IoT-enabled Banking: The Next Wave of Innovation in Financial Services
Is it possible for the financial industry to benefit from implementing the Internet of Things (IoT)? The short answer is yes!
Along with increased and improved client asset data, IoT finance applications intend to enhance every aspect of the finance sector.
In this article, we will discuss all things involving IoT in banking, including the challenges that come with it. We’ve also listed some real-life examples of fintech organizations benefiting from IoT banking.
What does IoT mean for finances?
When discussing the implementation of the Internet of Things in finance, it’s essential to understand some basics.
IoT in fintech refers to the interconnected web of IoT devices that collect, transfer, and enable data processing, which can take place in the cloud or via an on-premise server.
Fintech IoT enhances the banking experience for banks and customers alike.
Examples of IoT in the banking industry
The integration of IoT has introduced a new wave of innovation to the banking industry, transforming the way financial services are delivered. From enhancing customer experience to improving operational efficiency, IoT has enabled banks to leverage data insights in ways that were not previously possible: from IoT-enabled smart contracts to dedicated smart wallets to say the least.
Smart contracts powered by IoT
Blockchain and smart contracts. Source: Unsplash
Operating via blockchain, IoT-enabled smart contracts can validate and enforce agreements and negotiations. Users can make secure offline payments through their digital identity and an IoT smart contract.
For instance, paying after a 30-day trial period or controlling access to your home based upon a timely lease. While smart contracts aren’t utilized as frequently as other options included in this article, their potential advantages are quite impressive regarding simplified automation and risk mitigation.
Personalized car insurance
Importance of car insurance. Source: Pixabay
Certain insurance companies have already begun offering devices that connect to a vehicle’s onboard diagnostic system. These IoT devices document the vehicle’s behavioral data and transmit feedback to the insurance company.
The insurance rates of the vehicle’s owner are then partially determined by the vehicle operator’s driving habits, and responsible drivers could qualify for discounts. For example, Tesla vehicles use a Linux-based OS that automatically updates feature sets 24/7.
Users can set new metrics that offer customers a personalized car insurance rate based on the vehicle’s physical condition, such as engine health and wear-and-tear, and driving behavior. Driver speed datasets can overlay on GPS data, which determines the vehicle operator’s speed relative to a particular location’s speed limit.
For example, even though 50 km/h doesn’t seem fast, it would be classified as reckless driving when going that speed in a residential area or school zone. As a result, insurance companies receive critical insight that establishes the basis for assessing the probability of traffic accidents.
Real-time life insurance
Wearable fitness IoT device. Source: Pexels
Similar to the potential of the Internet of Things in car insurance, fitness device data can define “wear-and-tear” and predict someone’s health.
Fitbit has integrated with Wellcoin, allowing users to purchase rewards based on healthy nutrition, sleep, exercise, and alcohol consumption using Wellcoin’s virtual currency.
While completely automatic life insurance may seem futuristic, IoT fintech solutions already allow us to do just that. By overlaying an individual’s medical information obtained through wearable IoT devices, digital biometric identification can be created and stored on the blockchain. This means that no matter where or when an individual can instantly use their digital identity to request and receive life insurance.
In the lending process, several P2P (peer-to-peer) models have emerged as particularly harmful. However, in the future, IoT technology could expand P2P models into new areas and transform other traditional services, such as leasing. Assets can be rented out to other users through the Internet using services that connect tenants/lessees directly with landlords/lessors.
Thanks to digital identities, lease processes can be executed in real-time since asset ownership can change instantaneously once key payment confirmation is received. However, this possibility could impede banking institutions in some critical service sectors, such as leasing and mortgages, by securing digital asset-based financial transactions using peer-to-peer IoT banking solutions.
Digital smart wallet. Source: Unsplash
As common household items like clocks, refrigerators, and cars transition to digital smart devices, pre-installed wallets associated with a specific device have the potential to become a new trend.
For instance, an offline car wallet could potentially pay for gas, parking, rent, and/or maintenance expenses. Any device with network capabilities can have a prepaid wallet that manages the costs associated with that specific device. Besides the convenience it offers, users can gain clarity on expenses, ensuring improved personal spending and financial health.
Advantages of IoT for the banking industry
IoT is revolutionizing the banking industry by enabling smarter and more efficient operations, enhanced customer experiences, improved security, and more.
Banks can enhance branch security and safety through CCTV cameras, 24/7 monitoring, smart alarm systems, and other security-focused technologies. The advantage of IoT becomes clear because these smart devices can be interconnected and remotely managed. That means if any activity is detected, the security team can almost instantaneously lock the branch and take additional measures, where appropriate.
IoT devices can collect data in real time from banking environments. With this data, fintech institutions can evaluate the needs of their customers 24/7. One example is projecting the time customers spend waiting in line at the bank’s venue.
Another example, which focuses on a more tech-savvy route, would be a bank sending account balance alerts to users whose funds start running low. Real-time data collection allows banks to offer their customers better, data-backed services.
Fraud incidents are increasing worldwide, and the graph below depicts the sheer value of fraud loss just in the United States in 2021.
Value of fraud loss in the U.S. in 2021. Source: Statista
IoT has the potential to mitigate this issue that impacts innocent people worldwide. For instance, IoT devices have already made transactions safer by requiring the user’s biometrics to finalize purchases on mobile phones, or how websites ask users to enter authentication codes sent by banks to protect them from fraud when making online purchases.
Another example of how IoT helps detect and decrease fraud is how online banking apps send alerts whenever a purchase is confirmed. This allows users to be more conscious of their transactions, giving them time to flag any purchases they don’t recognize.
IoT can provide financial institutions with up-to-date data regarding individuals or projects they’re investing in, which contributes to more accurate ROI tracking. See examples below:
- • When dealing with real estate, banks can use the information they’ve collected from satellites and street cameras to monitor a vicinity’s economic activity levels.
- • Insight from multiple sensors and applications can be used for consumer loans, allowing banks to acquire accurate data regarding an applicant’s spending history from various applications and sensors.
- • For securities, they can utilize information from numerous analytics platforms, such as FactSet, Bloomberg Terminal, Eikon, etc., to view the amount of trading conducted with government bonds, as opposed to privately-issued bonds.
Next-level customer service
Leveraging insight from websites, mobile apps, or other domains where transactions are made/recorded lets banks customize services for every customer depending on their history. These services would encompass personalized budget planning and money management advice.
The modern banking industry extends beyond just money and asset management. Recently, banks have begun collecting data from customers’ smart wearables such as smartwatches to track their fitness levels. This data enables banks to reward customers with unique perks like lower APRs and cashback based on their fitness practices and daily routines.
To expedite transactions, mobile banking apps can sync with debit and credit cards, enabling users to make wireless payments using their phones. During the COVID-19 pandemic, this feature has promoted hygiene by allowing customers to avoid handling cash and cards in crowded environments like shops.
Smart devices can help users with modifying their financial behaviors and tracking and altering their daily, weekly, or monthly expenses. For instance, the interactive IoT approach utilizes wearables to provide educational programs for bank customers. By monitoring a customer’s spending during a specified period, wearable devices like smartwatches can send a notification once the user reaches their pre-defined spending limit.
Challenges of IoT in banking
While IoT in banking offers numerous benefits, it also poses challenges. Data privacy and security are primary concerns, as IoT devices collect sensitive financial information. Additionally, a lack of universal standards and proper data management can hinder the implementation of IoT in banking. Let’s review each of them in detail.
Data privacy and security
Protecting sensitive information in the fintech industry has been slow, and banks face challenges in providing personalized user services through the IoT. Therefore, AI is being used to mitigate fraud threats in financial tech apps, improving processes and defending against criminals.
IoT fintech software and devices with built-in AI can collect more data on customers’ financial transactions, contributing to better security and optimized financial procedures.
Each IoT device has a unique approach to service, and there are no standard practices for maintaining the equipment since they are made by different suppliers. Unfortunately, this lack of standard processes can lead to malfunctions in IoT devices. While having a single entity produce all equipment could potentially resolve this issue, it is both impractical and unrealistic.
Collecting user information from multiple devices can pose challenges to data management processes for financial service providers. They must manage information and security risks at various levels, including mobile apps and endpoints.
As the financial sector considers integrating IoT, it is important to recognize that the data generated by devices will be massive, and effective management and storage of this information is crucial to creating personalized customer experiences.
FinTech companies implementing IoT
Many FinTech companies are adopting IoT to offer more innovative and efficient financial services. Here are some more recent examples.
Stripe POS Terminal. Source: Stripe
Stripe software simplifies payments and offers applications for revenue management, fraud prevention, and international expansion. To expand its services to offline transactions, it introduced Stripe Terminal for POS use.
Kontakt.io bluetooth beacon. Source: Kontakt.io
Kontakt.io produces low-energy Bluetooth beacons that allow for mobile payments and other functions, replacing costly traditional point-of-sale technology. This results in an optimized shopping experience with shorter or non-existent queues, increased time for exploring other areas of the store, and improved data collection for the organization.
Armis provides IoT security to organizations, including banks, by allowing them to monitor and restrict all devices on their network. Benefits include easy integration with existing business infrastructure, automatic identification and disconnection of unmanaged devices, rapid deployment, and agentless management, making devices discoverable even before joining a network.
Dynamics, Inc. multi-purpose card. Source: Dynamics, Inc.
Dynamics provides battery-powered payment cards that connect to IoT, allowing for real-time, two-way communication between banks and customers. Each card has a screen for inquiries and the “wallet” sends banks alerts with details about payments. This interactive solution enhances customer experience and provides valuable insights for banks.
Mastercard has established strategic partnerships to develop products that simplify daily tasks, resulting in revolutionary innovations such as smart refrigerators that can reorder products (with Samsung), contactless payments (with Coins), and IoT-connected keychains (with General Motors). Mastercard also uses IoT to optimize fleet management by integrating service and fuel data into payment processes.
Using trackers connected to the IoT, Metromile offers cost-effective one-mile insurance plans based on mileage and driving behavior. It also simplifies the claims handling process by allowing drivers to file a full claim from their mobile phones.
The growing importance of IoT in banking operations
The finance industry’s growth continues to present endless possibilities for the banking sector. With the convergence of business automation, customer management, and transactional improvements, IoT in fintech is proving to be highly advantageous.
IoT data allows for the shift from traditional processes to optimized methods that enhance customer experience. Fintech and banking firms are already leading the market with IoT technology adoption. Banks are continually utilizing IoT to convert data into valuable insights that improve decision-making and optimize business strategies.