The IoT + Blockchain + Cognitive recipe

The more I work on discovering use cases in banking for IoT with colleagues, the IBM Academy of Technology and customers in Europe, the bigger is the connection I see among Internet of Things, Distributed Shared Ledgers (blockchain) and Artificial Intelligence.

Even banking seems to be an industry without “physical things” there are financial products and services, including those more traditional, that have a connection with real life things, like for instance loans, leasing or payments (that could be made automatically by connected things). Instrumenting those physical things would allow to know the state of the asset linked to a financial product to control who owns it, how is being used and which is its current value in real time.

On the other hand Blockchain can connect the world of the physical instrumented things with the world of virtual things (dematerialized physical things) to manage their identity and lifecycle with consensus, provenance, immutability and finality. Smart Contracts in turn  are the key element to automate and industrialize the physical/digital world, reducing or removing at all the processes’ friction.

These systems involving the physical and virtual worlds will be extremely complex to manage (including the real time dimension) and will only scale applying Cognitive capabilities.

So the  IoT+DSL+AI recipe seems very appetizing …

An Internet of Virtual Things (IoVT)?

Should we extend the IoT concept to the virtual things and entities?

Should we coin the term Internet of Virtual Things (IoVT)?

Up to now IoT uses to refer to physical things and we have used in that sense in the previous post about IoT in Banking where we consider scenarios like physical asset management, IoT for improving customer experience (also through physical things like smart phones, wearables or branch office sensorization) and financial services in the IoT ecosystems (basically other industries ecosystems like energy and utilities, transportation, health care or smart homes with plenty of physical things). So use cases involving just physical things.

But if we think on banking most of their assets are virtual: their products are virtual, their customer information is virtual, their investments are virtual and even the customer touch points (the digital channels) are virtual. Actually banks use a vast amount of virtual entities to manage the information life cycle: their capture it in the internal core banking systems deploying probes and sensors for collecting events and data, also in their own channels or even in the external social platforms with crawlers and bots; their process the raw data with tools that ingest, cure and enrich it, to therefore digest it with analytical engines that transform data in information and knowledge; the products engines manage the banking products lifecycle since the opening until expiration, normally running on process engines and rules engines to maximize flexibility and agility. The intelligent systems are becoming more frequent, helping or replacing the staff or the customer in decision making processes, like the next best action engines that can be applied to product recommendation, customer servicing, real time marketing campaigns or customer churn detection and prevention. Additionally there are entities working to comply with the regulatory requirements and others fighting against fraud and security attacks. Entities also to monitorize and manage risk in their different forms. Even the formerly very physical banking data centers are becoming virtual with the adoption of the Software Defined Data Center approach, as most of the functionality that in the past was implemented on specific-purpose machines, like servers, storage boxes or networking routers and switches, now become virtual as implemented by SW.

Therefore most of the bank assets and the entities that process those assets are pure virtual what means that we should sensor, instrument and connect those “virtual things”, among them and with the more traditional physical things, to create an “Internet of Virtual Things”.

(And not just in banking but also in other more physical industries)

Exploring IoT in Banking

The evolution of The Network: Individuals, Communities, API Ecosystems and now Things

Traditionally Internet was a platform to connect people with the systems of many type of institutions (businesses, not profitable institutions, universities, governmental, etc.), initially providing just content and later on more complex interactions, including things like banking information and transactions, anyway at the end something just between a person and an a institution (for instance a bank): the Personal Internet. During the last decade this platform evolved to support much more complex interactions, not just between a person and an institution but among people, communities of people, and also institutions: the Social Internet. In this new platform people share information, ideas, thoughts and whishes with peers and can express opinions and believes that provide the community a power in front of the institutions never seen before. More recently a new level of interaction complexity appeared in the Internet: as people got connected forming the social networks now it is the time of communities of institutions collaborating among them and also with the communities of people in the API Economy Internet.

But out there it is not only about people and institutions. There are “things”, many things, a huge amount of things (much many than people and institutions) that extremely quickly become instrumented and connected among them creating a community of things, but also with institutions (for instance with enterprises or municipalities) or people: the “Internet of Things-IoT”. The business, social, ethical, legal and economic impact and consequences of this era of integration among people, institutions and things is immense and still difficult to imagine. But it is a reality that is there, and it is there to stay and growth.

A bank in the IoT world? Exploring scenarios

Banks have been escorting people and institutions in this journey through the Internet evolution. They were (and are) the bank of individuals, the bank of social networks and more recently the bank of ecosystems. But currently, when they still are trying to find their space and role in the API Economy, the IoT abruptly irrupts into the scene in many industries like automotive, energy and utilities, healthcare, industrial sector, aviation or retail, impacting their manufacturing, logistics, distribution or even marketing functions and creating completely new IoT ecosystems like Connected Cars, Smart Homes, Smart Healthcare, Smart Insurance or Smart Utilities among others.

But, what about banks? Is there a space for a business (banking) that is mostly virtual and digital?. This is a so new space that is very difficult to predict the future, but we could envision three areas where banks could get in contact with IoT: Physical Asset Management, Customer Experience and Financial Services for the IoT ecosystems.

Physical Asset Management is the IoT area with less impact on banking business models but that best could reuse the experience of other industries, with a potential high impact on cost and operations efficiency and also on environmental regulation and social responsibility aspects, like greenhouse gas emission or water use. This area involves all the physical assets a bank can manage, including facilities like the branch offices, central departments and rest of buildings, data centers or even specific financial devices like ATMs. Branch offices and buildings in general are spaces with high cost for banks in terms of real state and energy consumption. Any efficiency gain related to energy savings or operations can have an important impact on the bank results, mainly in banks with a dense branch network. Additionally other possible benefits for banks, when instrumenting and sensing the spaces for detecting assets and people movement, are in operations efficiency, facility management and even in team working.

Customer Experience is a key element in the current banks’ customer centric strategy. This is about improving the interaction with customer with processes flowing smoothly among traditional and new access channels (omnichannel) and capturing and processing user information to build a single and complete view of the customer. IoT will contribute to improve the customer experience through devices that open new customer channels, providing not just a more convenient interaction, but also contextual information to enhance the clients’ view and therefore their insight. These devices include the already traditional smart phones but also new wearables that customers are adopting in many cases quite fast.

It is interesting to reflect about if devices, like smart phones, or wearables, like smart watches or wristbands, are self-service channels or “things” part of the IoT ecosystem. Clearly it is a self-service channel as banks deploy apps oriented to provide users access to the bank systems as any other self-service channel. In this case is the customer the one that drives the interaction with the channel using the mobile phone or any wearable to access to all the financial services and operations available for the bank’s end-users. But on the other hand the devices, like a smart phones, are currently equipped with plenty of sensors (GPS, temperature, humidity, communications –Wifi, Bluetooth, NFC-, fingerprint, etc) that can collect environmental information and share it through an app with the banks systems (if allowed by the user) in order to offer personalised services and products based, for instance, in geo-location. In this sense the phone or any wearable is closer to a “thing” working on its own on behalf of the customer and, therefore, an element of the IoT.

So smart phones and wearables can contribute to create a superb customer experience providing contextual information, which will enrich the 360º view of customer, and a new access channel. Additionally some spaces like the branch offices can be instrumented with sensors for presence detection to build a much more personalised customer experience in the banking spaces, like welcoming the customer, noticing the staff about VIP customers entering in the office, providing them personalized guidance on their movement into the branch, presenting customized ads in intelligent panels that can identify specific customers or demographic segments, facilitate the use of the financial self-service devices, like ATMs or kiosks, or guide the workforce to provide a better customer service.

But probably the most interesting and innovative domain for IoT in banking, the one that potentially can create disruptive business models and revenue streams for banks, is the integration of Financial Services into IoT Ecosystems. IoT ecosystems are raising quickly in many sectors, like automotive, industry, retail, utilities, telcos or healthcare among others. In ecosystems like smart cars, smart homes, smart retail-shops, smart cities or smart healthcare (just to mention a few) there will be instrumented, sensorized and connected devices, appliances and machines that will communicate among them and also with enterprises that could provide simple products and services like repairing, component replacement or replenishment, or even more sophisticated cross-industry services involving multi party contracts (for instance a home device needing a complex repair requiring multivendor involvement and supported by an insurance contract). In these IoT industry (or cross-industry) platforms the interchange of value will require not only payments capabilities but also more sophisticated financial products and services like customized lending or leasing that could be adapted based on the things’ events and context: Personalised loans could be offered for situations requiring meaningful investments (for instance expensive home device or machinery broken that need to be replaced); adaptive leasing with terms and conditions (for instance residual value) that could evolve over the time based on the real use of the asset under the leasing contract. The life events of things detection (or even prediction), in addition to automated and autonomous financial services provisioning as discussed in the previous paragraph, will open the opportunity for financial advisoring in the IoT ecosystems that, due to the huge number of participants (billions of things) and the level of interaction and transactions (trillions), will require an automated intelligent support based on cognitive and intelligent systems to help humans on forecasting, financial products selection and budgeting.

So it is evident that IoT is a completely new territory for banking, with use cases and business models that should be discovered or invented, like those envisioned in this post around physical asset management, advanced customer experience and financial services in the IoT economy. Banks should explore this new frontier to early detect new business opportunities. If they (the banks) do not move fast into this new IoT territory, for sure others will do, occupying the new IoT financial services space, as already is happening in traditional banking business where new entrants already are a real extremely huge threat for banks.

In incoming post we will keep exploring these scenarios, relevant news about IoT in banking, ideas and thoughts, architecture and technology to envision the future of banks in the IoT world.

New Banking Ecosystems

As it already happened in other industries, like music, travel, advertising, retail, photography, book selling, newspapers or even information technology. digitization is enabling a deep change in the retail banking industry, transforming its value chain and business models.

Internet, and more specifically mobile, are impacting in the banking distribution models, moving from a former situation where the branch office was the dominant channel to a new one where digital channels are gaining importance in the way customer interact with banks. Technology (mobile, social, cloud) is also impacting deeply in the customer behavior, reinforcing this strong trend to an omnichannel view of the banking distribution layer as the most convenient way of communication between clients and banks.

This digitization process is facilitating that third parties (frequently new entrants) can play a role in the retail banking value chain, offering value added services that complement, or even replace, those that traditionally have been provided by banks. Services, like new access channels, mainly for mobile (apps), or PFM are being broadly adopted by customers, regardless the banks willingness or reluctance to be part of this new ecosystem. New players are aggressively competing in traditional retail banks areas, like loans with new entrants providing crowd lending models.  This ecosystem is currently growing mainly around of platforms for apps (facilitated by APIs – Application Programing Interfaces), but quickly moving towards more complex services that will include not just financial but also multi-industry composite services.

All these disruptive changes driven by technology and new customer behavior is causing that the banking functional structure, that traditionally has been vertically integrated, is starting to be decomposed, separating the distribution domain from the manufacturing one in an accelerated way. This process will not only affect the distribution channels, but probably will impact also on the manufacturing one, as, for instance,  some platforms are allowing customers and third parties to define their  products and services (the client as a producer and consumer – prosumer).

The banking value chain

This value chain disintegration, common in mature industries to achieve higher level of specialization and efficiency, is going to cause a rapid disintermediation process with new players that will support the distribution domain and offer valued added services, cooperating or even replacing banks in some of their direct interactions with customers. This will be an opportunity for traditional banks of being more efficient as focused on their core capabilities using new channels to reach new customers segments, but, at the same time, can be considered a threat by the traditional financial institutions as they can lose the direct contact with customers and, therefore, their control as other players (those managing the distribution domain) will run the front office collecting invaluable massive information about the customer behavior, buying patterns, social relationships and life events.

The Web API model – a disintermediation process enabler

APIs is becoming the de facto standard to share enterprise business logic as a service to be integrated with partners and third parties creating new digital ecosystems. This is neither a new term (it was initially used in programing) nor the first intent of integrating systems, but is being broadly adopted by companies in all the sectors to expose core services creating an API Economy. Originated in the internet born digital companies that offer solutions as a service, like Salesforce or Google, this approach is currently being used by traditional banks and new players in the financial services sector. enabling the creation of new business models and ecosystems (we will discuss the API standards in upcoming events).

Business models

The current trend to value chain decomposition driven by digitization is allowing new business models that create a new banking ecosystem as banks are opening their core systems in many cases supported on the API (Application Programming Interfaces) paradigm. Some of these new models are:

• Mobile App’s. Offering APIs to create an APPs ecosystem. Examples: Credit Agricole or AXA
• Financial tools customization. Using APIs to customize the standard behavior of tools like personal finance management. Example: Yodllee or Geezeo. Some of these players are moving to the banking platform model (see below).
• Banking API Standardization. Some players trying to standardize the interfaces offered by banks. Example The Open Bank Project
• B2B. Some banks already offering integration capabilities for their SME or corporate customers to communicate banking statements or offer payment hub services, like in the case of Fio Banca or Westpac Payway.
• Banking Platforms. Platforms to offer financial services from different providers, integrating them with third parties (apps and financial tools providers) and customers, like Plaid or PFM (Personal Financial Manager) tool vendors moving to this area . This is a very interesting model as, like already happen in the internet economy (iTunes, Android, etc), the one controlling the platform will be the winner.
• Industry platforms with financial services. Industry digital platforms, like real-state, travel or car dealing, supported on portals that integrates financial services (ex. loans or mortgages), like Zillow. Some banks are also starting to fight by this space creating platforms where connect merchants and customers to provide value added services improving customer satisfaction and their cross-selling or up-selling capabilities, based on the analysis (using big data solutions) of the interactions supported by those platform.
• Financial Open Data. Public and private financial institutions offering  aggregated anonymized information as open data for public use, like in the World Bank API case.

All these models will be analyzed in detail in upcoming posts in this blog.