IoT, smart devices, wearables, mobile technology and nanotech - yes, nanotech - are forcing financial services incumbents and challengers to rethink every aspect of their value chains. Those value chains are getting to be exponentially more distributed and automated. Increased digitization means more data being generated, from all kinds of places at an accelerating rate. IoT, regardless of your perspective, promises to enable the development of new value-added services to improve and automate user engagement, customer acquisition and service delivery - everywhere at all times.
In insurance for instance, user engagement is very low. Customers like it that way because there are no incentives for them to interact other than once a year when a policy holder renews it. But recasting the current low engagement environment with an IoT lens, insurers may be able to develop value-added services that give customers a reason to engage more frequently. One way to do it is by providing discounts. An example would be to give customers price breaks if they opt-in to apps that monitor perspiration levels, body temperature, and heart rate via smart clothing. Sounds far fetched? Think again.
Sounds far-fetched? Think again.
My friend David Bray, the FCC’s CIO, once said this: “...in 1977, 4.2 billion people lived on earth and the first Apple II went on sale running at 1MHz w 4 KB of RAM (note, that is the first half of a second of your favorite MP3 song).” He continued, "today there are 7 billion people, about 850 million web servers online, and about 4 billion zetabytes of digital content worldwide. By 2022 there will be 8 billion people, 75-300 billion networked devices globally and 96 zetabytes of digital content is estimated to exist”.
96 zetabytes, by the way is 96,000,000,000,000,000,000,000 bytes = 96 billion trillion bytes. With this kind of exponential growth the opportunities are incalculable because data is the building block of the digitized economy. Information its lifeblood and for that reason there are billions being deployed in IoT by players in almost every sector of the economy. Real money to be sure yet for some products and services, like wearables and smart-home devices, the consumers themselves will bear the costs. For other products, including but not limited to: automobile driving monitoring devices, smart city clouds, connected cars, smart farming, and industrial embedded data to name a few there is zero or very little incentive for consumers to bear the cost. So in applications like these, companies are expected to seek partnerships with OEMs and OEDs to embed technologies (e.g., RFID tags) into their products. Alternatively, innovators in the space may play a more integrated role designing and inventing applications for incumbents delivering IoT enabled services and products.
RFID involves wireless communication that uses radio waves to identify and track objects. It is analogous to a smart digital barcoding system that allows users to uniquely identify items without direct line-of-sight, identify thousands of items simultaneously and identify items within a defined proximity. It can tell you what an object is, where it is, and how it is making the technology an indispensable IoT building block applicable in everything from supply chain and logistics finance to smart payments.
Another interesting technology being used – telematics. Telematics hardware uses GPS and wireless devices to collect real-time customer data. Think about a car insurer adjusting a customers’ premiums based on a panoply of driving behavior and vehicle use. These devices are now able to measure a number of additional behavioral factors, most notably hard braking (a decline of at least 10 MPH/second), which allows insurers to deeply refine risk models. This refinement, if executed properly, could lead to potential pricing power and margins.
This refinement, if executed properly, could lead to potential pricing power and margins.
Other technology evolutions are expected to make IoT even more viable. One such evolution is miniaturization. The number of transistors per chip has increased from thousands in the 1950s to over four billion in the present day. One atom transistors are the natural limit of Moore’s Law. This limit holds until a paradigm-shifting technology like quantum computing is able to perform at scale.
Computing power is fundamentally and physically limited by the number of transistors that can fit on a chip. In quantum computing there are magnitudes improvement in processing power because each quantum bit can theoretically be in an infinite number of states at one time. In contrast, today there are two states, the well-known binary system which allows only “1s” or “0s”. Increasing the amount of information conveyed per unit is the most realistic hope of extending Moore’s Law. And extending Moore's law will give rise to whole new industries (e.g., everything becomes a computer) and super charging others more specifically (e.g., nanomechanics). From a tech-enabled financial services perspective we can more effectively use real-time and uber-dynamic consumer data, perform individualized and highly contextualized analytics, and apply artificial intelligence to perform and deliver services across the entire value chain.
All of this potential raises security and privacy concerns. Important everywhere but especially true when dealing people’s money or health. The IoT’s infrastructure is vulnerable to hacking, almost by design. Researchers recently claimed that they could access a plane’s satellite communications system during commercial flights via Wi-Fi or the plane’s entertainment console. Other scary hack situations include thermostats, webcams, insulin pumps, automobiles, pacemakers and refrigerators. As it applies to distributed ledger technologies, IoT-driven and blockchain-based systems require users to be both sophisticated and vigilant – not something to bet on. Any systems used for the purpose of processing smart contracts, therefore, needs to be extremely robust and possess design redundancies to ensure the ability to withstand attacks. This is not a surprise, but in a world where breaches can occur through an infinite number of entry points or nodes, cybersecurity becomes exponentially more important to maintain and difficult to manage.
The internet of things is an exciting frontier where potentially hundreds of billions of devices will be able to talk to the network and to each other. This efficiency should lead to goods and services most of us can’t even conceptualize. This includes how we finance, price, transact and pay for those exact goods and services – B2B, B2C, B2B2C, C2B, P2P, P2C, C2C, O2O, B2G – and every other permutation of effecting commerce and creating or transferring value. I look forward to keeping a very close eye on developments at this important and evolving intersection.
Note: The idea for this piece was sparked by a research project our intern Matt completed for our firm, Fenway Summer Ventures.