Financial technology start-ups (fintechs) can expand well beyond the confines of payments and consumer credit by extending the use of data and frictionless processes, notes Santander.

Santander InnoVentures published a paper titled: “Rebooting financial services”, jointly with Oliver Wyman and Anthemis Group, that emphasizes that Fintech 2.0 will cause a major disruption in the banking market.

Fintech 2.0: Banking innovations based on the “Internet of Things (IoT)”

According to the paper, the IoT describes the widespread embedding of sensory and wireless technology within objects, giving them the ability to transmit data about themselves: their identify, condition and environment. Citing Cisco research, the paper notes 50 billion devices are expected to be linked to the Internet by 2020. The report points out that many IoT applications already exist, such as insurance, where monitoring the driving style of car owners can preferentially price premiums for safer drivers.

The paper notes, however, that in financial services, compelling uses have not yet emerged in the market place, though the IoT could have many valuable applications. For instance, in risk management and pricing, collateral management is a key element of risk management, where better data on the quality and condition of collateral would provide more accurate assessment and pricing of risk. The following graphic captures IoT in financial services:

IoT in Fintech 2.0

Taking up global trade finance as a typical area, the authors anticipate the IoT will streamline the trade finance process. For instance, access to real-time trade details would facilitate digitized smart contracts to be verified instantaneously, assuming pre-defined conditions are met. The authors note this would facilitate a letter of credit to be issued more efficiently than in today’s trade finance process. Moreover, by providing accurate, real-time data on trade flows, trade relationships and performance, the IoT can provide information required to underwrite trade finance:

IoT in trade finance Fintech 2.0

IoT in asset financing

Taking up asset financing as the next application area of IoT, the authors note currently monitoring and valuing collateral leased or financed by banks is made inefficient by the cost of getting detailed information about the asset concerned. However, they also argue that IoT technologies can facilitate banks to overcome this problem, allowing them to monitor the condition, environment and location of collateral assets without needing to send someone to assess them:

IoT in asset financing Fintech 2.0

Touching upon the importance of smart data, the report highlights banks can take advantage of the specialized expertise at fintech companies by engaging these firms to perform the required work or by acquiring them. The authors argue that partnerships between banks and fintechs would create a powerful combination of information supplied by the bank, and innovative analytical tools supplied by the fintech. The following table captures the kind of problems that might be addressed:

Application of smart data Fintech 2.0

Highlighting the use of distributed ledger technology, the paper notes as compared to today’s transaction networks, distributed ledgers eliminate the need for central authorities to certify ownership and clear transactions. The following graphic illustrates how a distributed ledger as a network can record ownership through a shared registry:

Distributed ledger Fintech 2.0

Recent research shows that distributed ledger technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 billion per annum by 2022.

Distributed ledger in post trade settlement process Fintech 2.0

The paper concludes that so far fintechs have focused on relatively simple propositions such as e-wallets and P2P lending. The authors believe that by extending the use of data and frictionless processes, fintechs can and will expand well beyond the confines of payments and consumer credit. Moreover, the paper emphasizes that to realize the opportunity of Fintech 2.0, banks and fintechs will need to collaborate, each providing the other with what it currently lacks, be that data, brand, distribution or technical and regulatory expertise.

See the full report below.