Be Prepared for the new order of Things

Introduction 

With the regulation pressure and the supervisory package like BCBS 239, Stress testing, IFRS9, Solvency II or last and not least Fundamental Review of Trading Book, my question to a GSIB chief risk officer was is this the future for financial services for the five next years without any vision on what can be the technology future for the risk management with regards to all digital transformation? The answer was yes and that is what it is, the risk managers will not look to change the current technology, but will look to leverage the risk management regulation costs.

Following this risk expert discussion, I got a second discussion with SAS Analytics Architect and he introduced to me the SAS Analytics for Internet of Things. At the end, the question came from the architect on the regulation package and its complicated rules, what can be the impact of the Analytics for Internet of Things for risk manager, when implementing a new regulation? What can be the future regulation standard framework?

Gartner estimates that connected devices will reach an installed base of 25 billion units by 2020, with an annual compound growth rate of 35.2 percent from 2013-2020.

*For this post, I will not reintroduce here the Internet of Things as it is widely approved that the Internet of Things (IoT) will have a huge impact on approximately every industry, and financial services is no exclusion.

Internet of Things and its impact on Insurance industry

Insurers are already exploring how the IoT will transform the insurance industry through improved customer information flow, more accurate price models and faster disbursements. This is done through real-time monitoring, collection and analysis of behavioral data for both P&C and life insurance. As a result, this generates many openings for incumbents, as well as threats combined with any analytics challenge – from experimental to mission-critical analytics on SAS Viya new architecture as an example.

Internet of Things and its impact on retail banking and capital markets

 While the impact of the IoT on insurance is “predictable” and more apparent, an analysis by Deloitte foresees that the IoT has prospective in both retail banking and capital markets, as well. Although use cases may seem rather less obvious, banks ultimately rely on access to data for risk management and credit analysis. Deployment of sensors and M2M communication represent a new array of data sources that may be utilized in a banking context.

The IoT is expected to reshape the world’s economy, and we have just scratched the surface of more or less of the possible use cases in banking and financial services. Considering the use of big data in banking, a small number of us would have predicted it was possible to prove a correlation between correct use of capitalization when lettering your information name’s online and your credit value 20 years ago. Also to add new data sources to credit scores, SAS Analytics for Internet of things technology could modernize loan collateral tracking and balance sheet reporting for both SMEs and corporate clients.

Combined with the promise of smart agreements or what is known as smart contracts, banks could be able to deliver credit and loans at a much less cost, as SAS Viya offers the capability to Self-service access to data management, analytics models applied for scoring and business intelligence, as well as give existing loan officers efficient tools when reviewing/tracking credit portfolios and optimization. Access to real-time client data also enables new business models like dynamic repayments based on real-time analytics for analysis of available working capital and cash flow.

 But with great potentials comes great complication and uncertainty…

For the #IoT to extent its accurate potential in payments, the concept of identity must also include things or mainly machines. This would also challenge the concept of connecting identity to a bank account, as well as existing card schemes as means of value transfer. When machines are able to perform transactions with machines in real time at a marginal cost basis, the concept of payments will become archaic in many use cases as transactions turn out to be automated and unified into other services. While the IoT and M2M communication will make payments invisible, banks are also exploring the use of connected devices for increased customer engagement through automated branches and contextual services based on consumer behavior and geo-location. IoT can support distributed ledgers for assets and probably there will no clear central authority to regulate, arbitrate, and/or mitigate risk of trade or counterparty failure, hence products benefitting from the technology will be Public & Private Stocks/Bonds, Syndicated loans, Corporate Bonds, Derivatives, Letters of Credit, and Margin/Collaterals. The traditional way of mitigating this risk has been to have a trusted third party, such as a bank, to act as a centralized authority keeping track of all transactions, but when it comes to counterparties, one needs to think about identifying the counterparties and how to link them to a legal entity and can be the likely regulatory framework to define for the good practice in that case.

Conclusion

We can “predict” various stages of technology adoption of #IoT for financial services, starting from an internal application within a bank to a transitional stage where capital markets participants will execute private transactions until regulation or legislation catches up and defines a new financial risk standard regulation, that’s why the risk managers need to take the lead on to start to use the analytics for Internet of Things in the future regulation framework much before the legislation or regulation will ask for. To quote Niccolò Machiavelli “There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things”, the Risk manager leaders have to keep in mind that the new order of things is starting, and they have to be prepared for at least by starting to assess the financial risk model for Internet of Things.