M-RCBG Associate Working Paper No. 85
Edward Cuipa, Sasha Ramani, Niriksha Shetty and Christopher Smart
As the Internet of Things begins to deliver gains in productivity and savings on everything from appliances and automobiles to turbines and pipelines, new opportunities have emerged in the realm of finance. The networks of sensors and Big Data analytics that help prescribe more efficient maintenance schedules and predict potential system failures can also deliver new levels of transparency to those who provide loans and insurance to these industrial and infrastructure investments. Especially in developing countries, where operational and political risks are already high, analytics that can monitor operations and productivity gains should help open up new pools of money from otherwise skittish lenders and investors. Initially, realizing these benefits will require the design of aggregated data streams that predict outcomes reliably based on similar equipment or installations. The longer-term challenge will be to process these data while protecting the confidentiality of the operators, satisfying the national security concerns of governments and defending against cyber-attacks. It also remains to be seen which players in these new commercial configurations will actually capture the financial benefits of the new technology. In many industries, traditional business models may be entirely transformed. Firms that now manufacture a product for sale may eventually simply sell the service their product provides: jet engine hours of operation rather than jet engines, kilowatt hours of electricity rather than turbine generators. In time, this may have a profound impact on which businesses will need to borrow and what revenue streams and balance sheets they will borrow against. Yet, the transformation is already underway on a smaller scale as business models have emerged to leverage the operational transparency that the Internet of Things can provide in order to expand financing options. In areas that range from trade finance to rural farming and energy, technology and data analytics offer the promise of tapping into new pools of finance. These cases point to the promise and highlight the challenges ahead for governments that must balance the need for data to flow for productive purposes against concerns for personal privacy and security.