Disrupting Financial Services with IoT Technologies
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The Internet-of-Things (IoT) computing paradigm is revolutionizing industrial organizations, through providing the means for bridging physical processes with the digital world. This digitization of physical processes is transforming entire industrial sectors including manufacturing, logistics, energy, oil & gas and more. The financial services industry is no exception: the blending of IoT devices and technologies into financial services processes holds the promise to disrupt the financial services industry, through enabling services driven by physical world information. In particular, IoT technologies enable the collection and processing of large amounts of physical world data, along with their conversion into actionable knowledge that can be used for structuring investment portfolios, optimizing returns, preventing fraud and more. In this way, IoT enables significant improvements in existing services, while at the same time facilitating the emergence of novel products and paradigms that will lead to monetary benefits for both consumers and financial institutions. This is the reason why IoT technologies are nowadays considered an integral part of financial services technology (FinTech).
IoT Use Cases in Fintech
While there are endless opportunities for innovative IoT services in the financial sector, it’s worth pointing out some characteristic areas where IoT technologies add value:
- Improved User Experience and Personalized Services: Consumer internet-connected devices such as smartphones and smartwatches, provide the means for improving the users’ experience when accessing financial services. As a prominent example, retail banks deploy sensors (e.g., beacons, RFID readers and tags) in their ATM (Automatic Teller Machines) and retail branches in order to facilitate push of personalized messages about products, offers and discounts, as well as personalized recommendations for a specific customer. Likewise, the consumer’s phone becomes a primary channel for timely and personalized communication with the bank, including information on loans, investments and other products. As another example, IoT technologies (like RFID and NFC (Near Field Communications)) disrupt electronic payments, through making them more secure, reliable and user friendly when compared to conventional credit/debit card payments.
- Location aware services: Location aware services can be seen as an integral part of sensor-driven personalization. For example, biometric sensors can be deployed in bank branches in order to detect customer presence and instigate personalized interactions. Nevertheless, there are also use cases where location can lead to improvements to the safety, security or efficiency of existing services. For example, in mobile banking transactions the user’s locations can be exploited as a means of detecting potential fraud. Specifically, in cases where the user is detected to be in an unusual location, banks may call the user for extra validation prior to committing the transaction.
- Usage based insurance products: IoT technologies are set to disrupt conventional “one-size-fits-all” insurance contracts, through enabling a “usage-based” paradigm. The most prominent case of such “usage-based” paradigms can be found in the car insurance sector. Specifically, several car insurers collect data about driving behavior in order to align insurance rates to the risk level that is associated with each individual driver’s driving patterns. Emerging IoT technologies such as connected cars are set to facilitate the collection of such behavioral data, as they are equipped with numerous internet-connected sensors. This will greatly facilitate the adoption and wider use of usage-based insurance schemes for cars and other vehicles. Such schemes will disrupt existing “fixed” contracts, as they will reward careful drivers with lower premiums, while at the same time easing insurance companies to streamline their rates with actual risk.
Enabling Partnerships with other sectors through IoT
The above use cases represent the low hanging fruit for IoT in FinTech. A wealth of additional opportunities can emerge when considering the integration of financial services with other sectors where IoT is widely deployed. For instance, financial services can be integrated with smart home services and devices in order to enable home appliances to engage in financial transactions. For example, white appliances’ vendors are already experimented with smart objects that order and purchase items over the internet, such as washing machines that automatically order their detergent and refrigerators that initiate replenishment orders without human intervention. These transactions are only the first step of financial services and smart homes integration. Additional services include the identification and execution of personalized orders based on past purchases, as well as the creation of offers that can be exploited directly by machines and smart objects.
IoT can also serve as a bridge for integrating healthcare services with financial services. Consider for example the connection between a pool of financial services (e.g., health insurance, pension plans, loans, investment accounts) and a consumer’s personal health record. Based on this connection, financial institutions could rapidly adapt and optimize their services taking into account the health status and needs of the consumer. Adaptation may include limiting one’s exposure at financial risk or liquidation of his/her holdings in order to meet cash needs.
Challenges and Risks
In order to leverage the benefits of IoT-based FinTech at scale, there is still a need to address several challenges, including:
- Privacy and Data Protection: Most of the presented services acquire, process, share and leverage consumers’ personal data, such as their location and medical records. This raises privacy concerns, which ask for compliance to applicable regulations, as well as for providing incentives to consumers in order to accept and use the service.
- Cyber-security: The deployment of sensors and other IoT devices adds up to the complexity of the financial services IT infrastructure. This increases the potential security vulnerabilities and asks for more sophisticated cyber-security mechanisms. Unless such mechanisms are put in place, the roll out of IoT-based Fintech services will be extremely risky.
- Data fragmentation and interoperability: At the technical forefront, the integration of IoT services with financial services requires the collection and unification of diverse datasets from heterogeneous systems. This includes the semantic integration of diverse datasets, as similar concepts are presented differently in the IoT and financial services domains.
- Lack of proven business models: At the business forefront, financial institutions and IoT services providers are still experimenting with business models that could lead to more revenues and tangible Return on Investment (ROI). The specification and validation of such business models is quite straightforward for some areas (e.g., usage based insurance) but much harder for others.
- Talent Gap in IoT & FinTech technologies: Financial organizations are nowadays faced with the lack of talented people that could successfully design, develop, deploy, operate and market IoT-based financial services. This skills gap is certainly a set back to the rapid commercialization and wider use of IoT-based FinTech.
Overall, emerging IoT infrastructures and services provide many opportunities not only for improving existing services, but also for designing and deploying novel and disruptive services that could generate new revenue streams. However, the actual deployment of IoT-based FinTech is still in its infancy, which is due to a number of barriers spanning technical, business and regulatory issues. These issues are gradually addressed as technology evolves and more systems are deployed, but also as more pilots are run. While the ultimate penetration of IoT-based FinTech remains to be seen, IoT will certainly have a prominent place in the FinTech landscape.