As the Internet of Things (IoT) permeates the marketplace, we're seeing more and more industry sectors tip their hats to this rapidly maturing digital channel. A recent Cisco study found that 73 percent of organizations are using data derived from IoT projects to improve their businesses. It's particularly interesting to observe how financial services institutions are integrating the internet of things into their business strategies. According to Infosys, "The Internet of Things (IoT) is the next big and imminent thing in financial services." A recent survey of bankers found that average IoT spending in banking would grow to $153.5 million by 2018, up nearly 31 percent from $117.4 million in 2015. Here's an exploration of that growing relationship.
The internet of things is a channel to monitor and communicate physical phenomena: Device sensors measure conditions such as temperature, position, vibration, speed, weight, heart rate, and other variables in the three-dimensional, physical world. This information is then transmitted to other systems and devices in a responsive interactive conversation. Such data streams can involve machine-to-machine (M2M) communication, or they can provide information to consumers. While the capacity to monitor the condition of physical objects may at first seem far removed from the world of financial services, in fact, there are a growing number of naturally overlapping functions.
Insurance is one industry where the physical and financial worlds directly interact. The arrival of IoT technology in the insurance world means that an individual's level of risk is no longer confined to their statistical positioning. Instead, their insurance coverage can be directly connected to personal behavior. While this gives rise to concerns about privacy and discrimination, it's also worth pointing out that such tracking technologies can open doors as well. With this in mind, car insurance providers, for example, can track real data on a customer’s careful driving habits as opposed to basing it on statistics that match their type of driving record.
Auto insurers' profitability depends on accurately assessing their customers' driving behavior and automobile maintenance. Telematics now allows individual driving habits to be transmitted to insurers with granular, unprecedented precision. Fintech Weekly reports that Progressive and Allstate are already using such information to incentivize safe driving and provide individual pricing. These companies find that their customers have become more conscientious about improving their driving habits and maintaining their vehicles in response to receiving regular telematics reports. Sensing devices on automobiles can also aid in finding the vehicle if it's been stolen, saving money (and the headache) for consumers and insurers.
Weather and natural disasters aside, home insurers are chiefly concerned about avoiding expenses due to break-ins or malfunctioning household utility systems. While this branch of insurance has not yet tied the price of premiums to specific home monitoring technology, Fintech Weekly reports that tracking the physical condition of a home can inform decisions during the mortgage origination process and provide more accurate pricing models for homeowner insurance.
Health insurers have a stake in their customers' health practices, behaviors, and compliance with provider instructions. Wearable technology is increasingly making a person's health-related behaviors and physical condition an open book to their insurance carrier. Not only can biological variables such as blood glucose and blood pressure be monitored, but exercise patterns and other personal behaviors are also easily visible by way of wearable fitness monitors. A wellness program through United Healthcare and Qualcomm now pays users up to $1,500 in healthcare credits for engaging in healthy activities as documented on their FitBit devices.
Even in the digital age, the global economy still rests on the success of farms that feed every mouth on the planet. The internet of things can help strengthen the relationship between the farmer and the bank by monitoring crop conditions, weather patterns, and expected yields. In the manufacturing sector, commercial borrowers and their lenders are constantly seeking new methods of verifying creditworthiness. How well is the business actually doing? How can the lender protect itself from fraudulent borrowing? Sensor devices installed at the borrower's warehouse or shipping container can provide direct data on inventory status to commercial banks. This direct connection eliminates the need for the business owner to submit complex documentation of their assets.
The advent of the internet of things allows banks to use sensors and analytics to assemble customer insights and provide more personalized service. For example, banks will be able to use biometric technology to recognize customers as they enter a branch location. Banking customers can thus receive personalized offers germane to their historical behavior patterns. Fintech Finance points out the advantage of such programs, noting that customers are nearly 20 times more likely to make a purchase after receiving a personal offer on their mobile phones. Geolocation through mobile devices can also offer individualized discounts at specific restaurants and retail stores, by matching a customer's bank card loyalty program up with their current location.
Last year, Citibank launched a pilot program that used beacon technology in some of its Smart Banking branches in New York City, allowing customers to access branch ATMs 24 hours a day and opt-in to branch or region-specific promotions and special events. The technology also gathers other information, such as waiting time inside branch locations - helping them assign staff more efficiently.
The Financial Brand notes that banking is expanding beyond mobile phones as more devices connect to the internet. The connected ecosystem of payment gateways will soon include wearables such as smart watches, rings, VR devices, and clothing. A survey of global banking and insurance executives found that 59 percent "expect wearables to become a common payment device for consumers within two years."Sameer Kishor, President of banking, financial services, securities and insurance at NTT DATA Services, puts it this way: "Banks will have a more vivid picture of the consumer, understanding how they move and where they spend money. This will allow banks to make more accurate lending decisions and deliver more real-time personalized offers."
Some possible future IoT uses for banking customers are mused on in Fintech Weekly: A wearable tech device could aid in controlling credit use, for example, by delivering some unpleasant signal to the user when they attempt to spend beyond their budget. Or an investment account could automatically adjust the asset allocation of a client's portfolio in response to a new development in their health status. Because the application of the internet of things in the financial world is still emerging, it provides fertile ground for the creative imagination -- and some of these blue sky ideas are likely to become reality in coming years.
Security is a huge and growing concern in the financial world. Fintech Weekly comments that "IoT can potentially make all parties highly vulnerable since FIs will be gathering not just financial data, but all types of personal and health information about customers to be used in any which way they like." In this increasingly complex financial ecosystem, physical input has a new role in building strong security infrastructures. Infosys notes that banks can use geolocation data from their customers' mobile phones to verify the customer's identity when they engage in debit or credit card transactions. This would provide a valuable layer of fraud prevention.
MasterCard announced in April of this year that they acquired financial cybersecurity firm NuData Security. NuData specializes in passive biometrics, enabling users of credit cards to be recognized through unique physical characteristics such as how they hold their phones or type into their keyboards. This extra layer of verification would be initialized if a purchase were made from a new location while keeping the customer experience streamlined and pleasant. NuData's flagship product, NuDetect, employs machine learning to get "smarter" from one session to the next, sharpening its ability to score transactions on a scale of fraud risk. This technology also enables merchants who accept MasterCard to authenticate users much more quickly.
It's appropriate that technology based on the internet of things is being used to address cybersecurity risks. Last year's Mirai botnet attack, which temporarily compromised sites like Twitter and PayPal, gained entry to those systems through unsecured IoT devices. These devices, which included DVRs, CCTVs and routers in 164 countries, were used by the malware as platforms from which it launched one of the largest DDoS (distributed denial of service) attacks in history.
We are in a test-and-learn stage right now with IoT technology applications in the financial sector, and it's an exciting time for banks, insurance companies, and investment firms alike. Gartner forecasts that in 2020, over 6.5 billion devices will have IoT sensors in them, with 64% of these devices being consumer applications. With a shift in digital transformation, however, comes the need for precautionary action in order to avoid wholesale privacy invasion as well as identity theft and fraud. Even as financial service institutions seize the massive growth opportunities that the internet of things is opening up, they are well-advised to do so in the context of a carefully structured IoT business strategy -- and they should implement such a strategy with rigor and agility.