The Internet of Payments Has Arrived
From appliances to automobiles, the volume and variety of endpoints gaining internet connectivity continues to grow. According to 451 Research’s IoT Market Monitor, the number of Internet of things (IoT) devices globally will expand from 7.9bn in 2019 to 13.8bn in 2024 (excluding PCs, smart TVs and game consoles). This rapid virtualization of the physical world has captivated the collective attention of the payments ecosystem with the prospect of new commerce use cases and market opportunities. It’s also garnering the interest of technology companies and OEMs, which view payments as a service that can increase device engagement and potentially underpin new revenue streams.
At the most fundamental level, IoT is catalyzing an expansion of the payments acceptance network by converting any connected device or endpoint into a platform for purchasing. 451 Research recently investigated the impact of this emerging opportuntiy in a new report entited Internet of Payments Market Playbook, which forecasts that IoT-enabled transactions in the US will increase at a 125% CAGR over the next several years .
While many Internet of Payment (IoP) transactions will be characterized by payment volume being displaced from another channel (e.g., a credit card transaction at the fuel pump now being made in the vehicle), an opportunity for net new payment volume (and ultimately, revenue) is also at hand. By 2022, 451 expects $7.5bn in new transactions will be driven into the US through IoP experiences , such as those that displace the usage of cash for low-value transactions and drive impulse purchases.
Longer-term, the latent – and more lucrative – IoP revenue opportunity will be found in harnessing the explosion of new data inputs that can provide deeper and more granular insights on customer behavior. The opportunities for new data streams generated by IoT devices and sensors are endless and will serve to bolster decision-making accuracy in areas ranging from fraud prevention to ‘know your customer’ (KYC) requirements, to lending to targeted offers and recommendations.
Before the IoP market can scale, payments industry stakeholders must successfully navigate a variety of headwinds that are paramount to long-term, sustainable growth of the market opportunity. If not properly addressed, some of these challenges may evolve into existential threats for payments providers as the IoP market begins to take hold. Among the most pertinent include:
- Consumer trust and adoption. IoT-enabled commerce will not be a ‘build it and they will come’ opportunity. As evidenced by tepid consumer adoption of contactless mobile payments, dispelling security concerns will be among the most significant hurdles to overcome before IoP transactions go mainstream. This will require effort and alignment from merchants, payments providers and technology companies to educate consumers – in language the consumer understands – on the security technologies that are in place to protect them. IoP stakeholders must also be transparent about how customer data will be collected and utilized, given 85% of consumers feel they have no or limited control over the amount of personal data that businesses are collecting about them online. Further, a measurably better value proposition than what exists today will be fundamental to moving the consumer adoption needle. If an IoP transaction isn’t noticeably faster and more convenient that what exists today, uptake will inevitably struggle.
- Integration and enablement. Bringing to life IoP use cases requires the payments industry to collaborate with companies (e.g., auto OEMs) and technical architectures (e.g., infotainment systems) that have not traditionally been associated with transactions. This will elevate the importance of things like microservices, DevOps and APIs for payments providers to streamline collaboration. Payment providers must strive for a single point of integration into their tech stack to limit the number of technical integrations that need to be supported under IoT. New types of middleware providers will also be essential to create the connective tissue between payments and technology companies. A variety of startups including FitPay, P97 Networks and PayByCar have already emerged to help fill this role.
- Device security and authentication. As evidenced by large-scale attacks like the Mirai botnet, various IoT endpoints are at risk of compromise. These endpoints will be at an even greater risk as they begin to intersect with financial data, making them more attractive to fraudsters. This poses a serious concern for payments companies, which will be tasked with facilitating secure transactions on devices that that are often not built with payments, commerce and strong security in mind. Further, many emerging commerce endpoints lack the interfaces on which these authentication systems have been predicated, spelling a need for an approach that moves away from manual inputs and instead relies on physical biometrics and behavioral data.
- Data ownership and manipulation. IoP transactions will generate rich data exhaust that can be used to underpin immersive customer experiences and new revenue models. The challenge in harnessing this data will come in the form of establishing data usage and sharing agreements between payments companies, merchants, consumers and technology manufacturers. IoP market participants will also have to balance data collection with regional regulations like GDPR and the California Consumer Privacy Act, while acquiring appropriate skillsets and technology to properly convert the data into action. Mastercard, for its part, has been acquiring some of these capabilities inorganically through acquisitions of Applied Predictive Technologies in 2015 ($600m) and Brighterion, Inc. in 2017 (undisclosed).