Driverless cars that make per-minute toll road payments. Lightbulbs that decide the right energy vendor at a given time and price. Investment decisions made by robo-advisors. And products created in-situ by 3D printers, with royalties paid in real time on whatever intellectual property is needed. This is the coming world of the Internet of Everything, as intelligence and connectivity becomes distributed more and more widely across our economy. Everything will talk to everything and end-points will make their own decisions, powered by sensor-driven data collection and computing that continually improves, known as machine learning.
To make this a reality, we will need a well-functioning, secure micropayments system. We must reimagine the nature of financial assets, digital assets, rights management, intellectual property and royalties. “Sensor technologies and the collection and exchange of data by the Internet of Things will require a fundamental rethink of financial services,” says Udayan Goyal, a London-based private-equity and venture capital investor focused on financial services.
If they aren’t careful, banks could be relegated in this new world to becoming mere clearing houses. Credit card and insurance companies could see business shrink. So traditional financial services companies are seeking a role for themselves at the nexus of the digital economy. Getting a pole position in the evolving IoT would allow banks to gain new revenue from a range of innovative services.
“In the IoT, payments become a kind of backbeat to life. They are everywhere, but they retreat from view. Your car will be connected to your debit card and will settle your gas charges for you. And your house will settle your utility bills,” says former Deutsche Bank executive Dan Marovitz, COO of Earthport, a London-based company building an alternative to correspondent banking. “The reality is that most payments are still made through banks and most people still keep their money in banks, so the banks will necessarily be part of these future flows.” But the way forward is rife with challenges.
Will Banks Be The Brokers of Digital Data?
Digital identity, data management and data privacy are key components of the IoT. People, devices and the software that makes up systems, applications and services will all have to be defined and given a digital identity. So who will develop, safeguard and store digital IDs?
In the past, powerful Silicon Valley players tried and failed to play a key role in securing and disseminating data. Microsoft attempted a centralized digital identity service 14 years ago with its Passport and Hailstorm initiatives. Intel, Sun, Oracle and AOL tried to develop their own such service around the same time through a group called the Liberty Alliance. Today, Facebook has vast stores of personal data, though for the most part it has so far shied away from financial services.
Now data is a valuable digital asset on a par with capital. Many believe that banks, not Silicon Valley companies, may be best placed to create and safeguard our digital identities and be brokers for data exchange. They could potentially offer services for identity, privacy, and security to accompany the global trading of any digital asset.
If smart developers can build apps on top of data that its owners give permission to use, taking into account an individual or organization’s preferences, it could usher in many types of new financial services. For example, access to commercial and transaction data, via the Internet of Things and point-of-sale systems, could help banks assess the creditworthiness of people and businesses. They could anticipate the need for capital, pre-empting requests for financing from small businesses and providing real-time credit, according to a Fintech 2.0 white paper prepared by Santander Innoventures, Oliver Wyman and Anthemis (the venture and advisory firm founded by London’s Udayan Goyal).
New consumer services could crunch data about individuals’ purchases, payment and habits. That may make people smarter financially, much as weaving together health records with dietary and exercise tracking is likely to make us healthier. Consumers could marshall their data to signal an intent to purchase directly to retailers, potentially attracting better offers. And the IoT may literally make form-filling obsolete, reclaiming tens of billions of wasted hours annually across the globe.
With such future services in mind, a dozen banks – including Citi, BNP Paribas, Deutsche Bank, HSBC, and JP Morgan Chase–began in 2011 to work with The Society for Worldwide Interbank Financial Telecommunications (SWIFT), a cooperative that handles transactions like wire transfers for thousands of banks. They envisioned an underlying global financial infrastructure called the Digital Asset Grid (or DAG) to bring bank-grade identity, privacy and security to the global exchange of any digital asset. But the project was later abandoned.
The obstacles were bigger than just getting many large institutions to cooperate. Something like the DAG would require banks to think and operate like a company like Apple, offering a platform on top of which others could create new innovative services. Banks may not be able to shed the outdated and arrogant thinking that comes from keeping a physical valuation in the basement. Also, many big banks still lack the digital infrastructure necessary to operate in the emerging IoT. Francisco Gonzalez, CEO of Spanish banking giant BBVA and a former computer programmer, says “In order to compete in the digital world you need to have platforms that perform in real time, and not run batch processes overnight. But behind the scenes most banks still have what we call a ‘spaghetti platform’.” (Obviously he excludes his own company, which has aggressively invested in digital banking.)
Still, the World Economic Forum argues in an August 2016 report that financial institutions are well positioned to drive digital identity systems, since they already have well-developed ways to verify user information for commercial and regulatory purposes. There is a strong business case for banks to move into such services, says WEF. Doing so would allow banks to offer extended financial advisory services and things like behavior-based insurance. Banks could also offer “identity-as-a-service” to businesses that can’t or don’t wish to store their clients’ personal data. And, they could potentially offer identity management as a separate, fee-based service.
One thing is sure: digital identity will be a key part of financial services going forward. The topic took center stage this year at Sibos, a major annual financial industry conference organized by Swift that convenes more than 7,000 financial services executives. Says Carlos Menendez, Mastercard’s president of enterprise partnerships: “Money is now more than an exchange of value and payment. Further information can be embedded with each transaction in the form of a digital ID.”
And digital IDs will have far more utility than merely improving security. “Identity and authentication schemes coupled with payment platforms can enable financial inclusion and poverty alleviation for billions of people,” says Kosta Peric, Deputy Director, Financial Services for the Poor, at the Bill & Melinda Gates Foundation, who worked on the WEF report on digital identity. “Ultimately, digital services such as data lockers will become the fundamental fabric of the digital society, and also a new, immense, opportunity to provide existing and new government and financial services,” he says.
The Dark Side of Data
Once digital IDs are ubiquitous and most of the things we own are connected to the Net, more and more information will be traded about us. The challenge will be keeping all that information under control. “The question for the not-so-far future is ‘What will a data market look like? Who will shape the rules? And how will rules be enforced?’,” asks Aurelie Pols, a data governance and privacy advocate at Krux Digital, a venture-backed San Francisco company that aims to unify data about people into a single view to help businesses. Pols is also an advisor on ethics to the Data Protection Supervisor established 15 years ago by the European Union.
The Internet of Things is a major step towards the long heralded–and feared–path to truly personalized marketing. It is rich with promise at the same time it is fraught with complexity and the risk of intrusion. Cars, watches, refrigerators, and garage door openers will become nodes on the network, controllable with a smart phone and trailing what Earthport’s Marovitz calls a “digital slipstream.” The endless resulting flow of purchases, preferences and decisions will define a very specific demographic–you.
Companies of many types may thus acquire an invaluable resource. “The way the financial services industry thinks about risk will fundamentally change as a result of the availability of the very granular data that can be collected through IoT devices,” says investor Goyal, who in addition to being a VC is managing partner of private equity firm Apis Partners.
The way insurance works could change dramatically. Continues Goyal: “The data collected from smart devices and wearable technology will be useful in redefining risk models for life insurers.” That sounds good for them, but maybe not so good for you. Similarly, connected vehicles will enable new risk models for auto insurance. Several insurers already offer policies in which a driver’s behavior is monitored while he or she drives, with the information transmitted directly to the insurer. The company assesses the chances that driver will have an accident and charges premiums accordingly. On the one hand, those who drive well should get lower rates. But the use of highly personalized data will potentially aid the creation of what Goyal calls “tail exclusion risks.” If you are perceived as risky as your personal data becomes exposed you may become completely uninsurable, he explains.
And when lots of information about your health and other personal details is shared freely by companies and government that could also have a dark side. Principles and data ethics need to be established and new technical innovations will be required so that permissions can flow with the data to make clear who can access what and when, says Krux Digital’s Pols. Many startups are pursuing ways to give control of personal information back to the individual, but it’s a dauntingly difficult task.
Ethical And Security Issues
When artificial intelligence gets added to the Internet of Things, as it inevitably will, the challenges will become even greater. The question of who will shape and enforce the rules is no clearer for AI than it is for data governance. But the combination of the IoT and AI is expected to usher in new personalized financial services like smart wallets that monitor and learn your habits and needs and alert and coach you to adjust your spending and saving behavior. Or automated agents may assist you, over the network, to determine your insurance needs, or provide financial advice and portfolio management. As these systems because more autonomous and reliance on them increases, we will need safeguards. Once a system becomes automated, positive feedback loops may develop and create problems like asset bubbles or market crashes. Autonomous AI can also lead to other unintended consequences, raising ethical and legal issues (see story page TK).
In addition to the introduction of new services, the IoT will also lead to more transparency and efficiency, especially in trade, both locally and globally. The blockchain, a distributed ledger technology (explained in detail on page TK), could add unprecedented levels of security and authentication when it comes to things like tracking the whereabouts, ownership and condition of assets of all sorts. Says the 2015 Fintech 2.0 white paper: “We expect the IoT, combined with the distributed ledger and smart contracts, to dramatically reduce the costs of trade finance.” International trade is expected to grow by 8% per year by 2020, with associated finance revenues growing to $70 billion, according to the Fintech 2.0 report. “This represents a massive opportunity for both banks and fintech start-ups to…streamline trade finance processes,” it continues.
Big financial organizations are trying to adapt by reaching out to small, more agile companies. Everledger, a London-based startup that uses blockchain technology to monitor the supply chain for diamonds and other precious stones sold at retail, has partnered with Mastercard. And BlockVerify, another London start-up that uses blockchain technology to improve anti-counterfeit measures in supply chains, is part of Startupbootcamp Fintech, supported by Rabobank and Lloyds banking group.
As the IoT connects things like light bulbs in a home and integrates them into the network, the bulbs themselves may be able to negotiate the most favorable price for electricity from competitive power grids. Visa envisions a lightbulbs paying for electricity only when they consume it. And rather than a single payment, the bulb pays continually and incrementally. This will require a new type of currency for ultra-tiny transactions. The digital currencies Bitcoin or Ethereum’s Ether may work for this, as well as paying for tiny chunks of bandwidth, storage, or CPU time in a computer, or energy and sensor data. Visa Europe is running a trial of such micropayment systems with Berlin-based SatoshiPay.
But investor Goyal wonders “What happens if these micropayments get hacked?” The security and efficiency of such systems must be reassuringly reliable, but they aren’t yet. And financial services companies will need to do more. The companies that win in the networked economy will not just process transactions but must leverage the rich information in the electronic trail clients leave behind – the so-called digital slipstream, explains Earthport’s Marovitz. If banks become trusted brokers of our data and figure out how to leverage our digital breadcrumbs, the Web could be transformed from a place where people go to visit sites and be tracked without their knowledge, to one where we give permission to know what we are doing and that helps automate our lives.
For example, say a consumer wants a car. Today she uses a bank network to send the payment. In the future, with banks as digital brokers, she could let it be known digitally that she is shopping for a car, a process known as “intent casting.” Others on the grid, like dealers or insurance companies, could pitch her in real-time, and she could filter those pitches based on their digital reputations. When she makes the purchase, the information for the paperwork to buy, insure and register the car could be released from her account, securely and with her permission, so it could go to relevant parties. She could also, if she chooses, authorize her data for third-party warranty services. In this scenario- originally envisioned by the Swift industry project – banks would take a cut for brokering these kind of exchanges.
When the IoT network is in full swing we may even be able to text our car and tell it to go sell or rent itself. When we do, a data broker – which may or may not be a bank– will make money managing millions of such transactions.