How Financial Services Industry can benefit from the Internet of Things

By Jordan Matthews DDM Sales Associate

Overview

Short sighted view to say FI is a business of providing services and not

“things” - Val Srinivas, Banking & Securities research leader, Deloitte Services

LP

Already in insurance through telematics (monitoring driving behaviour for car

insurance). Also soon to be in health and life insurance (monitoring fitness /

activity levels of individuals to assess their rating). Other potential applications

in insurance are homeowners insurance and worker’s compensation in the

commercial arena.

Analysis by Deloitte suggests that perhaps as many as one-quarter of sensors

deployed in 2013 could be of use to FSIs, rising to one-third in 2015 and then

to about 50 percent by 2020. In other words, one could reasonably assume

that by the end of the decade, companies will have deployed several billion

sensors that could provide data of interest to financial firms of one kind or

another.

How can other sectors such as banking and investment management leverage

the IoT technology?

Near- and long-term opportunities for the financial services industry to see the

benefits from IoT

ATMs, information kiosks in bank branches and credit/debit cards that may

use sensing technology to monitor and take action on the consumers’ behalf.

Big potential in the connection of financial services - checking, credit card, or

investment accounts to some of the common household devices.

Example in Insurance: a personal health monitor that is also connected to

your investment account. At the sign of any serious health hazard (say a heart

attack), the investment account could automatically rebalance to limit your

downside exposure, or transfer your holdings to more liquid securities, in

anticipation of future cash needs. This may sound a bit far-fetched now, but is

not completely out of the realm of possibilities.

Other applications may be possible in the middle- and back-office functions at

banks, insurance firms and investment management shops that could

potentially benefit from the IoT technologies.

Long-Term - eventual emergence of radical transparency may have a more

enduring impact on financial institutions. Information asymmetries, which are

an important aspect of the profitable operation of capital markets businesses,

may wither away; pattern of life data could emerge as a new way to “de-

commoditize” consumer financial products; and new businesses may emerge

to meet the market need for access to these data flows.

IoT applications might help banks improve underwriting processes and reach

new markets. They foresaw that physical, performance, and behavioural data

generated from biometric and positional sensors for individuals, and shipping

and manufacturing control sensors for businesses, could provide new

opportunities for credit underwriting, especially for those underserved

customer segments lacking a credit history.

Example in banking: lenders could partner with electronics and white goods

manufacturers to proactively make credit offers to individuals if their

purchased items begin to show noticeable wear or face imminent failure.

Leasing companies, too, could monitor the condition of leased assets in order

to determine a more precise residual value of the asset at lease expiration, or

determine with greater accuracy any discounts or penalties for preferred or

unacceptable use.

Use in capital markets - IoT-enabled opportunities to further automate

trading and investing activities, driven by continued acceleration in algorithmic

trading and the enhancement of this approach through the application of IoT

sensor data. The group considered the possibility that, with the removal of the

human element in combination with more comprehensive real-time data flows,

firms could develop analytics that might better evaluate suspected market

bubbles.

Venture capital could be completely shifted by IoT – Crowdfunding and

micro-investing could emerged based on analysing of data through the

medium of the IoT.

Impact on Wealth Management and Investment - Firms could utilize

information from a client’s IoT “ecosystem” to tailor investment decisions and

asset allocation based on behaviours, preferences, and location.

Example in Wealth Management and Investment - A more intimate

understanding of a client’s interests and purchasing patterns could enhance

wealth management. Investment offerings could be tailored based on these

data, leading to the extension of concepts similar to socially responsible

investing.

Example in Wealth Management and Investment – Automating portfolio

investment.

Risk Management – Quantified self-concepts through IoT to reduce risk.

Potential Risks and Challenges

The deluge of new data is likely to complicate data management for financial

services firm.

Cyber security could become a greater challenge.

Challenges involved developing an understanding of which kinds of data are

best predictive of creditworthiness, as well as the potential risk of new forms

of redlining based on so-called “pattern of life” (POL) analyses.

Challenges in capital markets - IoT-enabled opportunities to further automate

trading and investing activities, driven by continued acceleration in algorithmic

trading and the enhancement of this approach through the application of IoT

sensor data. The group considered the possibility that, with the removal of the

human element in combination with more comprehensive real-time data flows,

firms could develop analytics that might better evaluate suspected market

bubbles.

Bottle necks - IoT applications in financial services may increasingly shift from

common uses with tangible measures to uses with intangible measures.

Solution to bottle necks - Information Value Loop. One of the implications

associated with the IoT is that a product’s information content is now as

valuable as its performance.

The flow of information around the Value Loop creates value for customers

that companies can then capture. Analyzing this flow of information can help

companies locate specific strategic and technical challenges facing them in an

IoT-enabled world. But information does not flow evenly around the loop: A

bottleneck will exist at one stage of technology, which limits the flow and thus

the value. Alleviating this bottleneck can increase the flow of information,

creating value for customers, and the company that controls the bottleneck is

in a place to capture the bulk of value created.

The uneven progression of sensor deployments highlights the fact that for

many emerging applications, the bottleneck is at the create stage of the Value

Loop. Until some minimum critical mass of sensors is in the market, more

complex uses beyond the few existing tangible examples will be impossible.

Another bottle neck is the communicate stage – Not all information needed in

FSI is freely available as it may be in other industries.