Banking on The Internet of Things IoT

What’s the story?

Most people today have at least heard the term “Internet of Things (IoT)” and have a hazy understanding of what it means. Internet of Things (IoT) includes anything and everything that is connected to the internet and able to communicate and share information with other “smart” devices. Sometimes this concept is referred to as “M2M”—“machine-to-machine” communication.  

The Internet of Things (IoT) is defined as a way for sensors and machines to communicate with each other by combining the capabilities of big data, analytics and artificial intelligence to anticipate needs, solve problems, and increase efficiency.

Big Data (capturing & storing the information) and Analytics (understanding the information) are hot trends now and there is lot of work happening in these areas. The Internet of Things goes a step beyond by making information readily available and consumable by other systems and networks. The IoT acts as an intermediary tool that helps turn information into a force that can boost efficiency, increase productivity and drive fundamental improvements in customer experiences.

Just as various weather channels on television employ predictive graphics of what the weather patterns will be in the coming days and weeks, analysis of data from the internet of things will give us more concise predictions of what we will like, what we will need, and what we will do. It’s still early in the game. But this kind of awareness is starting to enter the consideration and we need to start envisaging the impact of this possible significant force on our industry.

While many industries may have already grasped and embraced its benefits, the financial services industry is just beginning to see how IoT can propel the industry to the next level. There is a decent probability that this concept can have as much of a radical transformative effect as the onset of the internet itself has had over the past 25 years. Just as the internet has vastly connected people globally, the internet of things will vastly connect all the systems, devices, and infrastructures people use and depend on.

The obvious question for us in the financial services industry is how we utilize this and how can this impact how we transact and communicate with customers. For banks the internet of things will deliver an unprecedented level of data and data-driven customer insight. This will allow banks to provide their customers a truly personalized experience with targeted advice, offers and insight.

Some indicative scenarios are provided for easy understanding. The aim is to throw ideas of what is possible. While many of these scenarios may look far-fetched and ambitious at present, these are surely possible and considering the amazing rate of change in today’s world, many of these are and will be possible in the near future.

Banking on The Internet of Things – Few potential scenarios  

Using IoT to improve risk management, reduce cost and improve operational efficiency 

Scenario – 1 – Collateral & loan arrangement verification 

Corporate borrowers from manufacturing industry usually have a line of credit with banks for purchasing raw materials and to manage the production & regular expenses incurred. This is usually given as a running credit line /overdraft / working capital loan and banks take raw materials, WIP & finished goods as collateral.

Presently the bank must monitor the inventory levels, cost of materials, sales and more to ensure that the loan agreement is being followed and that the borrower is not indulging in fraudulent practices. This process takes up many man-hours between the highly paid loan officer, the credit officer and loan administration staff to manually verify and document the stocks and is still not fool proof as there is lot of manual involvement.

Using IoT, the bank can install sensors in its borrower's premises in the assembly line that track the raw, in-process, and finished inventory. Those sensors update the raw materials, produced stock numbers and can sync with the account balance and availability, and it can verify that the loan is paid down appropriately when sales are made. The business owner can upload any invoices or other required documentation with a picture snapped in the bank's smart-phone app.

In this way, an expensive, burdensome process ripe with opportunities for mismanagement & fraud is now an automated, auditable and reliable business process on auto-pilot.

Scenario – 2 – Auto Loans, Insurance Claim management.

Many banks issue auto loans and many also have tie up’s with insurance companies or have insurance subsidiaries. In many countries vehicle thefts are prevalent and currently it’s mostly a manual tracking activity in conjunction with law enforcement agencies.

Auto loan & insurance companies can incentivize the installation of location & impact sensors in the vehicle which cannot be tampered with. This will inform the respective companies as soon as someone tries to remove these from the vehicle or whenever the vehicle has had an impact above a certain level. This can go a long way in minimizing insurance frauds and vehicle theft recovery and is a win-win proposition for both the law abiding consumer as well as the financial companies. 

Using IoT to improve customer experience, create customer delight & also generate customer cross sell opportunities

Scenario – 1 – Housing Loan / Mortgages

Many people take housing loans / mortgages globally. Using IoT, the bank can explore giving an option to the new home buyers to install a sensor in their new homes, which will inform them (and the bank) when there is a dampness in the wall above a certain % or there is significant internal damage to the walls / roof due to say an earthquake? Presently, we come to know about these issues only when it’s visible in the inside portion of the wall / roof, by which time the damage to the walls has been done and this requires more exhaustive repairs, but by putting in a sensor in the walls, large scale damage can be prevented.

How about an additional option, wherein the client is given an option to agree with the bank initially itself  that they will automatically issue a home improvement loan to cover the roof / wall repair costs and issue a work order to affiliated repairmen when the sensors indicate the roof / wall is leaking / damp above specific %?

The benefit for the client would be preferred & discounted rates for these repairs (with enhanced warranty) + no additional paperwork for home improvement + insurance for any force majeure or unforeseen incidents + of-course pre-emptive & preventive repairs. The client can opt out of this arrangement later too.

Scenario - 2 – Mobile Check-in to branch

Mobile banking usage is on the rise globally. Using location aware technologies will allow clients to automatically "check in" to the branch before they arrive. That will trigger a process to prepare the branch staff with your specific account information, your history, and your most likely needs that day. When you walk in the door, you're already first in line (depending on your customer profiling) and the banker will be fully up to speed on your unique financial situation. It's a proactive, fast, and customized process for every customer.

This uses most of the things already available (mobile banking + smart-phones), only thing needed is realigning the business process as well as adding additional new functionality to mobile banking application.

Scenario – 3 – Day out shopping

Most of us (if not all) do go out shopping. Say we went out shopping to an xxx mall. Bank comes to know through the location aware technology that we are in xxx mall. An alert is sent to our smart phone stating that the client has been pre-approved for a loan for yyyy amount at a preferred interest rate. All I need to do is click ok and his account will be credited. Also, there will be interest free credit for 60 days for any purchases in the next 6 hours in his credit card from a shop in that mall.

I buy a LED TV for USD 2000 using my credit card. I get an alert asking whether I wants to save the receipt in my digital locker. I click a picture and save it to my locker. The bank comes to know from my credit card transaction and receipt that a LED Tv has been bought and sends me an offer for a monthly insurance for the TV at a highly discounted rate (based on my profile).

Through the location app, they see that I am near a partner restaurant during the lunch hours. I get an offer to have lunch there and pay only 75% of the bill if I use the bank’s credit card. Bank can also show all partner food joint offers for that location.

Scenario – 4 – Linking personal health to investment portfolio

Many folks use personal health monitors nowadays. Say, that is connected to your main investment account held with a bank. If there is a severe health condition, the bank (and the investment manager) gets an alert and automatically the personal investment fund of the concerned person is rebalanced to protect any downside. (Say moving from equity to debt etc.). During personal health emergencies, people are much more focused on getting their loved ones to the best available heath care facility and rarely think about finances at that time. This feature ensures minimal downside and may be useful.

Scenario – 5 – Buying an air ticket using credit card

We usually buy international air tickets using credit card. As soon as I swipe the bank credit card to purchase an air ticket, bank sends an offer to client’s smart phone for preferred exchange rates for the trip if they buy foreign currency within a specific period. A preferred offer for travel insurance can also be provided.

Scenario – 6 – Visit to the gas station.

Most of us go to gas stations to top up regularly. Using location aware technology (already available) & mobile banking, the bank can identify that client is in a certain gas station and immediately send him targeted offer for using that bank’s specific credit / debit card there.

Scenario – 7 –Targeted Reward Programs

To better understand consumer spending patterns and offer personalized reward programs, early adopter banks have started and are continuing to use analytics to offer customized and targeted rather than standard programs to customers. The ability to access data captured by smart devices of all kinds is helping these banks provide customers with a holistic view of their personal finances & spending patterns in real-time. Pairing IoT with analytics will also enable banks to provide location-based, real-time discounts. Using data and location driven insights, banks can anticipate customer needs and offer advice, products and solutions to help customers make smart and financially sound decisions.

Banks are also starting to partner with different loyalty companies to reward customers for their purchases in real-time. This kind of IoT technology uses geographical data to identify offers and deals from nearby merchants that become active as soon as the customer swipes their debit or credit card at said merchant. Banks are increasingly under pressure to connect customers with other service providers such as retailers, insurance providers, health practitioners, airlines and hotels to deliver tailored offerings that meet customers’ needs and lifestyles.

The use of big data & analytics in reward programs can potentially become a key differentiator for banks in the medium to long term.

Concerns to be addressed:

Such path-breaking & transformative innovations come with their own risks. This deluge of data can be quite challenging for financial organizations and they need to take a deep look at data management, data security, privacy standards and safeguards.  Few key concerns with come to mind are:

Privacy: One of the concerns to deal with IoT is that all transactions are collected and stored. So, there is no privacy. For example : - Our smart phone, our smart watch all which have a GPS, will send your location details to banks or other companies to ensure organizations know your needs to perform focused sales.

Data Security risk: Companies will keep collecting huge amounts of information, which includes even the smallest details and this makes it very important to ensure this data is stored properly with proper safeguards. We are all well aware of how much damage data hacking are loss of sensitive personal information can be for companies. Incorporating latest data security technology, taking sufficient preventive measures to ensure that information is secure will be key.

Others: Industry regulations and red tape do exist in some areas. There are also issues with network & cloud infrastructure but it will be a matter of time these are ironed out.

Summary

The best part about the Internet of Things (IoT) is that possible applications are limitless. There can possibly be more than hundreds of other use cases that can improve the customer experience, provide more cross sell possibilities, reduce risk and increase operational efficiency which finally can improve the bank’s financial performance materially in the long run.

Data is already being gathered in many instances. It's all about analyzing it in smarter ways and automatically taking proactive action at the exact right moment based on predictive analytics.

While early adopter banks are increasingly turning to IoT to improve the customer experience, improve client stickiness and loyalty, gain market share and increase revenue -- improvements in overall network infrastructure, big data , analytics, cloud infrastructure & accessibility must mature before IoT can be implemented on a truly massive scale.

Banks that continue to push the envelope in their technology adoption and encash on the huge IoT opportunity will be tomorrow’s market leaders. “The internet of things” opportunity has the potential to be the key differentiating factor in the long run between the visionaries, the also ran’s and the laggards.