A Bank in Every Device?

By Tyler Mondres

In 2008, the number of internet-connected devices surpassed the number of humans on the planet. By 2030, it is projected that more than 125 billion things—nearly 15 for every person on the planet—will be connected online. We call this growing network of connected devices the internet of things, or IoT.

Just about anything embedded with a sensor capable of sending or receiving data can become part of the IoT ecosystem. As the size and cost of embedded sensors has decreased, the potential for smart device deployment has greatly expanded. We have thermostats that set themselves to manage energy costs, video-enabled doorbells that allow homeowners to answer when away and smart beds that maintain consistent temperatures throughout the night.

IoT promises to reshape every industry, and banking is no different. Payments will become seamless as digital wallets are embedded across multiple devices, and highly granular data collection will enable greater customization and smarter loan decisions.

Payments

IoT will allow virtually any connected device to be embedded with payments, enabling a wallet of things. Digital wallets have already been added to mobile phones, tablets, wearables like the Apple Watch, and smart home assistants like the Amazon Echo. These devices enable a more seamless payments experience both online and at the point of sale. IoT can extend this convenience to a broader range of devices, allowing customers to pay anywhere, any time.

On the frontier of IoT payments is the connected car. Connected cars have digital dashboards that allow drivers to listen to music, get directions, and even make payments from behind the wheel. For example, in January 2019 Honda announced the Honda Dream Drive—an infotainment, commerce, services and rewards dashboard for drivers and passengers. The dashboard lets drivers pay for things like fuel, parking, tolls, movie tickets and food for pickup or delivery from within the vehicle.

Customer relationship management

Mobile phones provided banks a new channel to connect with customers and deliver value. Increased digital engagement generated valuable data used to improve personalization, refine products and build new services. IoT can act as a force multiplier in this space, expanding the digital banking ecosystem to any connected device with a user interface.

Connected devices will allow the capture of data and consumer preferences once considered unattainable and enable new kinds of value-add services. This data will provide a more detailed picture of customers, which will enable greater personalization and context-specific messaging. Consider a customer seeking a branch on the way home. A smart car dashboard could highlight convenient locations and associated wait times based on the driver’s route to identify the best option.

IoT will also enable new kinds of banking services. Today, personal financial management apps allow users to create budgets, track spending, and set savings goals. In the future, customers will be able link these tools to other connected devices to help manage spending. For example, a banking app could regulate the temperature settings of a smart thermostat to meet a customer’s monthly spending limit for utilities.

Lending

IoT can enhance banks’ credit underwriting processes. As more IoT sensors are deployed across industries, banks will be able to reach previously inaccessible data to inform lending decisions and mitigate losses.

In 2015, State Farm received Federal Aviation Administration approval to begin testing the use of drones to assess property damage. Banks too are exploring potential use cases of drones and other connected devices. For instance, before underwriting a commercial loan, a bank could estimate foot traffic at a local business from the number of cars in its parking lot. Likewise, for agricultural loans, a bank could combine drone data with sensor data in the fields to estimate crop output.

Connected devices can also help banks combat fraud. In trade finance, banks already use radio-frequency identification to track goods in transit. Connected devices will allow banks to monitor more granular information—like tracking the temperature of a food container—to ensure contractual obligations are met.

IoT’s challenges for banks

The opportunities of IoT do come with some challenges. The vast quantities of data produced by connected devices will require smart strategies around data management, security and privacy.

Managing the constant tide of data is a challenge faced by many industries today, including banking. This challenge will only be magnified by IoT. Connected devices will produce highly valuable insights, but not all information will be useful. Banks will need systems capable of sifting through the noise to derive meaningful insights.

IoT will require new strategies around data storage, management, security and privacy. In order to successfully leverage these opportunities, banks may require new skill sets. Going forward, experience with data management, coding, machine learning and other technical experience will become even more important than they already are today.

Meanwhile, connected devices can pose serious cybersecurity threats. Every IoT object represents a possible surface of attack. Banks adhere to the strongest cybersecurity requirements. Advancements in IoT device-level security will be needed before banks are comfortable enabling the full potential of IoT banking.

Insecure devices can be used by attackers to access sensitive information, conduct fraudulent transactions, or orchestrate distributed denial of service attacks. In fact, in October 2016, attackers exploited weak cyber protections in IoT devices with malware called Mirai. They took control of hundreds of thousands of home routers, digital video recorders and other IoT devices to build a botnet used in a DDoS attack that shuttered access to thousands of websites.

Finally, IoT will raise important privacy questions. In a world where nearly every object collects and broadcasts data about its environment, consumers will find it increasingly difficult to opt out. While all industries will reckon with this challenge, few areas are as sensitive as one’s personal finances.

Banks take very seriously their responsibilities to their customers to maintain the highest level of privacy, security and control over their personal information. Today, consumers trust that their financial data are being protected and handled appropriately. This trust is critical to the functioning of the financial system, and it is the reason banks dedicate tremendous resources to safeguarding financial data.

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About Author

Tyler Mondres

Tyler Mondres is senior manager for research at ABA and a frequent contributor on fintech topics to the ABA Banking Journal.