“IoT” has been a buzzword for years, and initially bankers may have thought, “Okay, whatever.” That’s changing as the hype becomes reality. Banking executives surveyed by the Digital Banking Report noted IoT growth as one of the top predictions for the future of banking. 29% of respondents said IoT solutions will drive more than a fifth of all transactions by 2025, and another 39% said that will happen by 2030.
Citibank researchers predict the coming era of physical objects operating as autonomous financial actors — which they call the “Thing Economy” — will create new business models, ecosystems and opportunities for many industries, including financial services.
Tip of the Spear:
Along with drone delivery and autonomous vehicles, IoT commerce is now a reality and expanding rapidly.
“Financial institutions that facilitate trillions of dollars in global transaction flows daily are well-positioned to lead and grow in the Thing Economy, which could dramatically increase payment volumes,” the Citibankers wrote in a blog. “In the shorter term, the merging of the physical and digital worlds presents a major opportunity to work with partners on innovations that can become new ventures and products.”
From Payments to Embedded Commerce
Many financial institutions are already aware of the potential opportunities for consumer banking from IoT. After all, mobile apps and contactless payments are part of the broader concept. But so is Amazon’s popular virtual assistant Alexa and the Apple Watch.
In retail applications there is also the cashier-less Amazon Go Stores with their “Just Walk Out” concept — with payments handled by artificial intelligence and RFID tags directly to phones or watches. All these are already training consumers to make semi-automated payments through personal digital devices.
Yet these applications are just the “low hanging fruit” of the IoT world, observes Jim Marous, Co-Publisher of The Financial Brand and CEO of the Digital Banking Report. As financial institutions increasingly realize the importance of engagement instead of simply transacting, more will seek embedded banking opportunities beyond payments, he believes.
The Bigger Prize:
In-car payments are cool, yet the real potential of IoT is in embedded banking, which builds engagement.
These IoT options will soon go beyond things like wearables, voice devices, and in-car applications. “Other opportunities include the integration of IoT for financial engagement such as the flow of funds between accounts, content distribution, and the potential integration of healthcare insights with financial gamification,” says Marous.
The next step, however, is in small, regular payments and transactions that can be automated. Car IQ, a portfolio company of Citi Ventures, is already building solutions for vehicles that will enable them to autonomously connect to banks and pay for their own services. Car IQ uses a vehicle’s sensor data to develop a “digital vehicle fingerprint,” which allows the car to validate itself to a bank and perform transactions.
Yet banks and credit unions may eventually find the biggest opportunities in the commercial and B2B space where “smart labels” could be embedded throughout the entire supply chain. These labels contain a microprocessor, an identification module, antenna, and a beacon, all within the size of a postage stamp.
Smart labels could be embedded in products to automatically trigger events like invoicing and payments, creating a new economy where companies can embed financial services into objects capable of doing business with each other directly.
“Financial institutions that facilitate trillions of dollars in global transaction flows daily are well-positioned to lead and grow into the Thing Economy, which could dramatically increase payment volumes,” says Citi.
Preparing for an IoT Onslaught
The key for financial institutions to capitalize on the Thing Economy will be breaking through the headwinds and challenges related to change management, as well as cost, talent, and cybersecurity issues, according to a McKinsey report. Banks that can overcome these issues may unlock between $5.5 trillion and $12.6 trillion in value globally, including value capture by consumers and customers of IoT products and services, the report predicts.
Despite many successful pilots, widespread IoT adoption will require new infrastructure, including systems, technology, and partnerships to support the verification and trust required to conduct micropayments, says Citibank. “Once that infrastructure is in place, objects ranging from postage labels to electric cars will be able to conduct unattended, programmable transactions in a seamless end-to-end manner — unlocking new ways for banks to offer and embed their products and services,” Citi’s blog states.
Such autonomous transactions will also require trust, security, and a reliable digital identity system for devices. Financial institutions will have to build out know your machine (KYM) protocols on top of existing know your customer (KYC) protocols to confirm the identities of users and devices.
Financial institutions are well positioned for the ‘Thing Economy.’ The real risk is not moving fast enough.
These KYM processes will improve understanding and enforcement of permissions and provide the verification that unscheduled, autonomous machine transactions are legitimate.
“Trust and security are part of the foundation of any financial relationship or engagement,” Marous points out. “That said, the integration of biometrics with IoT devices provides a stronger KYC verification than consumers or businesses have with legacy transactions.”
An Opportunity, Not a Threat
Some observers question whether IoT will disrupt the role of traditional banking providers. Mercator Advisory Group, for one doesn’t think so. Even if third-party players step up to support new payment options, nearly all IoT payments are now happening within existing payment “rails,” said Tom Sloane, Mercator VP of Payments innovation, during a webinar covered by The Financial Brand.
Whether they’re merely part of that rail system or innovating their own application in the Thing Economy, adoption and integration will have to start at the top, says Jim Marous. Part of the challenge is that many banks have leadership structures anchored to legacy processes and procedures. Both the leadership and the processes are resistant to change.
Financial institutions are also challenged to move at the speed of digital while the demands of the consumer (and business customers) are changing faster than ever, Marous observes.
Banks and credit unions that want to participate in the next evolution will have to learn how to respond quickly or build relationships with trusted third-party IoT solution providers. “The days of making business model adjustment over a period of a year or two years are gone,” Marous emphasizes. “Every day a financial institution hesitates is a day that a bank or credit union falls further behind.”