March 16, 2018
The Internet of Things (IoT) has been growing exponentially for the past decade and is expected to double again to 50 billion connected devices by 2020. That is equivalent to more than six devices for every person on the planet. However, discussions recently have shifted away from the number of devices to how these smart devices are increasingly disrupting the business value chain.
Recent research suggests that the major growing trend is the Machine-to-Machine (M2M) market, which is expected to reach $27.62 billion by 2023. These transactions represent a significant trend where humans are no longer in the loop on purchases, but rather simply on the loop. That is, humans are simply being informed after their devices make purchases.
This growing shift in the payments landscape is known as the Internet of Payments (IoP). The early stages came in the form of payments being enabled through devices like FitPay or Amazon Dash buttons. The latter is a physical button that can be coupled with a specific item on Amazon.com, such as laundry soap. Whenever you press the button, the button sends a purchase request to Amazon and within a day or so; the soap will arrive on your doorstep without any other interaction.
The protocols that govern IoP are still evolving, but when they are coupled with the cloud, big data, artificial intelligence, and biometrics, they have the potential to become the next hyper-growth sector. Some even envision a future where money and payments will become automated and cease to be a part of our everyday lives.
As the payments markets shift, it will be the most nimble and open banks that will reap the benefits. In the initial stages especially, consumers will be wary of giving their fridge their credit card number. Payment providers, such as Visa, PayPal, Alipay, Chase, and Mastercard will need to provide much more detailed transaction data than simply the date and time purchases were made. Consumers that use a single account, a credit card, for example, will want to know which device made the purchase on their behalf and what initiated the purchase.
Many credit card companies have already introduced tokenization to enable devices to make and track purchases. Visa is working to develop a ring that would replace sensitive payment account information with a secure token so that consumers can make payments with a simple tap of the ring.
Payment providers will need to go beyond simply processing payments directly through devices, though. Once multiple devices begin making purchases on behalf of individual consumers, payment processors will need to offer more comprehensive management solutions that work with the devices, manage them directly, and report on their purchases & activity. Device management solutions will need to perform conflict resolution in case the washing machine and soap dispenser both attempt to make the same resupply purchase and provide detailed forecasts on future purchases and cash flow predictions while managing anomalous transactions.
As the independent devices across a dispersed network begin acting on their own, the traditional business value chain will be forced to evolve into a matrix-like structure. The payment providers that successfully navigate through the system will be those which are able to create mutually beneficial partnerships with developers to provide solutions that support consumer lifestyle choices. The most successful institutions will be the early adopters of open banking APIs.
Open banking APIs allow third-party developers to build applications and services around the services that a financial institution already offers. The European banking industry has already implemented regulation to encourage standardization and improve payment efficiency in European countries with the revised Directive on Payment Services (PSD2). The primary impact of the regulation is that it will require banks to open up their data and transaction information to new payment market entrants.
Along with the added transparency, the development of the underlying scalable technology will allow hyper-connected banks to position themselves at the center of the matrix value chain. The winners will be the banks which are able to ride the wave by combining technological interoperability with other banks, achieve high-end scalability, and invent a new revenue model that is not based on transactions, but on transaction data.
As the shift toward IoP progresses, individual purchases will get smaller. Consumers, both end-user consumers and business clients, will demand updated pricing models that will make pricing for financial services more transparent and beneficial in the new model. Per-transaction fees, however small, will become barriers to payments when purchase amounts drop into the micro-payment territory.
This means that banks will need to adapt and derive their revenue more from services than product offerings. Data usage patterns for consumers, the prediction of consumer trends, and the systemic highs & lows of the purchase patterns will become the tender of value for banks and financial institutions.
But banks will not solely be responsible for staying ahead of the IoP game. All stakeholders, from product designers to payment processors must keep the end-user forefront in their minds. To do this, the consideration of alternative payment methods must be built into every IoP device from the outset, rather than simply being a feature that is tacked on at the end.
Finally, the most important factor to consider in the rush to enter the IoP market is security. IoT devices are notoriously insecure. In an analysis of nine internet-enabled video baby monitors, Rapid7 found that every one of them had critical security flaws that mean hackers could potentially access the video feed and watch the children from afar. The report also pointed out that many parents were monitoring their children from smartphones connected to their business networks, meaning that the hacked baby monitors provided a window of opportunity for cybercriminals to access sensitive business information.
It will be critical for developers of IoP devices to put consumer security first to earn and maintain consumer trust while providing the most seamless experience.
There has been a great deal of hype about the potential applications of IoP. While many of these simply mimic traditional consumer behavior, such as a refrigerator or printer ordering goods that are used up, other paradigms go a step further when paired with emerging technologies. A self-driving car, for example, could detect that it needs repairs and drive itself to the shop, pay for the service, and then connect directly to an application like Uber to earn money to pay for the repairs before returning home.
Other possible scenarios include auto insurance companies that monitor driving activity and issue discounts for safe driving behavior, or health insurance providers that automatically adjust premiums based on data from health-monitoring wearables.
IoP financial service institutions may also leverage data as trusted advisors to allow the user to make purchases, use services and carry out their tasks without ever experiencing a payment.
As the M2M market continues to grow, the most successful institutions will be the ones who can provide genuine value to the humans that are in the loop with their devices. As consumers learn to trust their cars and refrigerators with their finances, a new business value chain will emerge. It is not clear now what exactly this new paradigm will look like, but with billions of dollars up for grabs, it is clear that developers, manufactures, acquirers, issuers, merchants, and processors will be eager to lead the charge. If they can build an ecosystem that provides the necessary functionality, user experience, and security everyone will be primed to reap the rewards.