Why the Internet of Things Should Be a Bank Thing
The Internet of Things, blockchains and smart (not "big") data could help financial institutions fend off disruption in lending, payments and money management, according to the Spanish bank's fintech mavens.
After the early exuberance surrounding Apple Watch, banks and vendors are ramping up testing of bank apps on other wearable devices and everyday objects, preparing for a day in which most everything is connected to the Internet.
Bank of America's ops and tech chief is looking to discuss the Internet of Things, innovation, diversity and recruitment at this week's global wholesale banking conference.
Asked about the Internet of Things, bankers often shrug and admit they haven't given the subject much thought.
But as more "things" — cars, refrigerators, dryers, scales and such — get connected (Gartner forecasts 25 billion new sensors will be deployed between now and the end of the decade), participating in the IoT could help banks stay relevant.
Forward-thinking companies could get a reputation lift from being first out of the gate with interesting apps for the Internet of Things. Banks could also be first to help protect customers from the inevitable privacy and security breaches that the Internet of Things will make possible.
A handful of banks are studying this technology. U.S. Bank is looking at IoT use cases that include secure payment management (think subscriptions and supplies) and information exchange. The bank's innovation center recently made a video about some of the projects it's working on, such as a link between an Internet-connected body weight scale and a financial rewards program. And financial institutions from Santander to USAA to Charlotte Metro Federal Credit Union in North Carolina are pondering a range of IoT ideas.
"As bankers, do we care if our customers connect their refrigerator to the Internet? I say we should care," said J. Paul Leavell, senior marketing analyst at Charlotte Metro Federal. "If you're paying for groceries with your refrigerator, as a banker I want to have my credentials in your refrigerator making that payment."
The most obvious IoT application for banks is in payments. In a commonly floated scenario, a customer's refrigerator senses the household has run out of milk and orders a fresh carton from the local grocery store. The payment seamlessly takes place in the background.
A good experience would incent the customer to use a bank app for this rather than a built-in payment system. Loyalty programs could flow through such an app, and the bank could collect data that could be used in marketing and customer service.
"The Internet of Things opens up a wonderful opportunity for us to get into the lives of our customers and segment them even further than we have in the past," Leavell said.
For instance, if a bank knows which customers are paying parking garage fees from a BMW versus a Hyundai, those car preferences might indicate a propensity for certain financial products.
That brings us to car banking.
"Cars are interesting to think about for any number of reasons, not the least of which is because many people spend an inordinate amount of time in their cars," said Dominic Venturo, chief innovation officer at U.S. Bank in Minneapolis.
Insurance companies have begun using sensors to improve underwriting for collision policies. Down the line, a connected car might not only tell the driver it's time for an oil change, but order the oil and send it, or find a service deal nearby, schedule the maintenance and complete payment when the driver pulls out of the garage.
"Or imagine driving by a parking spot and your device recognizes you're in a parking spot and texts you to ask if you want to pay," Venturo said.
Recently, USAA led the investing round for the company that sells the device featured in U.S. Bank's video, Automatic Labs. The device can be plugged into a car to share relevant data — such as engine diagnostics or where a car is parked — with Automatic Labs' smartphone app and other apps.
No one has come out with a car banking app yet, although FIS is working on one. Such an app would most likely be voice-controlled.
Beacons — wireless sensors that can be connected to the Internet and gather local data — open other possibilities for banks. Westpac New Zealand, for example, is using beacons in its branches to enable staff to personally greet and help customers when they walk in (those who opt in to this feature, of course).
Banks could use beacons in their branches to collect information about customers. "We know how many teller and ATM transactions customers have done, but we don't know how long they stood in line," Leavell said. "We don't know where they go first in the store."
And banks could work with partners' beacons.
"If you're looking for a house, you put a beacon on a sign and download information to your phone from it," Leavell said. A bank's app could then autofill data into a mortgage application.
"If we're not doing that, one of our competitors is," Leavell said. "This presents so much more opportunity for data and segmentation; it's exciting and spooky."
Another use case for the Internet of Things is in commercial lending and international trade finance decisions.
Chips could be used to track the condition of fleet vehicles and factory machines. And at the end of a lease term, there might be a benefit or a penalty to lessees depending on how much they used the items or what condition they were returned in.
"If you start to put sensors like beacons in retail locations or on a shop floor, you can start to see real-time and more informative data come online that a commercial lender might be very interested to find," said Jim Eckenrode, executive director of the Deloitte Center for Financial Services, which published a report last month outlining opportunities for banks in the Internet of Things.
Santander Bank executives envision the Internet of Things being used for shipping and international trade, with sensors picking up real-time data about shipments to make this business more efficient, and perhaps allow payments to be made faster.
Authentication is another use case. If a bank can identify that the device a consumer is using to initiate a payment, whether through a card or a mobile wallet, is within a close proximity to other known smart devices associated with that individual, it can be pretty sure the transaction is legitimate.
One idea being floated is a little out there, but plausible: "Pattern-of-life" data collected from consumers could help determine creditworthiness or detect signs of risk.
For instance, a spike in blood pressure data captured on a Fitbit could indicate a person is up to no good.
"You're going to have to think about what's really predictive and what's really a risk factor," Eckenrode said. "What kind of behaviors are they engaged in outside of their work environment? When/how do they feel stressed? What's the stress level of their voice? It's going to be really challenging for banks to separate the signal from the noise."
Using such data to inform loan underwriting decisions could raise privacy issues, as well as concerns about Fair Credit Reporting Act violations and disparate impact.
"There could be a potential risk of a new kind of redlining based on inaccurate or inappropriate usage of pattern of life data," Eckenrode said. "The other thing is the Big Brother effect. Banks have to think about what's good for the consumer, client and borrower."
Penny Crosman is American Banker's editor at large. She welcomes feedback on her column at email@example.com.