This is part 1 of a two-part series.
The payments industry is undergoing unprecedented change, thanks to innovations from fintechs and progressive financial institutions, as well as explosive growth of mobile, connected devices (see Figure 1). So far, merchant acquirers have been slow to respond. To succeed in this continually changing and complex environment, merchant acquirers need to embrace the Internet of Things (IoT) to generate new streams of revenue in the digital age.
With the growing number of digital payments channels (mobile point of sale, near-field contactless, wearables, etc.) and the surge of smart devices and applications, consumers increasingly expect a digital experience to approximate an ideal physical setting. In addition to one-click or type-and-swipe access, consumers look for fast, convenient, personalized service at every touchpoint.
For example, Square provides payment processing, point-of-sale (POS) and financial marketing services worldwide that enable merchants to get up and running in mere minutes. Additionally, MasterCard last year announced its “Internet of Payment Things” initiative, promising to turn any consumer gadget, accessory or wearable into a payment device. Consumers also expect these services to be low-cost, thanks to services like Mint, Venmo and others.
To compete against these and other alternate modes of payment from PayPal, Google, Amazon, Apple, Square and others, merchant acquirers and traditional payment companies will need to develop solutions that anticipate and accommodate consumer preferences and impending technologies.
Thanks to the explosive growth of smartphones and other sensing devices, the mobile payments market is expected to grow 122% to $721 billion in 2017. By then, the use of mobile wallets is projected to increase 183% and be available to over 43% of smartphone owners. The IoT represents the next stage of Internet development and a major stride in how companies gather, analyze and distribute data. Over time, data and payments will become inextricably bonded, and users will have a “digital identity” that stores everything from their payment details to digital signatures and biometric data.
The Future of Commerce: Contextual and Connected
For both merchants and acquirers, the IoT will continue to make commerce “contextual” — a natural and simple experience that takes into account a person’s interests and intent to buy. For merchants, the IoT’s vast connectivity makes it easy for consumers to purchase within an intuitive, familiar and comfortable environment (i.e., the “buy” buttons that now appear on Facebook, Pinterest and other social media sites). Acquirers, meanwhile, can provide various interfaces for accepting payments from all connected touchpoints, creating an omnichannel experience.
It’s vital for acquirers to accept payments from all IoT touchpoints. Once merchants incorporate APIs into their open platforms (which they can either rent or buy), users can connect, manage and control all of their smart, IoT-linked devices in one place. Acquirers will not only have the opportunity to increase their volume of transactions by acting as a payment processor; they will also be able to generate revenue by providing services such as tokenization, electronic identification and fraud detection. This will enable integrated, seamless payment capture/point of interaction from a range of devices and form factors — allowing consumers to start a transaction in one channel and complete it in another.
By allowing third-party app developers to utilize their aggregated data and selected services, companies can also gain multidimensional demographic insights into contextual buying trends across product categories, geographies and socioeconomic groups. A merchant acquirer might make its processing platform available to third-party apps through a pay-per-use model, or it could generate revenue through subscription models.
Figure 2 details the trends that the payments industry must prepare to act on and accommodate in the near future:
While mobile wallets simplify and speed the payment process by taking plastic cards out of the equation, the industry needs to focus on a time in the not-too-distant future when virtually all devices will be connected through the IoT and linked via standard IP — resulting in a seamless, efficient and highly secure payment process. In part two, we’ll explore key challenges acquirers must overcome, as well as an optimal approach to IoT-enabled payments adoption.
To learn more, please read Part 2 of this series, see our white paper The Internet of Things: A Prime Opportunity for Merchant Acquirers or visit our IoT Practice website.