Digital commerce has crossed its chasm of adoption and it is now part of the strategy for all major financial institutions to create an omni-channel environment for their end-customers. As the entry-barrier stands at its lowest ever level, nimble technology players are increasingly becoming the partner of choice for merchants and consumers for their shorter innovation cycle and easier commercial model. To stay competitive in this commoditized industry, traditional payment players must relook their business model.

A mobile wallet or Apple Pay makes the payment experience seamless but it does not break the idea of a traditional commerce that typically gets initiated by a consumer or a business in a B2B scenario. So the disruption it brings is mostly limited to the user experience at check out and remains at the periphery.

Shift from digital commerce to “Connected” commerce

 In contrary, a smart refrigerator, that can sense if eggs or milk are running low and creates an automated grocery list, disrupts the idea of a typical commerce cycle. It blurs the line between stages of a purchase cycle and seamlessly connects an user’s need of commerce with purchase of the right product while the user playing a limited or no role during the event.

 Commerce in the IOT world typically starts with a sensor capturing data from devices, interpreting data to understand user need, finding the best matched product or services and triggering payments with minimal or no user intervention. The global market for IoT devices is positively influenced by factors like the changing consumers' lifestyle and growing preference for technologically advanced products, which is poised to result in a profound CAGR of more than 43% by 2019. IOT will shift the gear from creating more touch points for consumers at their commerce journey to minimising touch points in an automated and connected environment.

Lets try to understand the shift towards Connected Commerce from traditional and digital commerce:

What does it mean for the Payment Industry?

Online and mobile payment needed banks, processors and networks to organically evolve their existing service paradigm. IOT puts forward a bigger question to address – should Payment companies be relooking at their core to be part of the bandwagon?

IOT brings opportunity for a bank, a card network or a processor to move up the value chain and create a connected environment for commerce that is built at the intersection of sensor, gateway, cloud, network and security. While accepting, processing, clearing & settling payments remain at the core of their business it does not quite give them a competitive edge anymore. Heavy-foot traditional players need to adapt and invent change in their business models to create new service lines across the market segments they operate in. Most importantly, it needs them to build the right partnership eco-system to create new value for end consumers.

IOT is blurring the line between industries and the boundary of core competency slowly fades out. A good example would be Nike. It created its own digital platform (Nike+) and launched a high-end electronic wearable (Fuelband) to track movements. Nike has successfully broken out of the boundary of apparel industry and moved into tech and data, which is a well thought-out strategic shift. Though technology doesn’t reside at the core of the payment companies, but to leverage the growing potential of the IOT-enabled commerce, they can’t shy away from device and sensors. Starting from a refrigerator creating the grocery list, to the car acting as a payment instrument for drive-thru pick up or a load-balanced intelligent car charging station – all of these are probable use cases a financial institution can launch but it requires them to expand their core and leapfrog across industries to create a hyper-connected experience for the end consumer segment.

Micropayment - needs relook at the CORE

As “Things” around us are getting connected it would potentially bring a huge leap in global commerce but do the banks or processors have the Payments Infrastructure to process real-time payments in an IOT environment? Connected devices can generate a transaction value of 10^-4 or of lower denominations which is much lower than what a dollar system can support. It can be a smart light bulb negotiating its price on an electric grid or automatic downloading of digital content at less than a dollar price.

IOT is poised to disrupt the traditional commerce cycle but it requires real-time payments processing with zero processing cost as the cost of payments in a traditional banking system might very well overshadow transaction value of a micro-payment. This triggers the need for larger adoption of crypto-currency like bitcoin that forces down the cost of transaction to almost zero. It is a major shift from the traditional settlement system of a bank or a processor that gets source of revenue from interchange fee, discount fee and chargebacks.

IOT enabled commerce demands a serious need for payment intermediaries to extend their core to support micro-payment. So diversifying presence across the value chain would not be sufficient to create a connected commerce environment; it needs a re-look at their payments infrastructure.

Security - a hurdle to get over

Complexity of IOT solutions will need a fresh look at the Security. Large numbers of moving parts increase the chance of potential weak links. Moreover, an IOT solution typically requires wide-spread sharing of data from sensor enabled devices. Microsoft estimates that more than a quarter of all cyber-attacks will target the IOT space in 2020.

MasterCard and VISA are playing active roles in bringing tokenization at the forefront of payments initiated through devices. The unique ID (token) that substitutes the primary account number (PAN) should give confidence to users towards adopting IOT enabled commerce. Technology for securing payments should be complemented with data security measures. Whether data is resting on a device or on a bank’s IT system or whether it is moving around nodes in an IoT ecosystem, it always must be fully secured and encrypted. So secure key management and strong authentication process must be in place to accelerate the move towards connected commerce.

Questions to address...

A future where virtually every gadget would be connected with internet is not far away. Manufacturing, fleet, insurance and healthcare industries have started reaping benefits out of connected devices through remote monitoring or by driving operational efficiency to have better control in their cost structure. Financial Service industry is an usual late mover in adopting technology innovation and IOT is not an exception.

As per Gartner finding, IOT is yet to see major adoption primarily because of two hurdles:

• Many organizations have not yet invested the time to develop ideas for how to apply IOT to their busines
• Insufficient expertise and staffing to drive IOT initiatives

While IOT brings huge opportunity for payment companies to add new stream of revenue, it also poses the challenge of building an integrated architecture. They need to address complex questions in the likes of: How to capture information and intelligence from the continuous flow of data? How to store the data optimally? How to secure the collected information?

Most of the IOT initiatives, with an integrated payment component, are in incubation or prototype stage, and a definite leadership is yet to be emerged. It doesn't need any brilliance to say, creating a sclabale business case and reaching market faster with an agile mindset would be the key for the financial institutions to get RoI from their IoT initiatives. The best bait for them would be to build an eco-system of co-innovation to co-create value for merchants & end-consumers. They need to extend their core from processing payments to data and services and build the capability of processing micro-payments.