Tuesday, October 25, 2016

IoT, is it a game-changer for Banks?

Days are not too far when we will be surrounded by intuitive connected devices such as sensors collecting and transmitting data about us, our living and working environments and offering intuitive services as we conduct business transactions.

While some industry such as oil and gas, large manufacturing, health care and smart home industry are ahead in exploiting this phenomena, Banking and Financial sector are bit slow on this front.

With customers expecting more and more personalized services and keen on embracing digital service than the traditional services, there is no doubt that IoT and associated data will add value to banks and their customers.

Banks realizes the new opportunities and their associated challenges, and are progressing in tackling them, which includes the establishment of clear benefits the IoT can deliver (commercial ideas), overcoming the lack of IoT expertise, choosing 3rd party collaborating partners, infrastructure for implementing them and data challenges (information storage, security, privacy, information visualization).

May be IoT will help banks to innovate and devise better ways to improve customer satisfaction, risk management, reduce costs and improve overall operational efficiency.

Transforming branch operations

Innovative approach to improve branch sales is the need of the hour for the Banking industry as branch transactions continues to decline and branches are facing imminent closure. Yet branches are seen by many banks as an advantage in fighting off competition from new players as, when customer walks into the branch it provides an opportunity for the bank to provide a personalized experience, with targeted advice, context-aware offers and insight and thereby helping banks to attain a new level of customer intimacy.

Transforming Commercial banking operations 

Manufacturing industry usually have a line of credit with banks for purchasing raw materials and to manage their operational expenses. This takes various forms from overdraft to working capital loan and banks usually take raw materials and finished goods as collateral.

The challenge often for the bank is on the monitoring mechanism to ensure the loan agreement is being followed and to avoid being in situation of being unaware when their customers indulge in fraudulent practices. This is very time consuming and manual process, which involves site visits and manual verification of various documents such as purchase order to determine the stock level and inventory of finish product.

Using IoT, the bank can encourage the business customer to install sensors in their warehouses and assembly lines, which will inform/alert the bank and insurance providers when there is significant deviation from the agreement and helping them to detect the possibility of default early enough and/or prevent the fraudulent practices. This also offers opportunities for the banks to shorten the time required to make decisions regarding increase in line of credit request from customers or even automate the credit risk decisioning and improving the operational efficiency of the bank. These enable banks to progress towards digital era by relinquishing the need for physical visits and abandoning time consuming and error prone paper works. This will also go a long way in minimizing loan defaults and win-win proposition for both business customers as well as for the banks. 

Businesses often use letters of credit (LC) to facilitate or guarantee payment in domestic and international transactions. LC process are complex and the use of LC in international transactions are governed by rules and regulations of The International Chamber of Commerce and the use of domestic LC in US by United States Uniform Commercial Code.

Usually the seller ships goods to the buyer and presents all the documents required in the LC to the bank. The bank reviews the documentation for completeness and compliance of contract and once buyer/buyer’s bank also certifies that all conditions have been met, funds are transferred to seller on behalf of the beneficiary. 

With IoT enabled cargo carriers and adoption of API Management (public API) by logistics providers on the rise, new opportunity are presenting themselves for the bank to consume those API and improve their ability to track and trace consignments and to automate the Letter of credit process.  In essence IoT enables, manufacturing industry and banks to streamline and automate their critical business process, while delivering audit trail to meet industry regulations, improvement in the overall operational efficiency and efficient customer services.

Transforming Mortgage business

In UK, lenders generally lend on a newly build or newly converted property only when the property is covered by a warranty scheme for example National House Building Council (NHBC) Buildmark scheme - which are regulated by Financial Services Authority (FSA). Buildmark is an insurance and warranty scheme designed to protect home owners should a problem with their home after the completion of construction for a period of 2 years, where builder will be responsible for rectifying any defects or damage reported such as structural damage or if any caused by their failure to build to the NHBC Standards or due to contamination. 

Also in UK, Energy Performance Certificates (EPCs) are mandated (with some exceptions) whenever a property is either built or sold. Lenders generally seek EPC (which rate energy efficient property as A and worst with G) as part of mortgage application process as the certificates provides useful information about a property’s energy use and typical energy costs as well as recommendations about how to reduce energy use and save money.

Using IoT, the bank can encourage the home buyers and builders to install sensors in their homes, which will inform owner, the bank and builders when there is significant internal damage to the walls or roof and helps them to detect damages early and prevent the need for exhaustive repairs to the structure of the property. These data could also come handy if it ends in dispute between homeowner and the builder and NHBC has to steps in to offer Resolution Service to assist in resolving disputes about defects or damage relating to the NHBC Standards.

Many banks tie up with insurance companies or have insurance subsidiaries and provides home owners many types insurance products and these sensor data can even be mashed with other agency data such as weather forecast or natural disaster warnings to provide them alert in advance where it make sense and to quickly assess the damage and facilitate quick settlement of claims.

Even when the EPC are valid for 10 years, these sensor data can be used to help home owners not only with suggestion on home improvements but can help the bank to work out home owners eligibility and offer personalized further advances thus enabling cross sells, while delighting customer with their timely services.

For bank success lies in developing a strategy and implementing IoT initiatives hand-in-hand with the likes of the cloud and big data and not when IoT is looked upon as a digital disruption which they can be ignore or as a standalone transformation program.

IoT without a doubt is not only going to bring competitive advantage for the early adopters but will also play a vital part in deciding the further market leader. The Banking industry, especially in Europe is currently undergoing a turbulent times with fierce competition both from new entrants (FinTech) and from regulators such as the introduction of Directive on Payments Services (PSD2). With Brexit thrown to the mix, banks (especially in UK) are at a cross road, where their strategy will decide if they are going to be able to play a vital role in customer’s daily life or become a back office type service provider in the future.