FinTech and the IoT


To lead off, we should probably define some things.

First, FinTech: Financial Technology is an industry that uses evolving technology to improve or replace existing financial services.  FinTech companies can be startups or existing companies that innovate on their existing products and processes.

The IoT or the Internet of Things “is a system of interrelated computing devices, mechanical and digital machines, objects, animals or people that are provided with unique identifiers and the ability to transfer data over a network without requiring human-to-human or human-to-computer interaction (IoT Agenda).”

If you work in technology or are a technology aficionado the IoT and FinTech are some of the buzziest of buzz words. According to KPMG total investments in FinTech companies in 2015 from venture capitalists exceeded $19b, this was double the total investment of 2014, and 6 times the investment in this sector from 2011.  Investment in FinTech is projected to exceed 2015 levels in 2016.  IoT companies have not seen quite those levels of funding but total funding in 2015 was $3.5b (CB Insights) and the first three quarters in 2016 totaled $2.7b (CB Insights).  If we more broadly apply the saying, “follow the money,” we see that there are significant investments in these two markets and that as they proliferate our lives to greater degree, companies and investors stand to profit significantly.

Why is this important to the everyday person?  It is important because we are moving in a direction in our society wherein connected devices provide data to consumer facing companies and these companies build out comprehensive profiles of their customers in order to better market to them and increase consumption.  IoT and FinTech merge where, using information from connected devices, financial service companies build out profiles of their customers that can include algorithmic information that will eventually replace credit profiles (popularly known as FICO scores) and in less developed economies, like many African countries, this credit information derived from connected devices will leapfrog traditional credit scoring systems of the developed world.

It is always important to discuss the privacy implications of this connected world.  You know those terms and conditions that the great majority of us agree to without reading? Typically we surrender all rights to the data that we create using a product or service when we accept these terms. Facebook has probably gotten the most press on their terms an conditions due in no small part to the fact that they have 1.7b users.  They have recently updated their terms an conditions that include drawing data from your GPS, Bluetooth, and wifi to determine the location of your connected device and when you are using said device, the obvious extension is that Facebook knows where you are if there app is installed on your smart phone.  Facebook using this information can know where you eat, travel, shop, and even who you are with when you are out and about.  Why does Facebook need this information?  Well, they want to serve us an advertisement for Walmart when we are on Facebook while buying our groceries. The more information that they know about us the more precise they can be in delivering an advertisement to us.  For many, this degree of data collection used to serve an ad is reason enough to avoid Facebook all together.  Or is it, remember that roughly a 1/4 of the world is on Facebook.

Applying these same types of data gathering methods to a financial services firm, we can see that they could analyze our spending habits, incoming balances, what financial apps interact with our account (Venmo, Square Cash, PayPal), whether we use a spending analyzation tool like Mint, if we e-file our taxes, and the list could continue.  It is not a stretch to imagine the level of robustness of a credit profile that could be created.  In less developed economies like Kenya, the digital wallet/currency solution M-Pesa, used by roughly 40% of the population, provides a platform to gather like information: spending habits, money flow, information on payees, that create a mini credit profile that can be used to make micro credit loans and as people repay these loans they begin the process of developing a more comprehensive credit profile that can serve to qualify them for bigger loans.  This can be the means by which the economies of developing countries can be cultivated, grown, and brought into the developed world, lifting people from poverty and raising the global standards of living.  This is a very big idea.  If you want to change the world, start a company with this premise.

Follow the links in this post.  Google around a bit.  There is a lot to learn about the future of our connected world.

Paul Proctor