Now, imagine scenarios where you get a mild electric shock from your wearable tech device every time you use your credit card after crossing spending limit or your investment portfolio automatically adjusting the debt-equity proportion in tune with your health reports or on crossing an age-related milestone such as turning 50. They might have sounded straight out of Arthur Clark or Asimov’s science fiction novels two decades ago; but now we accept them nonchalantly as very much plausible. It is only a matter of time when such technologies may become part of our daily life like GPS and what makes them possible is the concept of “Internet of Things” (IoT).
What is Internet of Things?
IoT is a network or ecosystem of Internet-enabled objects with the ability to share and exchange information among them in real time. Crudely put, it is nothing but machine-to-machine communication among machines connected to Internet, a concept that has been in existence since the advent of Internet. What brings IoT into limelight is the surge of smartphones, wearable tech devices, automobiles and smart homes with built-in sensors and the growing ability of financial institutions (FIs) to anticipate customer needs by leveraging big data predictive analytics and artificial intelligence. Naturally, IoT is expected to be one of the most influencing trends in Financial Services (FS) sector for the year 2017 and a key driver to usher in a fresh surge of digitization.
IoT Opportunities for Financial Services
IoT in FS is not as far-fetched or an ambitious distant dream as it may sound in theory. We already have several successful examples, especially in insurance sector where IoT is being leveraged by auto, health and home insurance businesses with tangible benefits.
Progressive and Allstate, leading US auto insurers, install telematics devices in policyholders’ primary vehicle to monitor and report driving behavior. This helps reward safe drivers with customized pricing and lower premiums. Interestingly, many drivers have also admitted to reviewing their driving style and vehicle maintenance on receiving telematics reports from their insurers – a win-win situation for the insurer and the insured.
Health insurance companies are monitoring crucial parameters like blood glucose, blood pressure levels, activity patterns, eating and exercise habits of customers via wearable tech devices that feed insurer’s database when connected to Internet. Health insurance premium pricing is dynamic, subject to current health situation of the customer, which can bring down costs for both the insurer and the customer. Such close monitoring helps insurers identify risky patients with chronic conditions and volatile parameters and caution them to take preventive measures. Customers are also compelled to make suitable alterations to avoid soaring premium costs.
Home insurance, including commercial real estate, is closely following the trend by installing sensors in insured properties, which track structural condition of the property such as fire and smoke hazards, plumbing and sewerage situation, energy efficiency, security, etc. Interestingly, this may not lead to dynamic pricing of premium as in the case of auto and health insurance but benefits the parties in a different form by impacting and improving the rental and resale value of a property.
Application of IoT in FS is no longer limited to human imagination. In fact, its application opportunities are as limitless as human imagination. IoT powered customer information used in insurance sector can unlock a world of possibilities for banks. For example, traditional demographics might profile a customer as ‘risky’ but telematics and sensor powered IoT data may provide a different perspective and show that customer to be a scrupulous driver with a healthy lifestyle and prudent home maintenance habits. Under different circumstances, that customer may have trouble obtaining a loan due to a ‘risky’ tag. However, thanks to IoT data, a bank knows that the customer is less likely to be a defaulter. It could mean a well-deserved loan to customer, which might have been otherwise denied and new business to bank.
Similarly, banks can work with customers to install sensors when mortgage is signed. Based on IoT supplied information on property condition, banks can issue a home improvement loan based on pre-existing paperwork at discounted rates to such preferred customers. It means a hassle free loan to customer at an attractive rate and additional business for bank. During a health emergency, one rarely has the time or inclination to review or reorganize one's finances. However, investment manager at the bank can read the alerts from customer’s wearable health monitor and take care of rebalancing the investment account suitably. IoT can also help banks to offer geo-specific deals to clients based on their current location. For example, when the customer is at a restaurant, gas station or a retail store, smartphone alerts the customer that 25% discount is available on all payments because that vendor is a bank card loyalty program partner. Just like mobile banking revolutionized payments, IoT also has the potential to take payments another notch up. Paying for Uber and Lyft is already hands-free for the customer. ‘Amazon Go’ also is designed on the same premise. One day, grocery shops, gas stations, restaurants and retail stores may all join the list of seamless payments. Paying for metro train ride via wearable tech is already a reality in Singapore.
While IoT possibilities for FS seem unlimited, in order to reap maximum benefits, FIs will need a three pronged strategy viz. convert near real-time big data obtained via IoT into smart data to seize cross-selling opportunities, design personalized financial products on the fly flavored by attractive dynamic pricing and, finally, reach and convince the customer with those products before the competitor does.
FS of Things?
Despite substantial long-term payback, it may be a little premature to envision a tech-driven ‘FS of Things’ (FSoT) or ‘Bank of Things’ (BoT) right away. FIs are the biggest repositories of customer data but have always been justifiably wary of using that information to the maximum extent due to multiple reasons such as legacy infrastructure, data security and customer privacy. A traditional mindset averse to risk and innovation, and general organization inertia are also strong limiting factors. The Internet opened a Pandora’s Box of cybercrimes; likewise, 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. While customers are right to be wary of losing privacy and averse to being tracked, even FIs are not willing to take ownership to protect such large volumes of sensitive customer data. Certain devices and automobiles used by multiple members of a family introduce another layer of complexity in terms of identity management. It also requires a fair amount of employee training vis-à-vis customer communication to explain why pricing of certain product is modified or why terms of a loan or insurance may need to be revisited. Given their large appetite for risk and willingness to adapt newer technologies, FinTech firms can pitch in to bridge the infrastructure gaps for FIs. Gen Y customers and millennials are more prone to be enthusiastic about wearing and carrying their bank rather than wary of being tracked. Like it or not, IoT is here to stay and grow with unavoidable pervasiveness. FIs may not have a choice but change their mind set to move to FSoT.