How new technologies that improve industrial operations will shape fresh opportunities for finance.
Data science, as you may have heard, is changing the world. In particular, new technologies to gather, store and analyze data are driving gains in the efficiency and reliability of everything from automobiles to jet engines to power plants. If these innovations help increase the transparency and reliability of complex operations, can they also help adjust the risk and reward calculations of those who provide financing? Will they drive better returns or open up less expensive sources of loans, insurance or equity? What are the regulatory or legal obstacles to these developments? How will the benefits be shared?
At its heart, finance is the balance of risk against potential return. People with money take the measure of people who need money and decide whether the game is worth the candle. Lenders and investors have developed new ways to crunch numbers and draw inferences based on financial results since the first appearance of calculating machines. Spreadsheets have helped, too. Today, new technologies allow complex physical operations to be monitored in real time and with unprecedented precision. Most impressive, algorithms now use repetitive operational analysis of past correlations to make more reliable predictions.
The Internet of Things is often associated with consumer gimmicks like a toothbrush that tracks dental hygiene and or a refrigerator that warns of soured milk. But this transformative technology, sometimes dubbed the Fourth Industrial Revolution or Industry 4.0, is already deeply embedded in large industrial operations and is being used to reduce costs, improve safety and extend asset lives. Operational breakdowns can be foreseen; accidents can be avoided; maintenance can be streamlined. What has yet to occur on a significant scale, however, is the sharing of these operational benefits with those who provide the loans, the leases, the insurance or the equity investment.
Widespread adoption of many of these technologies may still be years away, but now is the time for investors to explore just how a more sophisticated and systematic integration of “Internet of Things” technology can optimize financial decisions. Simply put, if a wide range of physical operations can be monitored and analyzed in real time, how can this also improve the returns on loans, insurance or other investments? Will it open up new pools of capital that would otherwise be more risk averse? Will it allow more reliable monitoring of environmental and social consequences of investments?