The Potential of IOT in Financial Services

Sundeep Kumar, CFA

JP Morgan Chase and Co.
Sept 14th, 2017 1
Number of Global Mobile Devices

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 Current IoT practices in the
Financial Industry
 The financial industry has been slow to really adapt to and use
IoT to its full potential.
 The three main businesses that have done so are insurance
companies, commercial real estate, and banking
 An August 2015 poll of IoT decision-makers worldwide by
International Data Corporation (IDC) found that just 43% of
respondents in the finance industry were familiar with the IoT.
 Despite this relative lack of knowledge, the same study found
that 58.4% of finance-industry decision-makers viewed the IoT
as a “strategic” initiative, compared with 20% who believed it
was “transformational.” Perhaps more significant, only 5.6% of
respondents said it was unimportant.

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 Current IoT practices in the
Financial Industry - Continued
 In the insurance field, many companies allow consumers to install sensors in
their automobiles that allow the companies to track data about consumer
driving habits. This allows them to offer discounts to drivers and encourage
safe driving habits. The data they collect can also increase the accuracy of
underwriting.
 In terms of real estate, businesses are using IoT to help improve
expenditures. IoT devices can help with security, climate control, and energy
use. Malls are also using data to track foot traffic in order to increase rental
income and investment.
 Banking has embraced IoT with biometric scanners in ATMs and bank apps
in smartphones, tablets, and smart watches. Many consumers can access
bank accounts with apps, make payments with mobile devices, or manage
all banking functions on devices through digital banks.

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 Challenges for the Financial
Industry
 Privacy and Security
 The most critical challenges that the IoT industry faces are Privacy and Security.
Information generated, received, processed and shared must be secure as every
device connected to a network is open to manipulation. Compromised devices
will lead to disclosure of customer data and financial risk. Therefore financial
services organizations will need regulations to address these risks to protect
consumer privacy.
 Standardization
 Insurance organizations and banks are already utilizing information from various
devices and multiple platforms such as phones, wearables, cars, home
appliances etc. in order to calculate the potential risks of a customer. Therefore
interoperability of these devices needs to be taken seriously as the variety and
volume will grow even more. As a solution, financial services industry already
started some initiatives for standardization which are expected to increase more.
 Data Management
 The explosion of new data from various devices with multiple users complicates
data management for the financial services industry. Data management and
collaboration scenarios need to be addressed and resolved in every field in the 5
industry.
 Opportunities for the Financial
Industry in IoTs
 Customer Experience
 One of the most beneficial outcomes of IoT in Financial Services is Personalization. Financial service
organizations can offer potential solutions by collecting and analyzing data from customer behaviors,
spending patterns and earnings which help customers to manage their financial conditions better.
 Analyzing customer data not only enables financial services organizations to offer personalized services.
They can also be beneficial when used with location technology. For example banks can make relevant
location-based decisions such as analyzing the frequency of ATM usage in certain areas to target new
ATM installations or open new branches.
 Another outcome for customer experience in Financial Services is card-free financial transactions.
Banks already started to enhance the ATM experience by augmenting it with users’ smartphones or
wearables without the hassle of carrying a debit card, while mobile wallet apps linked to financial
institutions enable customers to make mobile payments effortlessly. Beacons can also conclude financial
transactions between businesses and customers. The technology provides a range of uses including
scanning codes and coupons, gathering information, and extracting payments without mobile devices
even being presented.

 Risk Management
 With regard to risk management, the opportunities mostly lie in the insurance sector. With the help of
telematics (in-vehicle telecommunication devices), automobiles are now able to transmit drivers’
behavior and vehicle usage data to the insurance companies. As a result, auto insurance companies
can calculate drivers’ risks and offer usage-based insurance to align driving behavior with premium
rates. This will also benefit low-risk drivers as well as the insurance companies since they will pay
reduced premiums.
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Future Scenarios for IoT in Financial
Services
 Banking
 Physical, performance, and behavioral data generated from biometric and
positional sensors for individuals, as well as shipping and manufacturing control
sensors for businesses, could provide new opportunities for credit underwriting,
especially for customers lacking a credit history. A challenge would involve
developing an understanding of which data points best predict an individual’s
creditworthiness.
 Capital markets
 Firms on both the “buy” and “sell” sides of trading and investing activities could
benefit from enhancing their capacity and capability to gather, store, and analyze
huge amounts of real-time, IoT-generated data, especially when combined with
continued acceleration in algorithmic trading. By removing the human element
and obtaining more comprehensive real-time data flows, for instance, from
sensors that monitor manufacturing plant activity or foot traffic in retail stores,
capital market analysts might develop analytics that could better evaluate
suspected market bubbles. However, it is also possible that algorithms might be
unable to account for shifts in consumer demand or geopolitical events, leading
to faulty conclusions that could actually create bubbles.
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Future Scenarios for IoT in Financial
Insurance
Services - Continued
 The longer-term impact of the adoption of automotive sensors is one of the more
interesting IoT scenarios for insurance carriers. Already, the industry is grappling
with the strategic implications of self-driving cars, suggesting a shift from
automobile casualty insurance, where the driver is at fault, to product liability
insurance, where the manufacturer may be held liable.⁴ With IoT, insurers may
also gain better information on potential product defects, allowing them to more
accurately price coverage. However, these changes in traditional coverage
models, as well as the potential for fewer accidents, could result in insurers
seeing decreased income from premiums.
 Investment and wealth management
 In the future, firms could utilize information from clients’ IoT ecosystems to tailor
investment decisions and asset allocations based on their individual behaviors,
preferences, and locations. A more intimate understanding of a client’s interests
and purchasing patterns could enable increasingly personalized investment
offerings. This analytical approach could also potentially provide a more accurate
model of investor risk tolerance than typically provided by client onboarding
surveys. Traders, equity analysts, and portfolio managers in mutual fund
companies might also use real-time data flows to better automate fund
management, which could lead to increased competitive differentiation between 8
types of investment management firms, funds, and pricing strategies.
Future Scenarios for IoT in Financial
Services - Continued
 Commercial real estate
 With IoT technology, firms could potentially combine data from sensors
used to manage building energy and security with activity sensors that
monitor human interactions within the building and in the surrounding
neighborhood. With this information, commercial real estate analysts
could value properties even more accurately. These data flows, if
exposed to a public marketplace, could also reduce friction in the leasing
or buying processes, and give investors greater transparency into
property values.
 Risk management in FSIs
 Using IoT technologies, companies might draw on sensor-based
information on FSI employees’ stress levels, patterns of movement, and
other factors as a way of predicting potential for internal fraud. Portfolio
managers could also improve their performance by understanding how
they react during times of stress. Employees may resist being monitored
so closely, but for those in positions of particular importance, agreeing to
this collection of data may become a requirement of employment. 9
Opportunities for Financial Services
in IoT – At a glance

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 Big Data and IoT

 IoT delivers the information from which big data analytics can draw the information to
create the insights required of it.
 Big Data Solutions deliver near real-time analytics on massive sized datasets, and
essentially condense a full-rack database into a small server processing up to 100TB,
so minimal hardware is required.
 The next generation analytics database leverages GPU technology, allowing an even
further downsizing of the hardware, i.e. big database in the car, or 5 TB on a laptop.
This helps IoT companies correlate the growing number of data sets, which helps
them get real-time responses and adapt to changing trends, solving the size
challenge without compromising on the performance.
 The Internet of Things and big data share a closely knitted future. There is no doubt
the two fields will create new opportunities and solutions that will have a long and 11
lasting impact.
Machine Learning, AI , Analytics and
IoTs
 When I demonstrated the computer for my grandmother, she began by saying,
"Could you ask that machine ... ?"
 Machine learning can be applied in cases where the desired outcome is known
(guided learning), or the data is not known beforehand (unguided learning), or the
learning is the result of interaction between a model and the environment
(reinforcement learning).
 The philosophy behind machine learning is to automate the creation of analytical
models in order to enable algorithms to learn continuously with the help of available
data.
 Continuously evolving models produce increasingly positive results, reducing the
need for human interaction. These evolved models can be used to automatically
produce reliable and repeatable decisions.
 Examples of everyday application of machine learning include recommendations
made by online services (Amazon, Netflix) or automatic credit ratings by banks.
 Machine learning has experienced a boost in popularity among industrial companies
thanks to the hype surrounding the Internet of Things (IoT). Many companies are
already designating IoT as a strategically significant area, while others have kicked 12
off pilot projects to map the potential of IoT in business operations.
 Security Challenges in IoTs
 IoTs is becoming an increasingly attractive target for cybercriminals.
 More connected devices mean more attack vectors and more possibilities for
hackers to target us; unless we move fast to address this rising security
concern, we’ll soon be facing an inevitable disaster.
 IoT Vulnerabilities Open Up New Possibilities To Hackers
 critical vulnerabilities in a wide range of IoT baby monitors
 Internet-connected cars can be compromised
 Wearables also can become a source of threat to your privacy, as
hackers can use the motion sensors embedded in smartwatches to steal
information you’re typing, or they can gather health data from
smartwatch apps or health tracker devices you might be using.
 Some of the most worrisome cases of IoT hacks involve medical devices
and can have detrimental — perhaps fatal — consequences on patients’
health.
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 Security Challenges for IoTs in
Financial Services
 Contactless and wearable payment technologies such as Apple Pay are on the rise
 Google, Samsung and various OEMs are actively deploying proximity and secure online
payment strategies and embedding payment functionalities in wearables.
 These technologies and devices are marked by new identity verification and data security
methods. Apple Pay, for example, uses tokenization, replacing a user’s credit card
number with a unique number for making payments.
 In addition to tokenisation, banks and retailers will increasingly start to use real time geo-
location technologies and information in order to identify where and when they might
deliver the best offers and incentives to their customers. Each such development will
require specific security and user authentication techniques in order to ensure the banks’
customers are happy with their personal location data being used this way.
 Banks will also very quickly become repositories of huge amounts of information on the
daily movements and habits of their customers. This means that banks will be required to
show that they can protect the location-based data they receive from the customers’
smartphones, wearables and connected cars by incorporating the latest data security
technology at every step in the chain and at every node in the network.
 Overall, to fully embrace the potential of IoT for both consumer and business customers,
banks are going to have to step up to the new security challenges to build and maintain 14
customer trust, as they develop new ways of improving overall network infrastructure and
their uses of big data, analytics and the cloud.
 What Is being Done To Secure The
IoT?
 IoT network security is a bit more challenging than traditional network security because there is
a wider range of communication protocols, standards, and device capabilities, all of which pose
significant issues and increased complexity
 IoT authentication: Providing the ability for users to authenticate an IoT device, including
managing multiple users of a single device
 IoT encryption: Encrypting data at rest and in transit between IoT edge devices and back-end
systems using standard cryptographic algorithms, helping maintain data integrity and preventing
data sniffing by hackers.
 IoT PKI: Providing complete X.509 digital certificate and cryptographic key and life-cycle
capabilities, including public/private key generation, distribution, management, and revocation.
 IoT security analytics: Collecting, aggregating, monitoring, and normalizing data from IoT
devices and providing actionable reporting and alerting on specific activities or when activities
fall outside established policies.
 IoT API security: Providing the ability to authenticate and authorize data movement between IoT
devices, back-end systems, and applications using documented REST-based APIs.
“The continued evolution of IoT-specific security threats will undoubtedly drive innovation
in this space, so expect more new IoT-specific security technologies to appear in the
creation phase in the near future, many of which may align around vertical- and industry-
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specific use cases such as connected medical devices or industrial applications.”
 Future Trends in IoTs
 Platforms
 IoT platforms bundle many of the infrastructure components of an IoT system into a single
product.
 Standards and Ecosystems
 As IoT devices proliferate, new ecosystems will emerge, and there will be “commercial and
technical battles between these ecosystems” that “will dominate areas such as the smart
home, the smart city and healthcare.
 Event Stream Processing
 Some IoT applications will generate extremely high data rates that must be analyzed in real
time. Systems creating tens of thousands of events per second are common, and millions
of events per second can occur in some telecom and telemetry situations. To address such
requirements, distributed stream computing platforms (DSCPs) have emerged. They
typically use parallel architectures to process very high-rate data streams to perform tasks
such as real-time analytics and pattern identification.”
 Operating Systems
 There’s a wide range of systems out there that have been designed for specific purposes.
 Processors and Architecture
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 Designing devices with an understanding of those devices’ needs will require “deep
technical skills.”
 Future Trends in IoTs Continued
 Low-Power, Wide-Area Network
 “Traditional cellular networks don’t deliver a good combination of technical features and
operational cost for those IoT applications that need wide-area coverage combined with
relatively low bandwidth, good battery life, low hardware and operating cost, and high
connection density.

 Low-Power, Short-Range IoT Networks

 Short-range networks connecting IT devices will be convoluted.

 Device (Thing) Management

 IoT things that are not ephemeral — that will be around for a while — will require
management like every other device (firmware updates, software updates, etc.), and that
introduces problems of scale.
 Analytics
 IoT will require a new approach to analytics. “New analytic tools and algorithms are needed
now, but as data volumes increase through 2021, the needs of the IoT may diverge further
from traditional analytics,”

 Security
 threats extend well beyond denial of sleep attacks: Those are attacks using malicious
code, propagated through the Internet of Things, aimed at draining the batteries of your
devices by keeping them awake. According to Gartner “The IoT introduces a wide range of
new security risks and challenges to the IoT devices themselves, their platforms and 17
operating systems, their communications, and even the systems to which they’re
connected.
Questions and Discussion

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