From smart speakers, wearables, and refrigerators to self-driving cars, connected homes, and smart cities — internet connectivity continually pushes back the limits and wins new markets. It can be reasonably called the next stage of the digital revolution, and it is expected to transform our lives significantly. Gartner foresees that there will be over 25 billion Internet of Things solutions in use by 2025. This rapid proliferation has created much awareness among top fintech startups and banking organizations with the outlook for innovating use cases and industry opportunities.
Supporting large banking organizations and financial technology companies with fintech consulting services, we often hear questions regarding the IoT applications in financial services, so we’ve decided to share our knowledge in this article.
The Introduction: What Is the Internet of Things (IoT)?
The Internet of Things refers to the system of physical assets — appliances, gadgets, devices, accessories, and vehicles — equipped with sensors units and connectability so that they can accumulate, communicate, and act upon data, usually without human intervention.
The Internet of Things market forecast by Fortune Business Insights has appraised the global IoT market at $190Bn in 2018 and expects that it will reach $1.103 trillion by 2026, while the financial services industry will become the largest market segment. It comes as no surprise since monetary organizations take the initiative in IoT implementation, and around 58 percent of financial stakeholders have sophisticated IoT initiatives.
To be able to answer questions related to how and where these devices should be utilized, we should have the functionality of the Internet of Things explained in more detail.
Digging Deeper: How Does the Internet of Things Work?
Devices with built-in sensors are linked up to the Internet of Things platform, which pools data from multiple gadgets, analyzes them, and transfers the most important information to specific appliances, designed to address these needs.
This IoT platform can precisely define what data are valuable and what can auspiciously be ignored. The information is utilized to discover patterns, identify possible problems, and give recommendations. The structure of the ecosystem is as follows:
- Things or sensors involve any kind of appliances, devices, or vehicles that can be connected to the Internet, as well as checked and managed remotely. They collect information from the surrounding environment, and it can be as innocent as a location or temperature or as valuable as health indicators of a patient.
- Gateway transfers the data with the use of wireless or wired technologies, like Wi-Fi, Bluetooth, Ethernet, and others. These connectivity methods differ in connection range, bandwidth, and power consumption, but it’s recommended to choose the one that complies with the particular requirements of the IoT system.
- Cloud-based services supply data-warehousing systems and ensure the control of access between the device and its controller.
- The controlling unit refers to a smartphone, tablet, or any other gadget. Through the Internet of Things software solutions, end-users can receive alerts and emails, proactively check the network, perform actions, or make necessary adjustments, depending on the complexity of the system.
The State of IoT in the Banking Sector: Service Segment Steals the March
While businesses are seeking new ways to not only understand their consumers better but also to build innovative services and products to respond to their needs, customers buy multiple devices and invest much in IoT ecosystem components. Consumer electronics is a critical area in IoT, and gadgets that enhance the quality of life continue to gain momentum. Coupled with the convergence of information and operational technologies and connected banking, all this can be referred to as the major drivers for such wide adoption of the Internet of Things in the financial services sphere.
The ‘IoT in Banking and Financial Services Market’ report states that the size of the market is expected to reach $2.03Bn by 2023, and the service segment will demonstrate the quickest growth. Today more and more people prefer to pay for goods with a wave of a hand, make purchases through Apple Homekit, Amazon Echo or Google Home, shop provisions via Samsung refrigerators, or make payments from the in-car Honda navigation system. All this is now called the next great disruption in the financial industry, namely the Internet of Payments (IoP).
IoT in Financial Services: What Is the Internet of Payments?
The Internet of (Things) Payments, in its simplest definition, means the initialization and processing of payments over IoT objects, such as wearables, appliances, or cars. It is a game-changing machine-to-machine (M2M) trend, where a human isn’t a primary initiator, but they are being notified right after their smart things make necessary purchases.
The protocols and standards for IoP regulation are still in the pipeline, but we believe that they hold much promise to turn into the next momentous fintech innovation since with the expansion of PSD2 and Open Banking third-party providers and fintechs can also take on the roles of IoP providers.
The Benefits of the Internet of Things for Financial Services
Though for some people, the Internet of Things evolutions and innovations may still sound inconceivable, the global fintech industry is already employing the IoT for accumulating data and conducting large-scale financial operations. Individuals now utilize smart things for health and wellness, personal security, and daily convenience. Meanwhile, there is a notable demand for the advantages of the Internet of Things in industries like healthcare, manufacturing, logistics and supply chain, and others.
Before deciding on the use of IoT in the banking industry, business stakeholders should understand the real benefits that technology offers. Here are the most prominent reasons why you should opt for the ‘Fintech-Internet of Things’ tandem:
- Customer-focused services. As we’ve already mentioned, financial services providers embrace IoT to collect more information about clients and so discover new ways to connect with them. Obtaining immediate insights about customers’ interests and needs, companies can suggest personalized content, exclusive experiences, and even tailor-made products.
- More accurate decision-making. Working with data is one of the major benefits of IoT in the banking sphere since, in this way, businesses can obtain all the necessary information for proper credit risk assessment. With the sensor implementation and machine-to-machine communication protocols, data science analysts can get access to figures from other fields and create exhaustive profiles, addressing various needs from KYC and AML compliance to fraud prevention.
- Smart possibilities. Combining fintech and IoT businesses can delve into a client’s daily routine and become a part of it. For instance, customers can connect their wearables with banking apps to better track the expenses, set daily or monthly limits, and even block accounts if they are exceeded. Such applications can also eliminate the need for physical cards, boosting the speed and convenience of shopping.
- Seamless synergies between financial gadgets. M2M communication can have a wide variety of applications and IoT banking examples. First and foremost, this latest fintech innovation empowers automated cashless payments and turns ‘things’ into platforms for commerce. Besides that, analyzing customers’ spending habits, companies can assist individuals with curated financial recommendations, promote shared investing, or p2p lending.
Nuances of the Internet of Things Software Development for the Financial Services Industry
Except for quite typical challenges in IoT application development, like choosing a technology stack, gateway, or proper IoT platform, there are other massive concerns associated with security, regulations, and trust. While in the first case, the solution depends on your fintech development outsourcing partner or in-house department, the latter case requires the involvement of all the parties.
Banking organizations and payment providers should move beyond standard payment processing via smart devices. They need to design comprehensive management systems that allow users to interact with a specific gadget, set up and customize it directly, as well as report on the activity and purchases of each. These systems should also be able to perform conflict resolution in those cases when several ‘things’ try to order the same resupply and suggest an extensive estimate on future purchases.
As ‘things’ within a distributed network start to act independently, fintech payment providers will be forced to adopt a matrix-like business structure, and that’s why the early adopter of PSD2 and Open Banking regulations will win hands down. Open APIs enable external software engineers to build solutions around the products that you already offer and so place you at the center of the matrix. As a result, hyper-connected banking institutions that can interact with direct and indirect competitors, ensure maximum scalability, and utilize transaction data for revenue growth will be the winners.
The last but not the least in the checklist for fintech product development with IoT is security. Data protection and proof of identity (POI) become even more complicated as the connected ecosystem continues to grow, along with the new security threats brought by Open Banking API and PSD2. Smart devices gain access to customers’ sensitive information and can make financial transactions on their behalf, so IoT endpoints become attractive to fraudsters and are exposed to hacking. So far, it’s up to fintech software development companies to integrate future-proof security measures and put a stronger emphasis on behavioral data and physical biometrics.
Challenges and Limitations of the Internet of Things in the Banking Sector
Before the Internet of Things (Payments) market has the opportunity to grow and mature over the long term, banking stakeholders should successfully address several stumbling blocks on the way to tangible outcomes. Otherwise, as soon as IoT in banking and finance starts to gain traction, some of these bottlenecks may morph into existential threats. Among the most relevant are:
- User trust. The IoT-powered shopping won’t be a ‘just develop it, and they will adopt’ opportunity since the Internet of Things’ privacy, security, and governance concerns should be thoroughly solved and later explained to the potential users. This challenge requires involvement and effort from payment providers, financial institutions, fintech advisory, and technology companies to educate the customers and articulate the applied security measures that will protect their data. Moreover, IoP providers should also be transparent about what information is collected and how it is used.
- Integration. The implementation of IoT in fintech makes payment providers cooperate with firms and software approaches that haven’t typically been connected with financial interactions. All this will promote the importance of legacy system modernization, application of microservices, DevOps, and open APIs to streamline interoperation.
- Data ownership. IoT-based transactions will produce rich volumes of data that can be employed to discover engaging user experiences and innovative revenue streams. The main bottleneck will be to make a bargain about the information usage and sharing with financial institutions, clients, fintech solution providers, and technology firms. On top of that, we cannot ignore global and regional regulations, namely the California Consumer Privacy Act (CCPA) and the General Data Protection Regulation (GDPR), so the IoP providers should also think through what information will be collected and how it will be stored.
How Has the Internet of Things Impacted Business? — IoT Use Cases in Financial Services
Connected devices are undoubtedly one of the opportunities that financial services companies should embrace to remain competitive. Today people are after innovative solutions from their banks and particularly from the disruptive fintech mobile app development companies that already provide them with handy products and services suitable for their active and connected lives. We’ve analyzed our experience in fintech consulting and custom software development services to define current top four IoT use cases in banking:
- Wallet of Things. This type of apps eliminates the need for physical credit cards and enables payments right to any terminals with your smart devices. Digital wallets can be found on your tablets, mobile phones, or wearables like Apple Watch, and home assistants like Amazon Echo. Another example is Honda, with its Dream Drive dashboard that allows drivers to pay for parking, fuel, food, and movie tickets right from the vehicle.
- IoT-based bank security system. A drastic shift towards seamless financial interactions turns the Internet of Things cybersecurity into an enormous issue. Most financial firms see biometrics as an effective tool that can support the industry with strong security solutions. In this context, Barclays has announced its breakthrough Finger Vein reader that can analyze individual vein patterns to prove your identity, grant access to online banking accounts, and even authorize payments without passwords, PINs, or authentication codes. Citibank has partnered with Diebold to build ATMs that have no PIN pad, card reader, or T-display, and that will give out cash following on from your mobile phone and eye scan.
- Tailored IoT insurance. To achieve better decision-making and improve their services, business owners can track customers’ safety habits on-the-fly. Moreover, insurtech companies can base their rates on mileage, driving habits, well-being, or even oral health. Allianz France has introduced its connected home app, namely Allianz Safe Home, with fire and smoke sensors, as well as cameras and water leakage detectors to notify customers in case of emergency and provide appropriate assistance. The insurtech startup Metromile utilizes a telematics device (Pulse) to analyze your driving data, mileage, and car health and offer you a pay-per-mile insurance plan.
- Smart advice. The amount and speed of information globally will continue to grow, and for business owners, it becomes mission-critical to be able to use it effectively. The Internet of Things can be applied to analyze this information, define valid algorithms, and gain maximum benefit. For instance, Amber Agriculture is the IoT fintech startup that helps farmers to control and manage the storage conditions of the crop, sell before it rots, all while seizing high-market prices.
Final Word: The Internet of Things Future
Revolutions don’t happen overnight, and currently, the Internet of Things-Fintech tandem is in its infancy. Some business stakeholders state that technological progress and modern digital trends will substitute traditional banks, while others believe that all this will augment conventional financial infrastructure and make it more efficient. Nevertheless, what we know for sure is that the entire banking model is already becoming more digital-driven and interconnected.
Based on our own experience of working with the leading banks and fintech firms, we should note that nearly all the dangers of the Internet of Things listed above are surmountable with the right technology partner. What is important is a clear understanding of IoT benefits for your business, skilled IoT team, advanced analytical capabilities, and constant scaling up of the payment infrastructure as new ‘things’ are added.
Adopting IoT any time soon, financial services providers can enhance their data acquisition and storage, create a better risk assessment framework, find more ways to connect with their customers, and thus improve their engagement.
Schedule a free consultation with the Dashdevs team to see how IoT can change your financial business.