The Impact of IoT in the Financial Sector: Overview of Industry Projects, Benefits, and Challenges
Updated: Oct 30, 2019
With significant advancements in wireless communication, the internet of things poses as one of the decade’s most promising technologies.
The market is already seeing forward-thinking banks like Commonwealth Bank of Australia (see below) harnessing IoT’s extended value, but how will the rest of the industry respond?
According to a survey conducted by MarketsandMarkets.com, IoT’s market size in banking would surpass the $2 billion mark by 2023. Banks will dedicate 34 percent of their IoT budget to customer premises monitoring in hopes of creating inner-network connected banking.
While the goal may be to create an efficient financial network, there are quite a few touchpoints these institutions should consider to help facilitate their adoption's success.
In this post, I’ll be going over some of IoT’s most exciting projects in the financial industry, as well as three benefits and three challenges every relating establishment should be aware of when considering or undergoing adoption.
Here are some of the earliest and most exciting B2B and B2C IoT projects within the financial sector.
Supply Chain Optimization
As mentioned above, Commonwealth Bank of Australia (CBA) witnessed remarkable progress in its adoption of the internet of things.
Last year, the company completed a new blockchain-enabled global trading experiment where they integrated the use of distributed ledger technology, smart contracts, and IoT to propagate new supply chain efficiency alongside their current operations.
The use of all three technological components helped CBA view and track the position of the shipment as well as analyze important metrics belonging to the container. As a result, the company experienced a higher level of data transparency and shipment efficiency regarding the location, condition, and authentication of goods being transported.
London Test Bed
Last year, Clydesdale and Yorkshire Banking Group opened an IoT testbed in London to prepare itself for the shift in smart financing and the competitive demands of personalized banking experiences. One of their projects consists of leveraging voice assistance products like Amazon Alexa to provide customers with more power and flexibility in how they manage their finances.
Industrial Sector’s New Financing Standards
As IoT makes its way into industrial manufacturing, the industry is experiencing a demand for data-driven variable equipment financing options, also known as usage-based financing.
Original equipment builders (OEM) are forgoing additional revenue streams as more of their customers have difficulties abiding by the rigid repayment methods traditional financing enforces.
As a result, the latest demands in machine financing shows that original equipment manufacturers are looking to provide their customers with flexible financing solutions so that they can sell more equipment.
With usage data generated from machine output, manufacturers have the option to enroll in variable financing plans that determine payment amount based on every unit they produce.
Innovation within Retail Banking
According to Forbes, IoT will revolutionize the retail sector as a complete revamp is expected in the upcoming years.
More than 70 percent of retail businesses are aware of IoT’s potential and are ready to integrate this tech to advance their customer’s experience.
Banks have leveraged this innovative technology for faster trading and process times. Reducing online transaction costs and adopting more digital ways have helped banks acquire additional retail customers.
There are numerous benefits in adopting IoT, but here are the top three that I believe pose as the largest value-add to the financial industry.
1. Strategic Optimization
TATA Consultancy found that banks will allocate 34% of their IoT budget to monitoring customer activity by 2020. With pioneering IoT technology, novel opportunities open up to banks when it comes to enhancing their overall strategy.
Constantly gathering and analyzing usage data enables financial institutions to optimize their customer segmentation and strategic positioning among their competitors on the market.
Let’s discuss this by taking an online trading bank as an example. Assuming the usage data indicates that 3% of customers are above-average frequent traders, showing a high number of trades per year. By contrast, 97% of customers occasionally trade, only execute a few trades per year. However, this first group of customers accounts for 40% of the total revenue of the bank, whereas the majority of customers only generates 60% of the bank’s income. If the provider can recognize these specific customer behavioral patterns, it can benefit from valuable implications for strategic positioning on the market.
For instance, instead of providing the same offering to all its customers, the online broker could position itself as a premium provider to improve the attractiveness for professional traders, yet launching a zero-cost sub-brand for trading beginners.
2. Smarter Financing Methods
In the same TATA Consultancy study, IoT adoption is competitively growing at a staggering rate, with the industrial and financial industry ranking in first and second place, respectively.
Big data is quickly transforming the equipment financing industry as machine usage enables more profound insights into a manufacturer's overall business operations that can, in turn, prevent the likelihood of certain situations transpiring.
The collection and analytical usage of structured equipment usage data can provide lenders with predictive analytical tools to help prevent credit fraud, loan default risks, and better investment decisions.
Additionally, lenders can create new service offerings and demand-driven products, all the while gaining insights into developing marketing trends to surpass competitors.
3. Customizable Financial Products and Scalable Solutions
By tracking user activity, banks can initiate personalized services to develop stronger relationships with clients and users. Banks leverage user information to generate better insight into what their customers want and can create better-tailored services to meet their demands.
With an ample amount of data collected, banks can use certain information to create new tailor-made products and services to meet their customer’s needs without stifling scalability.
For example, banks can leverage market uncertainty to create better financing terms for their customers based on their individual economic situation or asset usage.
Let’s return to the online trading bank example again. By providing a weekly email with inspirations and recommendations, the bank tries to increase trading engagement and encourage the customers to use their platform more frequently.
Instead of sending a standardized email to all of its customers, the bank can benefit from usage data and tailor the specific information to their customers’ preferences.
While inexperienced and less active traders could benefit from trading ideas for low-risk securities or funds, frequent traders could be informed about complementary products like warrants or certificates.
However, usage data is not static.
The key lies in staying flexible and being able to adapt ones marketing methods by identifying and reacting to changes and trends revealed by data.
Here are the top three critical challenges banks and other financial service companies face that stifle the success of their IoT strategy.
1. Technology Adoption
There is no “one-size-fits-all” IoT solution.
A bank’s IoT strategy must be designed and tailored to its core business objectives to achieve the technology’s full intended value.
With that being said, such personalization and integration not only requires a substantial investment of time and resources but the right IoT data management solution provider who understands your organization’s hardware and software requirements.
That brings me to my first point of business lacking the technical expertise to facilitate such IoT migration.
Microsoft’s 2019 IoT signal’s report discovered that 38% of their respondents stated that the top challenge for IoT adoption is complexity or technical challenges since there’s a lack of industry expertise.
When further analyzing the study, it’s clear that IoT won’t have a substantial impact until more experienced individuals or companies possess the right “know-how” to integrate such technology into their existing business operations.
2. Data Fusion Management and Analysis
The majority of banking institutions understand that their consumer data is quite essential to understanding their customers, yet, many lack an excellent infrastructure to properly digest and interpret what specific impact this data has on their business.
When it comes to B2B data management, many industry companies lack the subject knowledge and skill set for collecting, storing, and repurposing such information gathered from IoT sensors.
Additionally, when it comes to cross-border enterprise-grade data transfers, banks typically encounter roadblocks as they don’t have the right infrastructure to fulfill such tasks, securely and efficiently.
To overcome this problem, existing establishments need to ensure that their software can aggregate and manage new types of data streams collected by IoT sensors so that customers and banks can access the right information more efficiently.
Finding the right technical partner to harvest and analyze critical information is vital to understand what role data has in a business.
3. Multidimensional Data Privacy and Security Access
By far, one of the biggest challenges the financial sector will encounter is the ability to securely share sensitive data with other network participants and ensure its information authenticity.
97% of respondents from Microsoft’s report also claimed that security was a concern when adopting an IoT solution.
Removing this adoption hurdle consists of educating decision-makers on the various existing security standards so that businesses can take advantage of the gold that lies with reliably sharing information with other network participants.
But, why is it important to share data in the first place?
Well, business organizations require the constant sharing and transfer of data to receive updates, insights, and various other critical information to generate new business intelligence.
When reviewing the industrial financing example from earlier, IoT sensors collect unique machine usage-data to generate innovative financial products that help machine buyers finance new equipment.
Each data point can consist of unique information like units produced, IP processes, machine downtime and uptime, and customer account details that can, in turn, be used to create new products and services.
With the proper data infrastructure, these data points are garnered to reveal new insights for original equipment manufacturers such as untapped revenue streams and predictive maintenance checks.
The right data management solution provider can help reveal hidden value from existing data sources, all the while providing a secure foundation to share sensitive information, worry-free and confidently.
Security and Privacy Challenges
If financial institutions have no way of securely managing data transfers, their networks are prone to the following risks:
Third-party data breaching
Malware attacks- hackers or third party
To overcome these various challenges, there are several proven methods, such as end-to-end data encryption, digital fingerprint authentication, and the migration of information from cloud infrastructure to a blockchain database.
The right IoT data management partner will handle every component of data coordination by making use of these standard security methods so that businesses can limit information vulnerability.
The internet of things is quickly molding itself within the banking and financial services industry at a blooming pace.
While some banks experienced early adoption and are heavily investing in the right infrastructure, others continue to experiment with IoT to determine how it will shape the future of their business.
Choosing the right data management partner will determine your success and is an inevitable choice for financial institutions to develop a winning strategy for the future.