Making payment in exchange for goods and services is nothing new. The ways of making transactions worldwide have constantly been changing since ancient times. First, started the medium of exchange, whereby grains, livestock, or other valuable commodities were exchanged for goods, described as a non-tangible payment method. However, the first tangible form of currency coins first appeared in Lydia (modern-day Turkey) in around 600 BC. Fast forward to 1200 years later, the first paper currency appeared in China – in the form of bills and exchange notes; from there, it got to Europe in the 17th century. Western Union made the first electronic money transfer in 1871. Since then, people sending money and making payments with the electronic medium has become a popular mode of transactions. Making a purchase has never been this easy due to electronic payments supported by the internet. Electronic payments have been intensified by technology in recent years.
In this era of the world wide web, staying connected at all times has become a necessity. In 2020, an estimated 38.5 billion connected devices worldwide had been reported, which is significantly more than 200 million devices reported in 2000. Everything is connected from your watch to a refrigerator and car these days. It is due to the massive growth in IoT devices. The Revolution of Smart Payments has also benefited from this growth. With IoT and Smart Payments, transactions are now possible through wearables, smartwatches, and even cars. Advanced transactions such as ordering and paying through a refrigerator, once thought impossible, are now a reality.
What is a Smart Payment?
How do Smart Payments work?
Development in IoT devices has successfully enabled machine-triggered payments using real-time data opening new digital experiences for consumers and businesses. An automated transaction allows you to pay and receive payments electronically without human intervention. The concept of Smart Payments can be defined as payment transactions through IoT devices maintaining a certain level of autonomy derived from the data the device collects and analyses. This autonomous behavior is one of the critical characteristics of the Smart Payment ecosystem. For instance, if a person orders groceries by getting notified from their refrigerator that they are running low on supplies, it can’t be considered a Smart Payment. In contrast, if the refrigerator automatically triggers a supply order by gauging which supplies are running low and initiates a payment transaction, it can be considered a Smart Payment. As Smart Payments continue to grow, it will incorporate a range of connected devices, including connected cars, household appliances, and wearables.
One good example of automated payment is Amazon Go, the grocery store that took the first initiatives and is enabled by the Just Walk Out technology. In this, one can scan the app as they enter the store, put away the phone, and begin shopping – picking up items, putting them in a basket, or in bags (without needing to scan each item). There is no need to check out.
Another example is autonomous vehicles that charge for themselves. There is no need for the owner to worry about charging the batteries. The car could analyze data such as the distance to be covered, how long the driver has been driving non-stop, their habits for taking breaks, and their food preferences. The car can determine a suitable location and time for charging the vehicle using all such information. It could reserve the charging point and even book a table at a food outlet at the expected arrival time. So that the driver can relax, have some food, and pay bills automatically using a walk-in/walk-out model. When the charging is done, the driver will receive a notification on their phone or a wearable device. The vehicle automatically triggers the payment, and the journey resumes after disconnecting their car from the charging point.
Characteristics of smart payments
Connected IoT devices
Communication technology
Storage of payment credentials
Advanced payment experience
Use of real-time data
Secure payments
IoT Payments
IoT devices rely on wireless communication technology. Two major wireless technology categories are LPWAN (Low-power Wide-area Network) and 5G. While LPWAN operates on both licensed and unlicensed radio spectrum, 5G (NB-IoT, LTE-M, LTE cat x) operates only on the licensed radio spectrum. Depending on the use case or the corresponding business case, one technology will suit better than the other. Therefore, LPWAN and 5G can co-exist. LPWAN is designed for IoT applications that can be restricted to sending and receiving small amounts of data (i.e., a few tens or hundreds of bytes each day). Low power consumption is the main advantage of LPWAN.
On the contrary, implementations of 5G provide better bandwidth and lower latency for many IoT devices. The low latency is essential for frictionless payments. For instance, in a 5G empowered smart city infrastructure, streetlights could order and trigger charges for repairs and replacements autonomously, a concept shown by Worldline recently.
AI has massive potential for ensuring frictionless and invisible transactions. IoT devices need large amounts of data to fuel AI, machine learning algorithms, and neural network systems for predicting consumer behavior. Extensive training of the collected data on user behavior and understanding the transactional context is essential to successfully execute autonomous and invisible payments on behalf of the user while ensuring trust and confidence. AI can also use resource allocation mechanisms to provide smooth connectivity to more consumers and their devices in the connected ecosystem.
The most fundamental aspect of building trust in Smart Payments is ensuring the security of the user data. Since a large number of IoT devices are involved in Smart Payment mechanism and the exchange of data often takes place over the internet, ensuring the safety of the consumer data is the biggest challenge. Fraudsters are targeting IoT devices more than ever before. Because hidden payments through IoT have no visible human control, cybercriminals could seize this advantage.
One way to solve this problem is by enabling robust authentication mechanisms to secure the consumer’s data. Authentication of the devices through and users can ensure a secure environment. Consumer authentication can be made through retina scan, face or voice recognition, fingerprint, etc., based on the type of usage. Consumer authentication could improve by using continuous multimodal biometrics and contextual information checking. Several biometric information sources (such as gait, face, etc.) are combined with information such as the person’s location to provide a more rigorous consumer authentication.
Physically Unclonable Function can also provide authentication of an IoT device. These functions give a unique identity to each specific device. They rely on slight variations during manufacturing and provide special features to produce private and public keys to authenticate the device. As the device does not store the private key, it is derived from an unclonable feature of the device. The security and integrity of such devices are greatly improved.
Blockchain technology is another tool to safeguard the smart Payments ecosystem. It is a cryptographic-based solution with a distributed model to replace centralized architectures. Blockchain technology provides an approach where accuracy and reliability are of prime importance, without the explicit need for a trusted third party. The essentials of using blockchain technology consist of data that cannot be tampered with (integrity), no single point of failure due to the distributed architecture, identity secured by public/private key pair (authentication), cryptographic primitives that blocks access to unauthorized users (confidentiality), and that all transactions are signed and can be audited.
Evolution of Smart Payments
The technologies to support Smart Payment are already well established. However, payments are still predominantly triggered by humans. With Smart Payments, machines will replace manual payments, which means devices will initiate transactions depending on their capacity to function autonomously. Here are four levels of transactions in Smart Payments.
Stage 0 – In this, the device does not conduct a payment transaction; rather, it is only authorized to provide information regarding other payment transactions. For example, a smart voice assistant at home (e.g., Alexa) can access a user’s bank account. The voice service provides information such as the account balance, previous month’s transactions, or a statement on how much was spent in the previous month on food at restaurants.
Stage 1 (Permissioned) – In level 1, there is a need for the customer’s consent before the device can initiate the payment. The permission for initiating a payment is granted via authentication or authorization such as biometric or non-biometric authentication. For example, at a fuel station, the device, before conducting the payment for refueling, may initiate an authentication through a one time password or a biometric scan, so to verify the customer against the number plate of the car to ensure that it is the authorized user who is refueling the car.
Stage 2 (Conditional) – In this level, the device is authorized to automatically make a payment (without the user’s explicit consent) under some pre-defined deterministic conditions set by the user to trigger the transaction. For example, a smart refrigerator is authorized to initiate a grocery order and payment when it detects that it is running low on supplies. The level of grocery considered as low is determined by the consumer and is fed into the system of the refrigerator beforehand.
Stage 3 (Fully autonomous) – In this, the device conducts payments based on the pre-defined deterministic condition behavior described at level two combined with the adaptive capabilities of the device. For instance, a smart printer is authorized to initiate a payment against an order for a cartridge running low on ink. The ink level as low is determined by the user and fed to the printer on an earlier occasion. When it is not functioning correctly, the printer can detect a part at fault, order the faulty part, and conduct a payment.
Market Scenario
The market for Smart Payments is vast. Industries implementing Smart Payments are automotive, retail, banking, etc. In October 2016, Mastercard announced is working with General Motors (GM) to develop the OnStar Go platform. This new cognitive mobility platform enables drivers to pay for transactions such as picking up food at a drive-through window or filling the gas tank from the comfort of their GM vehicle.
Today’s smart and connected cars include a range of advanced features from emergency services to smart driving assistance and predictive maintenance to comfort and infotainment. The automotive industry comes with huge potential, enabling intelligent payments. Automatic payment functionality can provide drivers with seamless transactions to pay for various goods and services, including parking, gas, tolls, and food at drive-through restaurants.
Wearables can enhance various use cases, given their ability to process information with smart sensors and chips. Smartwatches and wristbands are the dominant wearables enabling Smart Payments. The Samsung Gear S3, Apple Watch, and LG Watch Sport are all widely used smart wearable devices that include payments capability. However, other form factors, such as rings, necklaces, glasses, shirts, shoes, virtual reality headsets, lenses, and smart tattoos, also gain ground.
As the contactless payment structure expands and develops at the point of sale, wearables can be perfect for payment. Smartwatches like the Apple Watch provide an authentic IoT payment experience. It allows the consumer to buy products on Mac and then check out by paying through the Apple Watch, serving as authentication.
Banking organizations and the financial sector are industries where IoT payments will prove successful. Providers facilitating payments should start thinking beyond standard payment processing via intelligent devices. They need to design comprehensive management systems and enable user interaction with specific devices, set up and customize it directly and report on the activity and purchases of each device. These systems should also resolve conflicts when several devices try to order the same resupply and suggest an accurate estimate for future purchases.
As ‘things’ within a distributed network start to act independently, fintech payment providers will be forced to adopt a matrix-like business structure, and that’s why the early adopter of PSD2 and Open Banking regulations will win hands down. Open APIs enable external software engineers to build solutions around the offered products and place the payment providers at the matrix center. As a result, the winners will be the winners of banking institutions that can interact with direct and indirect competitors, ensure maximum scalability, and utilize transaction data for revenue growth.
Conclusion
Smart payments are now almost a reality. The increased number of IoT devices and AI and blockchain technology advances support them. It is a matter of time before IoT payments become the key enablers for smooth, frictionless, and invisible payments. However, the success of Smart Payments does not solely depend on the ability to solve the customers’ problems and improve the consumer experience but also depends on consumers’ trust and security of their data.
*Disclaimer: This report is based on information that is publicly available and is considered to be reliable. However, Lumenci cannot be held responsible for the accuracy or reliability of this data.
*Disclaimer: This report is based on information that is publicly available and is considered to be reliable. However, Lumenci cannot be held responsible for the accuracy or reliability of this data.
*Disclaimer: This report is based on information that is publicly available and is considered to be reliable. However, Lumenci cannot be held responsible for the accuracy or reliability of this data.
Editorial Team at Lumenci
Through Lumenci blogs and reports, we share important highlights from the latest technological advancements and provide an in-depth understanding of their Intellectual Property (IP). Our goal is to showcase the significance of IP in the ever-evolving world of technology.
