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How the Internet of Things will change finance
THERE is plenty of potential from the combined markets of the Internet of Things (IoT), with Bain & Company estimating in 2018 that this global market will grow to about US$520 billion in 2021, more than double the US$235 billion spent in 2017. In recent times, the move by Google to buy up Fitbit - which makes fitness trackers - for US$2.1 billion, speaks to the growing demand.
IoT here refers to technology that allows physical objects to be connected to the digital world, with breakthroughs in the cost of sensors, processing power as well as bandwidth to connect devices, bringing the potential of IoT to the forefront.
As people become more wired up, that connection between the physical to the digital - be it on a simple fitness tracker or embedded in cars - also appears to pave a natural path forward for this megatrend.
To be sure, the Bain & Company report suggested that while enterprise customers remain bullish on IoT, their enthusiasm has been tempered since 2016. Businesses have come to terms with the fact that complete solutions may take longer to implement and yield a return than they had originally expected.
"These customers have extended their expectations about when those use cases will reach scale in their organisations. On average, they are planning less extensive IoT implementations by 2020 than they were planning just a couple of years ago."
That being said, one bright spot is that cloud service providers have emerged as more prominent and influential vendors in the space. These are lowering barriers to IoT adoption, allowing for simpler implementations and making it easier to try out new use cases and scale up quickly.
IoT in finance
What does this mean for the financial sector? An EY report noted that probably the most important and fundamental change that the IoT introduces to the financial sector is the disruption of established information asymmetry.
"Currently, there is an asymmetry of information between sellers of financial sector services and their buyers, that is to say, there is relatively balanced access to similar data by various entities competing in the market," the report said.
"However, the existence of this market will be significantly disturbed by massive IoT deployment."
For example, the popularisation of IoT devices has enabled the introduction of a new type of insurance known as usage-based insurance, also known as pay-as-you-drive, said EY. In this form of insurance, the final cost depends on the type of vehicle used, measured against time, distance, behaviour and place.
This differs from traditional insurance, which attempts to identify and reward "safe" drivers, giving them lower premiums or a no-claims bonus. EY projected the long-term consequences of the emergence of a new company on the market (NewCo) offering only usage-based-insurance.
"A fairly obvious conclusion is that, in the first place, drivers who want to reveal their cautious driving style to the insurer will migrate to NewCo. Less careful drivers who use their cars in 'unsafe' regions will remain with the traditional companies (TradCo)," the report said.
This means if the NewCo has drivers generating statistically less damage, it will be able to offer more and more favourable insurance rates.
This will further accelerate the flow of customers between the companies and, as a result, will affect the statistical distribution of losses throughout the market. As a result, for NewCo, the expected value of damage will fall.
"What is even more interesting is that the introduction of usage-based insurance in TradCo will not necessarily improve its competitive situation. The problem in this case is the group of drivers not covered by usage-based-insurance, whose impact on the amount of compensations paid can only be tracked statistically - after collecting relevant data - and therefore, with a significant delay," said the report.
"The cause disrupting the motor insurance market is the change in the established information asymmetry by the massive deployment of IoT."
This could also play out in mortgage loan valuations and real estate transactions. With IoT, there could be more availability of data on the actual state of the construction status of buildings, environmental conditions, and security level.
In the area of lifestyle measurements, consumer IoT could provide data specific to an individual person that could be used as part of their health insurance assessment. While with crop prices, agriculture IoT could provide forward contract valuations and on the new derivatives market.
"In simple terms, the IoT is just a new source of data acquisition and a mechanism to enable the control of physical objects remotely. However, the indirect impact will be disruption in markets where uncertainty about the future plays a significant role," said EY.
"Financial sector enterprises will have to revise their operational models by adapting them to market requirements, as well as their business models. They will need to decide in which areas they should cooperate with other entities for the common goal of broader market stabilisation, and which fields of their operations will represent their unique competitive advantage."