smart devices. Spend patterns and information accessed, when analyzed logically can provide countless value added services, loyalty incentives, on-demand services and fraud detection. In essence, banking could emerge to be an intermediary between their customers and service providers, armed with information on what the customer needs, much before it is actually spelt out. The core to this is in the ability to determine what data is to be analysed, what conclusions can be drawn, and what potential services can be rendered to address them. The inherent challenge however, in accessing such customer data, is the grey line of privacy, that banks can ill-afford to cross.
Is there a cost to convenience?
When cars pay for their own fuel – with automated sensors deducting from the card, or when utility bills are paid directly based on a budget defined by the user preference that go on to auto-set the temperature in the living room to minimize power consumption, or even better still – when the 2insurance premium is automatically inferred based on the data pumped out of the wearables, the bottom-line promise to customers is that of ‘convenience’. The question however would be, at what cost? The advent of 5G network and the excitement around it, the promising emergence of cloud technology and its objective to bring down cost of information storage seemingly advocate that IoT is here to stay. While the writing may be on the wall, when it comes to where this is heading, it would still be important to recognise what this would imply as the cost to pay, which is not necessarily just financial. There is, in some shape or form, a cost which is spelt as privacy.
Data to be harnessed: what and how?
The burgeoning participation of devices in the IoT game, as we saw earlier has have one looming question: how much of data that does this entail, and how will privacy of data matter in this? While PSD2 has helped banks share account information with TPP’s who are regulated, how would the regulation unfold in defining identity of billions of devices? What data would a bank directly own, and what would it be dependent on other third parties to process? How much of the data would need to be protected, and what liabilities would banks be exposed, if this gets infringed? Perhaps part of the answer lies in the emergence of API banking, where new age fintech solution providers connect the dots – between what is private information that sits within the bank, and what sits outside as real big data, available to harness and develop point solutions. Digital market-places help connect providers and consumers of data, assuring consistency and continuity of data. Infrastructure and hardware providers would also need to be engaged as part of the ecosystem by IoT solution developers. The key word here is inter-operability, and emergence of new standards would also, therefore, be inevitable.
How would management of risk be different?
While traditional enterprise risk management principles of a bank are typically defined across market, credit and operational risk pillars, the new name of the game would undoubtedly be management of data and information security. The potential for distributed attack of cyber-crime across unassuming devices, which are multiplying by the day and is all around us, does not seem far-fetched. The risk of private information being leaked out – as we have already started observing around the world – is only increasing by the day. Banks would either directly or indirectly be liable for security of the data security of its customers, and therefore the mitigation of the risk of its leakage and/or infringement would be the new bedrock of risk management.
How does the bank differentiate in the new crowded place?
Digital disruption has already seen upstart Challenger bank and Fintech Davids taking on the global Goliaths, and that path is well set for the times to come. However, successful and smart banks would do well to determine what would remain their fundamental value proposition, and the core value-add that is being brought through any of these innovations. Determining the right business objective, developing the appropriate IoT use case, developing a successful proto-type, running a real-life pilot and validating the results is an iterative cycle to be traversed, before any meaningful customer impact could be made. Building partnerships with players leveraging the API connectors, and engaging with ‘willing’ customers to validate proto-types help drive experimentation, filter out the sheaf and consolidate on areas that have a definite appeal to its customer segment, is the only approach to differentiate in the long run.
The era of IoT has got a new definition for every inanimate but connected object – to be the source of data that could provide a new dimension, a completely new perspective that was not possible before. However, it would still be interesting to see how the rules of the game to access the data beamed from devices– be it mobiles, wearables or home appliances emerge. What was hitherto considered as private information, will no longer be so private, and the lines are beginning to blur. May be its time to listen, as devices have begun to talk!
For a further conversation on this subject of Cedar View or how we may be able to help please email V. Ramkumar, Senior Partner, Cedar at V.Ramkumar@cedar-consulting.com