IoT in Fintech and Banking: Opportunities and Challenges

Aleksandra Velickovic

May 20, 2024

The days of frantically searching for your wallet are coming to an end. The Internet of Things (IoT) is revolutionising industries across the globe, and the financial services sector is embracing this transformation. This article explores how IoT in fintech and banking enables innovations like contactless payments, biometrics, and predictive analytics while requiring updated approaches to cybersecurity, privacy, and legacy systems. 

Join us as we examine the primary use cases where IoT improved customer experience and operational efficiency. However, success depends on strategic implementation, from choosing the right IoT partners to updating data practices

Introduction to IoT and Its Applications in Banking and Fintech

The Internet of Things (IoT) is a network of physical objects embedded with sensors, software, and other technologies to connect and exchange data with other devices and systems over the Internet. In fintech and banking, IoT enables new ways for companies to interact with and serve customers. Connected devices can provide real-time insights into customer needs and behaviours.

For example, smart sensors and IoT devices in homes, offices or vehicles can detect when customers need certain financial products or services. A smart thermostat may indicate when a customer could benefit from a home efficiency loan. A connected car may detect when a customer needs auto insurance or financing.

IoT also allows for more personalised services. By connecting customer accounts and profiles to IoT devices, banks can better understand customer’s spending habits and personalise offers based on individual needs and lifestyles

For instance, a bank may offer customised investment plans based on a client’s long-term financial goals detected from their online accounts and spending patterns.

A futuristic minimalistic bank interior focused on IoT in Fintech and Banking

Of course, with the opportunities of IoT come challenges like data privacy, security and ethical concerns. Banks must ensure customers consent to data collection and understand how their information is used. Strong cybersecurity measures are also needed to protect against cyber threats that could compromise connected systems and sensitive financial data.

Top IoT Use Cases in Fintech and Banking

#1 Personalised services

With IoT, banks can gain deep insights into customer behaviour and preferences. With data from smart devices, banks can provide personalised financial advice and product recommendations tailored to each customer’s needs. 

For example, if a customer’s fitness tracker shows they’re saving money by walking instead of driving, the bank may suggest high-interest savings accounts.

If a client frequently travels abroad, their bank can anticipate foreign transaction fees and notify them. Banks can also suggest customised accounts and interest rates based on spending habits. A bank may offer customised lending terms for a new car based on the customer’s driving and spending data from connected vehicle systems and accounts. 

Personalised banking can improve customer satisfaction and loyalty. Some banks are experimenting with IoT-enabled “smart branches” that recognise customers on entry and provide tailored recommendations.

#2 Streamlined loans

IoT data from connected vehicles, properties and other assets can help assess lending risks more accurately. Your bank can use IoT data to determine the value and condition of client’s assets, and their ability to repay loans. 

For example, data from connected commercial equipment and fleets allows banks to extend low-risk asset-backed loans. It can speed up lending decisions and open up new opportunities.

#3 Fraud detection

Expert reports show that banks lose billions each year to fraud. IoT in fintech in banking can help detect fraud in real time by analysing customer behaviour and transactions. 

For example, if a customer usually withdraws $200 from an ATM but suddenly withdraws $2,000, IoT systems can flag this as fraudulent behaviour. IoT-enabled cameras at ATMs can also match faces to account holders to verify identities during withdrawals.

If a customer’s connected home alarm system is activated when the customer is on vacation, the bank may flag unusual account logins during that time as potential fraud. Banks can also require two-factor authentication for high-risk transactions, using a customer’s connected security system or vehicle.

#4 Monitoring assets

Banks lend money to businesses and individuals, and IoT helps monitor these assets. For example, IoT sensors on vehicles, equipment, and property can alert banks if payments are late or the asset’s value declines. 

IoT-enabled inventory systems also give banks real-time visibility into businesses’ stock levels and sales to improve risk assessment. Banks themselves use IoT to monitor critical infrastructure like server rooms, vaults, and offices.

#5 Improved digital experience

With IoT, your bank can provide a seamless omnichannel experience across digital and physical channels

For example, ATMs can automatically load account information and recent transactions to streamline the customer experience. Their connected payment devices could sync account balances and details in real-time. These connected experiences build loyalty by saving customers time and hassle.

#6 Operational efficiencies

IoT in fintech and banking allows banks to optimise operations by automating certain processes. Connected sensors in bank branches could monitor foot traffic to determine optimal staffing levels and HVAC usage.

ATMs could also alert the bank when cash levels run low, improving uptime. On the back end, IoT can enhance risk modelling and compliance by providing more robust data. These efficiencies can ultimately reduce costs and improve the customer experience.

A futuristic bank lobby showcasing a seamless blend of minimalist design and advanced Internet of Things (IoT) technology.

IoT creates opportunities for banks and fintech companies to boost revenue, cut costs, and gain a competitive advantage. By investing in IoT now, banks can shape the future of connected finance and build stronger customer relationships over the long run. 

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Challenges and Risks of Implementing IoT in the Finance Industry

While IoT brings tremendous opportunities for innovation in banking and finance, its implementation also introduces risks that companies must address.

Data security and privacy

The massive amounts of data generated by IoT devices create vulnerabilities that hackers can exploit. Finance companies must have professional cybersecurity measures to protect customer information and transactions. They must encrypt data, use strong authentication for devices and networks, regularly update software, and monitor systems for breaches.

Regulations like GDPR also require companies to get consent for collecting and using customer data. Finance companies must be transparent in how they gather and apply IoT data. Customers may hesitate to adopt new IoT-enabled services if they feel their privacy and data are at risk.

Technology limitations

Many IoT devices have limited computing power and connectivity, making them difficult to update and secure. The technology is also evolving rapidly, so companies can face challenges integrating new and legacy systems.

Outages or interruptions to IoT networks and devices can disrupt services and operations. Finance companies must build redundancy and ensure critical systems can function even if parts of the IoT infrastructure go down.

Discover how our mobile development services can help you build applications that connect with IoT devices.

Cost and complexity

While IoT may reduce costs in the long run through automation and streamlining, initial investments in devices, networking equipment, and system upgrades can be substantial. The proliferation of devices and connections also adds layers of complexity for technology teams to manage.

For finance companies, adopting IoT requires carefully evaluating risks and costs versus the benefits of new efficiencies and customer experiences. 

Bias in data-driven decisions

Algorithms used to analyse financial data can perpetuate existing biases, potentially impacting loan approvals, investment recommendations, and insurance rates. Ensuring fairness and transparency in these algorithms is crucial.

With the right security, oversight and integration, IoT’s huge potential can be achieved safely and responsibly. But companies must go in with their eyes open to the challenges of this rapidly emerging technology.

The Future of IoT in Finance and Banking

The convergence of IoT and finance is still in its early stages, but the future holds exciting possibilities. Here’s a glimpse of what’s on the horizon:

  • Cashless societies: While entirely cashless societies may not be imminent, we can expect a significant decline in physical cash usage. Biometric authentication and wearables for contactless payments will likely become the norm. Imagine paying for groceries with a simple wave of your hand.
  • AI and Machine Learning: Artificial intelligence (AI) will further enhance IoT applications in finance. AI can analyse vast amounts of data collected by connected devices to predict customer needs, personalise financial products, and even automate investment decisions.
An IoT, high-tech ATM equipped with advanced sensors

Important reading: Our detailed guide on AI in Software Development

Examples of Fintech Companies Using IoT

Several fintech companies are already pioneering the use of IoT:

  • SmartRent. This company uses IoT sensors in rental properties to automate rent payments, manage utilities, and even detect potential maintenance issues.
  • WeFit. This fitness app leverages wearable data to offer personalised fitness coaching and connect users with health insurance providers for customised discounts.
  • Clover. This point-of-sale system integrates with smart devices in stores to streamline transactions and provide real-time inventory management for merchants.

These are just a few examples, and as the technology matures, we can expect even more innovative applications to emerge.

Conclusion

Ultimately, the opportunities presented by integrating IoT in fintech and banking are significant, but so are the challenges. Whilst the potential for greater efficiency, security and customer experience is clear, there are privacy, connectivity and compatibility issues that need to be addressed. 

As with any new technology, progress will be incremental rather than immediate. But by taking considered steps, being agile and responsive, plus collaborating across sectors, the finance industry can harness the Internet of Things in ways that benefit organisations and customers. With care, investment and vision, these ambitious innovations can become secure, sustainable realities.