The Internet of Things and its Impact on Fintech and Banking

The Internet of Things (IoT) is one of many recent innovations already making a significant impact on the world in general. A natural progression from the ever-increasing availability of smart devices, it is resulting in more and more integration between seemingly random industries and objects.

In a world where it’s possible to operate your door locks, lights, air conditioners, car and more from your smartphone, it is inevitable that the fintech industry should get involved. But what form should that integration take? How does the world of banking fit into the Internet of Things?

What is the Internet of Things?

Before we dig into how fintech firms are getting involved, let’s first make sure that we all understand exactly what we are talking about. It must be said that, as names go, the “Internet of Things” is not exactly descriptive. The problem is that it is virtually impossible to be more specific about what exactly classifies as a “thing” since the list of devices that can fit the bill is so varied.

But we are getting ahead of ourselves. Put simply, IoT is a network of devices that can collect and transmit data over wireless networks. Most of us have a smartphone these days, and lots have a smartwatch, so that’s already two devices. Smart TVs are also pretty widespread now, so that’s three. However, there are more and more day-to-day devices that you can now put onto a wireless network. These include:

• Smart thermostats
• Smart doorbells
• Smart vehicles
• Smart locks
• Smart refrigerators
• Smart key chains
• Smart light bulbs
• Smart speakers
• Smart security systems
• Smart coffee machines

Most of these (and the many not listed) can be controlled using a voice-activated home hub like Amazon’s Alexa or Google’s Home. While we haven’t quite reached the point where you can fulfil your Star Trek: The Next Generation-inspired dreams of demanding “tea, Earl Grey, hot” and actually getting it, it’ll only take someone figuring out how to make a smart tea-making machine, which can’t be far off.

Of course, there is far more to the IoT than voice-activated hot beverage devices. The data collection aspect of the system is the more significant part. Through machine learning, the various devices on your network can track your habits and eventually remove the need for your input. The smart locks can open themselves as you approach, removing the need to fiddle with your keys. The same goes for the smart car. The air conditioning and lights can switch themselves on shortly before the time you consistently return home, meaning that you walk into a nicely cooled and lit room without having had to find the switches. With enough data, your own personal IoT can establish your routines to such a degree that almost everything is just ready for you when you want it.

How does finance fit into the Internet of Things?

Take another look at that last paragraph and you will notice that the theme is one of predicting your needs based on your routines. For many of us, our experience with the financial sector is one of regular routines - paying your tax every year, paying your bills and mortgage every month, paying for groceries every week and so on.

Of course, the processes for a lot of these already exist and have done for decades. Direct Debit has been a thing in the UK since the 1960s, for example. More recently, digital wallets and payment systems have simplified daily transactions. From a customer-facing perspective, there’s not that much more that the IoT can offer, besides quirky benefits like your smart fridge automatically ordering more milk when it detects that your current stock is either expended or expiring.

However, there is much more that the IoT has to offer. Integrating with AIs and machine learning (the benefits of which we have looked at in a previous post) could help banks to predict customer needs before the customer realises that they need them, detect fraudulent transactions faster and generally reduce the friction felt when dealing with banks. Thanks to features such as eKYC, it would even be possible to conduct a wide range of financial business without needing to step into a bank branch or wait for hours on a helpline.

What are the practical applications of the Internet of Things in Finance?

Let’s look at some direct examples of IoT in action:

• IoT can speed up banking processes by reducing the dependence on human labour. For example, saving and spending pattern analysis could be conducted automatically, providing financial plans and loan authorisation effectively instantly.
• Relatedly, IoT could allow financial institutions to gather more accurate real-time data on customer assets and habits, allowing them to make more reliable risk assessments.
• IoT helps to improve security of financial accounts by offering additional authentication options. For example, a certain action could require that an additional input be made on a second device, ensuring that having your phone stolen does not lead to all of your money being stolen, too. The IoT could also include sensors and systems that improve security, such as fingerprint scanners, facial recognition software and other biometric systems.
• IoT can improve the customer experience enormously, allowing access to financial services at any time of the day or night, using a wider variety of portals to suit needs and preferences. For example, those who like interaction can work through a virtual assistant while those who like to get hands-on can do so through an appropriate interface.
• IoT can help to minimise fraud by tracking previous spending habits and behaviour, immediately flagging activity that does not fit previous patterns.

What is the future of the Internet of Things in the financial sector?

The biggest stumbling block faced by banks and fintech firms in applying the IoT is one of data privacy and security. As helpful as it is for banks to predict your needs, the data required for the AI to learn your habits is sensitive and personal. Whenever such data is collected, stored and accessed, an opportunity is created for that data to be hacked and stolen. The IoT creates more connections to that data, creating more potential weaknesses in your data security. In fact, a report by security firm Symantec found a 600% increase in attacks on smart devices in 2018 - they are clearly seen as a vulnerability.

Of course, progress is being made in the technology required to keep data secure, but legislation is slow to follow that progress, inevitably hobbling development. The other way of looking at that situation is that lawmakers are more concerned about the privacy of private individuals than they are convenience and what could arguably be called ‘gimmicks’. Both sentences can be true, depending on your perspective of this issue.

A further blockage comes in the very ‘thingness’ that we mentioned right back at the start of this article - the fact that the range of devices trying to integrate into a single network can be vast. Each manufacturer takes their own unique approach to development, meaning that different devices offer different data. Additionally, there is little uniformity of maintenance across different devices. Depending on the device or the network, a single failure could bring the whole network to a crashing halt - not a trait you want in a financial system.

That said, the future of IoT within finance is a bright one. As the concept gains momentum, the need for better integration of different devices will likely iron out most of the bigger obstacles. Meanwhile, the significant benefits for the customers will almost certainly drive momentum for more and more functions and services becoming available.