The Internet of Payments
Recent research explains IoT’s transformational possibilities for commerce
By Josephine Rossi
Robot vacuums. Smart thermostats. Talking refrigerators. As digital technologies continue to excite investors and pique the interests of consumers, a new research report conducted by IDC Financial Insights and sponsored by ETA and Intel takes a closer looks at the Internet of Things specifically and why it’s poised to cause a paradigm shift in payments.
IDC defines the Internet of Things as “an aggregation of endpoints—or things—that are uniquely identifiable and communicate over an IP network using some form of automated connectivity, whether locally or globally.” That definition is important from a payments perspective because it includes several key phrases, according to James Wester, research director for IDC and author of the whitepaper. He presented the paper’s findings at the ETA Strategic Leadership Forum (SLF) this fall. The first phrase to hone in on is “uniquely identifiable,” which means that any endpoint exists as a distinct entity within a network, and each endpoint is capable of being differentiated on the network. “Automated connectivity” describes how endpoint communication is managed with minimal input, and “local or global reach” refers to how networks of devices scale based on the needs of the endpoints.
“Where these concepts inform the discussion on payments and the Internet of Things is in emphasizing how varied, complex, and vast the aggregation of endpoints will be,” Wester wrote in the whitepaper. “In addition, the endpoints themselves will have their own identity as well as the ability to initiate actions independently, such as placing orders, sending invoices, and making payments.”
Although the full scope and scale of IoT has not yet been realized, a lot of recognizable use cases exist, such as smart TVs, connected cars, connected homes, and more. IDC estimates 12.1 billion devices were connected to IoT in 2015, and by 2020, that number is predicted to be 30.3 billion connected devices, sensors, smart appliances, and more. “That means we are almost halfway to this point where we first thought IoT would be taking off,” said Wester during the presentation, “so we are already 40 percent there when we start looking at it from an installed base standpoint.”
Impact on Payments
Currently, 31 percent of the organizations surveyed already have deployed an IoT solution, and 43 percent plan to do so in the next 12 months, according to the research. Total global investment in IoT is expected to reach $1.5 trillion by 2020. “That’s a very big, eye-popping number, but you have to look at exactly what it means. It’s investment in everything from consumer spending to the foundations, platforms, technology—everything,” said Wester.
Drilling down specifically for payments, IDC forecasts $14 billion in payment revenue globally for the same time period. “If that’s revenue that you’re separating, if you’re splitting it up, you can make a tidy living on $14 billion in revenue. This is not transaction volume, it’s not transaction value—it’s actually revenue.”
It’s also a conservative number, said Wester, because it is based on current adoption rates and use cases, and not future possibilities. “This is the very beginning of what we’re starting to look at from a revenue standpoint,” he said.
At Intel, Michelle Tinsley, director of mobility and payments security in the retail solutions division, is helping to turn those possibilities into realities. She co-presented with Wester at SLF and said the company is using IoT to help automate and lower costs in supply chain logistics and to “recreate the retail experience and merge commerce between online, on mobile, and in store.”
One example is RFID tagging of clothing at Levi’s to improve inventory accuracy. Managers can now track, for instance, how many times a piece of clothing goes into the dressing room. If it is tried on many times but not purchased, it could be defective and should be removed from stock. “If [retailers are] going to start offering new types of fulfillment models like buy online, pick up in-store, they have to have 95 percent or better accuracy,” said Tinsley. “Most retailers are about 65 percent accurate today on their inventory.”
The technology offers considerable operational savings and the ability to focus on revenue gains from keeping hot-selling items in stock. Tinsley cites one retailer that spends $200 to $300 million annually on markdowns to clear out excess inventory.
Another example, which Intel demonstrates in its booth at trade shows, involves using contactless ink on packages so the items can interact with the shelving, showing the retailer what’s there and when items are removed. “It’s turning the product into a smart thing itself versus just being a dumb product hanging on a peg,” said Tinsley. “When we think of Internet of Things, we need to think really broadly, and a lot of times it means connecting some technologies and partners that you may not have worked with before.”
Many future use cases also will involve the automatic movement of money, according to IDC. Current examples include connected cars paying tolls or meters paying utility bills. Across such examples, IDC is forecasting connected devices will initiate more than $1 trillion in transactions by 2020.
It’s important to point out that these uses may not represent new transactions—a human would still be paying the tolls or utility bills without a connected device. What is new, according to Wester, is that these connected devices have access to payment networks and the ability for payments providers, acquirers, and processors to bundle purchases.
“Where it used to be many, many vendors, where it might have been many acquirers that were actually providing the services, or payment processors that were connecting those previous transactions, now it’s going to be the network,” said Wester. “That network is now going to bundle all of those transactions. You’re actually going to see fewer providers in the background.”
That network also has the potential to displace merchants. “They’re going to be replaced because now a network is going to be going around them, or is going to be controlling both endpoints, maybe even the payment type that’s available,” said Wester.
As with conversations about mobile commerce, ease of use for consumers and vendors and seamless transactions among connected devices are paramount. Equally important will be how the payments ecosystem updates card-based processes and models to validate identity and address risk and security issues.
“In my mind, there is great potential for those companies—maybe on the issuing side, maybe on the financial services side—for somebody to say, ‘We’re going to actually take those talents that we have in protecting your financial life and maybe we wrap a service around that,’” said Wester.
“[IoT is] not just about the transactions,” he added. “Payment is about identity. Payment is about data. Payment is about risk, and I think that there are going to be other use cases and other products besides just transactions that the vendors in the payments space will have a role in.”
Misconceptions and Moving Forward
Both Tinsley and Wester agree that the payments world has been slow to recognize the profound effect IoT can have on businesses.
“Actually, the U.S. is one of the slower growth areas. Asia, for instance, because there’s so much growth happening there, it’s almost easier to adopt some of these IoT use cases straight into what we call greenfield,” said Tinsley. “We see a lot of smart city activity coming from the Middle East and Asia, really innovative, new banking types of things coming out of Indonesia… they’re jumping the shark. They’re going straight to value-added use cases.”
Another misconception, according to Tinsley, is that IoT is prohibitively expensive. As a result, Intel is seeing retailers that are putting off the investment or implementing a modular approach. “It’s our job to come back and talk about how quickly some of these investments can pay back,” she said. “Correcting your inventory distortion problems could have a very real impact on the current year financials just by implementing some simple technologies. We’re also trying to broach the misconceptions about the cost of deploying some of these things, because the costs have really come down.”
Wester and Tinsley also agree that the payments community needs to realize a sense of urgency if it wants to take advantage of IoT. IDC predicts that requirements for payments systems will scale quickly, and far fewer providers will be needed to initiate transactions via connected devices. The network of providers responsible for connecting the devices also will decide payment methods and routing.
It’s time to start planning now, according to Tinsley. She advises adding IoT to strategic planning for three to five years. “Start to make it part of the day job,” she said, “because otherwise just pontificating or wondering about it, you could again be one of those that has their lunches handed to them.”
Wester likens the IoT phenomenon to the advent of e-commerce. When merchants wanted to be able to sell merchandise on the internet, a lot of acquirers, processors, and banks pushed back because they didn’t know how to apply risk models to a card-not-present environment. However, the companies that moved forward to figure it out benefited. “I think that there is going to be room for companies in this space to do that same thing with the Internet of Things,” he said. “But if you want to be one of those companies, get on that now, because we are a lot further along than you think.” TT
Josephine Rossi is editor of Transaction Trends. Reach her at firstname.lastname@example.org.