If it seems like IoT is the new shiny object in payments, it's because it is. From appliances to automobiles, emerging connectivity platforms have captivated the collective attention of the payments ecosystem with new commerce use cases and scenarios. The latent commerce potential of an ever-broadening number of connected endpoints has brought with it great optimism for payments stakeholders, as well as significant hype. In this report, we take a pragmatic look at the early roles of collaboration, control and intelligence in bringing next-generation commerce experiences to life.

Despite massive fanfare, the intersection of IoT and payments remains undeniably nascent. Before this opportunity is realized, much work remains to be done in addressing the unique business challenges and requirements posed by an increasingly connected payments landscape. The next several years will require collaboration up and down the payments stack to ensure security and interoperability are maintained at scale. At the same time, collaboration will demand incumbents cede some of their control over customer relationships to other parties. Winners will view the growing influence of third parties not as an existential threat, but as new commerce distribution channels, and will develop platforms and new customer value propositions to adapt. The most differentiated players will be those that create value by thinking beyond payments. The real IoT opportunity for payments companies will be found in the data, and more specifically in the unique products, services and experiences that can be crafted with it.


The internet wasn't initially designed for commerce. There is an inherent advantage with IoT in that commerce is being planned for at the onset. The challenge comes in working now to collaborate on the underlying technologies, standards and protocols that will power commerce in IoT in a secure and scalable manner.

No one knows exactly what the payment stack in IoT will look like. Without alignment across the value chain on the fundamental infrastructure, there is a definite risk of creating fragmentation. Proprietary approaches will stand in the way of delivering a strong and consistent user experience – asphyxiating interoperability and, inevitably, the overall opportunity.

Major ecosystem players must begin to align on common approaches to handling payments in IoT. Fortunately, this level of collaboration is not foreign within the payments ecosystem. Groups such as EMVCo have long guided the development of standardized approaches across the value chain, most recently with the rollout of tokenization and 3DS 2.0. More work remains to be done, however. Much of what worked in e-commerce cannot simply be transposed into IoT settings. Areas such as risk and authentication – where entirely new approaches and orchestrations will be demanded for transacting via connected devices that may only rely on voice for interactivity (e.g., Google Home) – must be completely re-architected. Those vendors that fail to speak up now on what these processes should look like may risk being married to unsatisfactory procedures once commerce in IoT gets to scale.

While standards bodies will play an important role in ensuring a consistent direction, they alone will not be enough to foster commerce growth in IoT. Payments companies must begin to think of themselves more as platform companies, and to do this must transform both culturally and technologically. New products should be built with collaboration in mind, meaning a pivot from monolithic and proprietary designs to API exposure and ease of deployment. This will be obligatory as new entrants into the payments ecosystem accelerate and seek out partners that can expedite market entry.

Success in this next chapter of commerce will increasingly be defined by payments companies' ability to partner in a diverse and effective manner. Many of the most exciting new commerce experiences in the years ahead will in part be brought to life through players not associated with payments just five or so years ago.


There is a dark side to collaboration. The insertion of new players into the payments value chain means that incumbents are increasingly being asked to relinquish control of their customer relationships to another party. This can be seen acutely with issuing banks participating in third-party digital wallets – where banks have effectively been relegated to dumb pipes that provide the financial plumbing – and will likely continue to be the case with regulations such as PSD2 coming into the marketplace.

Not only are banks seeing their brands wrapped and consumed by other brands, the reins to their ownership and control over the customer experience are beginning to slip. The implications of this today may seem benign, but pose the risk of growing malignant as more new entrants call on banks to power – not drive – their commerce applications. The concerning reality is that payment is increasingly being associated with a device or application, not the bank that issued the card.

The process of removing a payment card from a physical wallet and keying it in during an online transaction is becoming increasingly passé, eroding yet another consumer touchpoint for card issuers. Connectivity is driving payment cards into environments where the issuer/network brand is no longer visible (consider a transaction via Amazon Echo), with growing volume flowing through cards linked to digital wallets (e.g., PayPal) and card-on-file databases. IoT will further galvanize these approaches because many devices gaining commerce capability simply lack a physical user interface. This shift in consumer payment method will continue to fortify the abstraction layers between cardholders and their issuing banks.

The evaporation of physical cards into virtual wallets and databases means issuers must become creative in their approaches to cardholder engagement. A successful 'top of wallet' strategy now equates to being the de facto card linked to every commerce experience a cardholder intends to use. This is particularly important in the near term, given the general 'set it and forget it' mentality of most consumers when it comes to enrolling a card into a wallet or commerce application.

Initial approaches will necessitate cardholder incentives, such as the 10% cashback bonus Discover has offered to cardholders using Apple Pay on up to $10,000 of in-store purchases. However, near-term incentives cannot be used alone as an excuse for generating long-term sustainable cardholder value. IoT will require that card issuers reflect and reconsider their ongoing roles in consumers' financial lives. Increasingly, cardholders will judge their banks by their compatibility with next-generation commerce experiences and the unique value that they can provide within them. Banks will need to think more like platform companies – providing access and ease of onboarding into third-party applications – to effectively compete.


Payments will be a critical infrastructure layer within IoT applications, to be sure. However, IoT's promise in payments extends beyond enabling a transaction in a new context. Initiatives focused solely on integrating payment support into a connected device have lost sight of the broader opportunity. The capability to conduct a payment never has been, and never will be, an effective stand-alone value proposition.

Card issuers, merchant acquirers and other payments stakeholders in IoT must recalibrate around a larger objective: intelligence. The sheer volume of data exhaust generated by myriad connected devices consumers interact with on a daily basis creates an unprecedented opportunity to better design around outcomes and customize to customers' wants and needs. Inputs from various devices, brand touch points and transactions can be used to augment existing CRM data to add context to interactions (e.g., real-time notification of remaining credit line during product discovery phase) and generate personalized experiences (e.g., tailored offer for purchase financing delivered at the right time and place). The ability to do this with precision and tie it to a meaningful business proposition will be among the more effective ways for payments companies to differentiate through services and ultimately generate customer loyalty and value in IoT.

We see opportunities to capitalize on intelligence in both the issuing and acquiring sides of the payments business. Banks' core competencies in areas such as risk and underwriting will see new data inputs from IoT further improve their models; issuers with lackluster card-linked offer programs will benefit from richer customer data to drive real purchase behavior; acquirers with analytics tools will find value in diverse data streams to deliver deeper insight to merchants about their business and customers. If payments companies aren't already thinking of themselves today as data companies, they ought to start.

While the use cases for applying intelligence may be becoming more lucid, the payments industry is admittedly in early stages of capitalizing on data growth to build new products, customer experiences and go-to-market strategies. More robust data platforms and analytics tools, against the backdrop of emerging technologies such as AI, are essential (and currently lacking) inputs for execution. New business agreements (Who owns the data?), privacy constructs (What can you do with the data?) and security protocols (How do you securely transmit and store the data?) must also be taken into consideration. If these seem like complex hurdles, it's because they are. Those able to overcome them first and repackage vast amounts of data into truly transformative customer experiences will be the ones that achieve true competitive advantages in IoT.
Jordan McKee
Principal Analyst, Payments

Jordan McKee is a Principal Analyst leading 451 Research’s coverage of the payments ecosystem. He focuses on digital transformation across the commerce value chain, with an emphasis on the major trends impacting payment networks, issuing and acquiring banks, payment processors and point-of-sale providers. His research helps vendors and enterprises assess the key implications of emerging technologies driving the digitization of the end-to-end shopping journey.

Christian Renaud
Research Director, Internet of Things

As Research Director of 451 Research's Internet of Things practice, Christian Renaud covers the ongoing virtualization and digitization of the physical world around us.

Keith Dawson
Principal Analyst

Keith Dawson is a principal analyst in 451 Research's Customer Experience & Commerce practice, primarily covering marketing technology. Keith has been covering the intersection of communications and enterprise software for 25 years, mainly looking at how to influence and optimize the customer experience.

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