The traditional payments market is at the beginning of an upheaval, thanks in large part to the Internet of Things (IoT).
The absorption of transactions and commerce into convenience items such as Amazon's Dash and Echo products, the disruptive potential of blockchain technology, and micro-transactions between devices are just some of the many factors driving evolution of the payments market.
Startups and incumbent vendors are developing new business models and technologies atop an ever-growing and evolving IoT foundation, disrupting the status quo in the payments market.
The intersection of IoT and payments has created several market opportunities for payments companies, as well as a number of challenges.
IoT Payment Opportunities
. IoT will break the non-secure, inefficient payment-card model by enabling a more advanced distribution network that eliminates the need for physical cards. At the same time, IoT will increase the speed and efficiency of consumers' purchasing.
The four major payment networks have launched tokenization platforms with the initial objective of securing payment credential distribution provisioning in digital wallets. However, as Visa and MasterCard have already made clear, the broader vision is to leverage the platforms as payment distribution hubs in IoT environments.
. Early IoT deployments show the opportunity for 'things' such as automobiles, appliances and wearables to become platforms for commerce. These deployments underscore the way in which IoT is expanding commerce to a plethora of channels.
IoT significantly expands the payment-acceptance network by converting any connected device into an endpoint for commerce.
Expansion of the acceptance network will drive the industry's goal of displacing cash and expanding card volume.
This is good news for the entire value chain, and particularly for Visa and MasterCard, which benefit most from increased card utilization.
. Eliminating friction in the purchasing process is a critical goal in commerce: The easier it is to purchase goods and services, the higher the likelihood for conversion and repeat business.
IoT plays to this goal by expanding the number of environments in which commerce can occur. In a world of connected things, commerce is no longer limited to
traditional channels and contexts.
IoT allows commerce to happen at the time and place of consumers' choosing - be it over interactive voice response in cars, an Amazon Dash button on washing machines, or during a commercial on smart TVs.
Successful IoT commerce experiences will require simplicity, immediacy and context.
IoT Payment Challenges
. The emergence of new payment acceptance points is in direct opposition to the investments that payment networks and issuing banks have made in their 'top of wallet' strategies.
As payment cards become wrapped by the new, immersive experiences and brands of third-party providers, fostering relationships with cardholders will become more difficult for issuers.
The objective for issuers evolves from 'how do we ensure the consumer reaches for our card when they pull out their wallet?' to 'how do we ensure our card is the one linked to every application and device the consumer uses?'
Issuers will need to find innovative ways to drive value to cardholders while searching for ways to position their brand prominently in a connected world. The Visa Commerce Network is an excellent example of how issuers can increase the utility of their cards stored in mobile applications.
. As commerce experiences intertwine with IoT connectivity, one of the biggest unknowns is how consumers' shopping behavior will evolve.
It's easy to envision how a beacon-enabled storefront can transform the retail experience, but to what extent will consumers embrace these types of intimate yet intrusive experiences, and how quickly will it happen?
451 Research's Voice of the Connected User Landscape survey shows that while consumers are interested in immersive commerce experiences, they remain apprehensive about sharing personal information and giving up privacy.
IoT will change the status quo of commerce. As in-app payment experiences (e.g., Uber) increase in popularity, will there still be a need for point-of-sale terminals, or will payments happen seamlessly via a combination of Bluetooth Low Energy and cloud-based mobile wallets as shoppers exit the store?
. The question of how to secure data and validate identity is becoming more challenging as the IoT mesh of connected devices expands.
This question becomes even more critical as the IoT mesh begins to access consumers' payment credentials and conduct transactions on their behalf.
While innovations in tokenization address part of this puzzle, questions remain:
Where will tokens be stored?
How and when will they be accessed?
What entities will have the ability to request tokens?
All of these questions are up for debate.
Payments companies must also address consumers' security concerns. In the wearables space, for instance, 451 Research found that 62% of owners are very concerned or somewhat concerned about the safety and privacy of their personal information.
IoT is in its infancy - with protocols and standards still being settled - but the battle over how payments will be transacted in the IoT world is already well under way.
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