• Cognizant Reports

cognizant reports | november 2015

Gearing Up for the Internet of PaymentsMade possible by the Internet of Things, a host of IP-instrumented devices and appliances are opening vast opportunities for banks to play a bigger role in the lives of their customers.

cognizant reports 2

Executive SummaryCars that pay tolls, thermostats that pay bills based on projected monthly usage, airline baggage tags that authorize payments for luggage allowances – while these capabilities might have seemed like science fiction not too long ago, the IoT is making them possible now. In doing so, it is giving rise to the Internet of Payments (IoP), embedding digital payments deeply into consumers’ daily lives via an assortment of wearable devices – watches, wellness monitors and augmented reality glasses — that are moving from mild curiosity to commonplace status. Combined with crypto-currencies, the IoP will also give life to micropayments, an idea that has kicked around for years but has yet to go mainstream due to the lack of an enabling technology.

Premised on consumers’ growing acceptance of digital payments, and a boom in connected device technology, the IoP is emerging as a force to be reckoned with. Consumers are now more willing to try devices that may be able to handle payments autonomously in the future. Research indicates that consumers are interested in devices such as connected security systems, smart thermostats, smart meters and smart cars.

Some banks have begun efforts to incorporate the IoP into their digital offerings. For banks, the IoP will create more digital touchpoints that will send back large amounts of data that can be analyzed for greater insights into consumer behavior. Adopting this approach – what we call Code Halo™ thinking1 — will enable banks to track changing customer preferences and create differentiated offerings.

The benefits of IoT will extend to improving other performance metrics, as well. Banks that have implemented machine-to-machine2 (M2M) solutions have experienced improved customer service and competitive advantage. For most banks, however, legacy systems impede efforts to upgrade to M2M technologies.

As banks face competition from nimble-footed non-bank businesses that benefit from fewer regulations and agile business models, a proactive approach to innovating in this area will boost incumbents’ competitiveness. A bigger threat to banks is emerging in the form of crypto-currency startups, whose solutions negate the need for a bank altogether. Crypto-currencies are ideally suited to online micropayments; in fact, a number

of startups are developing coin-mining devices that can be embedded into Internet-enabled consumer products to make payments.

It is clear that banks must defend their turf in the payments arena. They need to devise a digitization strategy to scale their offerings to meet the consumer demand of the IoT era, while prioritizing data security and privacy. This means looking beyond the smartphone into the realm of machines that can communicate with one another and enable payments. To do this, banks will need to:

• Make the IoT central to their digital payments strategy.

• Create capabilities to incorporate new types of devices into the payments strategy.

• Improve their understanding of customer behavior using Code Halo thinking.

• Prioritize security and privacy.

• Partner with manufacturers of connected devices to create payment offerings.

The Future of PaymentsThe rise of the IoP is being fueled by the growth in connected things and consumer interest in a host of new applications, from fitness trackers and smartwatches, to IP-instrumented home appliances (see Figure 1, next page). The number of M2M connections, for example, is set to reach 18 billion by 2022 from 2 billion in 2011.3 Connected devices, meanwhile, will grow to 50 billion by 2020.4 On the consumer side, there is a notable uptake of connected devices — 33% of early adopters in the U.S. monitor their daily activity using connected fitness trackers; families in the U.S. and UK own an average of seven connected devices.5

Market followers believe the IoP will be the next stage in the evolution of digital payments. IoT-powered devices that can make payments promise greater convenience than ever before – for consumers as well as payees. Take the growing adoption of mobile payments. In-store mobile payment volumes are expected to surge in the next few years, growing at a CAGR of 154%.6 Mobile payments, of course, are part of the larger digital payments landscape, which will also be impacted by the IoP.

cognizant reports 3

two decades but have had limited success on the Internet, due primarily to high transaction costs (typically 2% to 3%) applied by payments processors. Companies such as Apple have been able to make micro-transactions work (individual songs can be bought for anywhere between 69 cents to $1.29) but within the limits of their walled-garden ecosystems.

Yet, the forecast for micropayments growth is healthy. Pegged at $9.8 billion in 2013, micropayments are expected to reach $13 billion over the next three years.8 As crypto-currencies gain greater acceptance, companies are working to bring them into the mainstream by incorporating them into digital wallets.9 This trend points to the possibility of micropayments using crypto-currencies.

The digital nature of crypto-currencies such as Bitcoin allows transactions to occur in exceptionally tiny fractions, starting from a few cents.10 Moreover, these transactions are validated and recorded on a public ledger

However, IoT-enabled payments will be different from the current method in a small but crucial way. While it is the consumer who today initiates payment through a card or a mobile wallet, in the future, payments may be triggered by a car or a home appliance. For example, telematics devices installed in a car could trigger premium payments.

The possibilities of IoP also burrow more deeply into the daily lives of consumers than conventional payments. A simple example could be reusable grocery bags that authorize payments at a grocery store when a customer checks out. In the not-so-distant deeply connected future, machines could perform micro-transactions, creating a whole new layer of the economy. For example, cars that communicate with each other could allow commuters who are in a hurry to pay other commuters to make way for them.7

Micropayments Enabled by Crypto-CurrenciesMicropayments (i.e., payments made in very small denominations), have been discussed for almost

cognizant reports 4

known as the blockchain. Although challenges with blockchain are still being overcome, the technology is designed to enable fast, secure and cheap transactions by decentralizing the ledger of transactions across user computers,

eliminating the need for a centralized accounting system.11 A startup called BlockCypher recently cre-ated an API that enables users to make small payments in Bitcoins.12 Zip-Chain, a social network for Bitcoin users, has created an in-house tipping system that allows members to tip the website, thereby gener-ating revenue.13

A system like this could transform the way people consume media online and enable content creators to receive payment directly

on a pay-per-use basis. Newspapers, which have been struggling to generate revenue on the Internet, for example, would be able to accept Bitcoin payments for each article at the click of a button. An early, albeit crude, example of this is the Chicago Sun-Times, which recently began accepting annual subscription fees in Bitcoins. Crypto-currency micropayments made on the site are then converted to dollars by Coinbase, a Bitcoin transaction processing company.14

By taking payments directly from the user, such a system could also reduce content websites’ dependence on ad-based revenue.

Crypto-currency-based micropayments are also likely to play a major role in the payments landscape by allowing machines to autonomously perform small payments; an example is cars that could communicate with parking garages to identify the best option in terms of price and availability. This could be a harbinger for banks, whose role in such transactions today is almost non-existent.

Blockchain Challenges As blockchains and crypto-currencies evolve, industry participants need to be aware of the challenges that need to be overcome before these technologies are fully embraced:

• Scalability: Transaction volume remains con-strained compared with conventional payment networks.

• Float management: Since blockchains func-tion as pre-paid stored value rather than credit cards, money management can be problematic for some users.

• Ecosystem biases: Because blockchains operate as loosely confederated communities without regulatory scrutiny, participants can be subject to discriminatory or exclusionary behavior.

While it is the consumer who today

initiates payment through a card or a

mobile wallet, in the future, payments may be triggered

by a car or a home appliance. For

example, telematics devices installed in a car could trigger

premium payments.

cognizant reports 5

(For more on these challenges, see our latest thinking in Perspectives https://latestthinking.cognizant.com/all-latest-thinking.

Banks vs. Non-BanksMany traditional banks are beginning to test the waters of digital payments. As adoption of M2M technologies grows in consumer-facing industries, such as automotive, retail and consumer electronics, for example, banks are taking interest. A study by Verizon found that banks that have implemented M2M have experienced benefits in areas such as improved customer service, as they can extend services beyond branch locations for competitive advantage (see Figure 2).15 In fact, some leading U.S. institutions have begun to offer services that complement the adoption of M2M technologies.

• Wells Fargo, for example, is testing a connected car concept that will address the needs of 30% of its customers who prefer drive-through banking.16

• Wells Fargo and Chase are testing beacon technologies that alert tellers when a particular customer is approaching, enabling them to bypass basic questions.17

• Citibank is reaching out to developers and hackers to invite ideas for applications built around the IoT.18

• Banks will be helped in these types of efforts by Intel, which has partnered with Ingenico to create tablets that allow secure payments in the IoT space, thereby reducing the risk of credit card fraud.19

Banks are also testing offerings built around wearables and biometric technologies that can authenticate customers before they make a payment and enable them to perform hands-free mobile banking.

Beacon technology will allow banks to further personalize the banking experience by enabling location-based offerings based on a customer’s shopping behavior. Innovations in this area will allow banks to play a bigger role in the daily lives of their customers.

For most banks, however, legacy infrastructure is a major barrier to scaling up their systems to meet the requirements of M2M technologies.

Meanwhile, the largely digitized operations of emerging non-bank competitors allow for faster innovation of M2M-enabled services that simplify more aspects of a customer’s daily spending routine. An example is Amazon’s Wi-Fi-enabled Dash buttons, which can be configured to order specific products from Amazon,20 with payment made through the user’s chosen online mode. While human intervention is still required, this approach offers a glimpse of how IoP could work. Retailers such as Walmart have influenced customers to open very low-cost checking accounts in partnership with Green Dot Bank, which offers a $2.95 starter kit to open an account online.21 In the future, this could enable Walmart, an early adopter of IoT, to create an ecosystem of highly personalized offerings that could obviate the need for a traditional bank checking account.

Innovations around crypto-currencies could be even more disruptive for banks. 21 Inc., a San Francisco-based start-up, has created a Bitcoin miner, BitShare, which can be embedded into any Internet-enabled device to generate Bitcoins by itself and allow device-level authentication.22 BitShare would allow the Internet-connected device to share portions of mined currency between the user, the retailer, the hardware manufacturer and the carrier. In such a scenario, a bank is completely shut out from the transaction.

Most banks seem to have adopted a wait-and-watch approach toward crypto-currencies, although some are experimenting with blockchain technology for improving data security.23 Given the possibilities of this technology, it is imperative for banks to closely monitor the unfolding IoP-led future, with strategies that proactively address the threats and challenges of crypto-currencies.

Preparing for the IoP EraAs banks work to retain their payments stronghold, those with a well-defined digitization strategy will ultimately be able to incorporate IoT into their payment offerings, which will also impact other customer-facing bank activities, such as advisory services and branch banking. In this context, payment digitization must extend beyond mobiles and wearables to all the possible touchpoints enabled by consumer adoption of the IoT. Together, these devices/sensors will generate massive caches of data that can help banks further improve the user experience.

cognizant reports 6

To this end, Code Halos will play a critical role in enabling banks to develop a holistic view of customer behavior. The combination of advanced analytics, big data and cloud computing with IoT allows banks to create unique profiles of their customers based on their personal Code Halos. Banks are positioned to generate deep insights from the troves of data in their possession to create a compelling omnichannel banking experience. At the same time, it will be crucial to ensure the security and privacy of customer data. When banks collaborate with device manufacturers, retailers, network providers and intermediaries that handle data, they will need precision data-sharing agreements that ensure curated experiences that respect customer privacy and security.

We offer the following recommendations for banks that are developing an IoP strategy:

• Digitization is at the core of IoP, and banks’ digitization initiatives should factor in IoP to help them gear up for the future. Systems must be in place to enhance data management and big data analytics capabilities, aided by cloud computing. The ability to collect and analyze data in real time will allow banks to differentiate themselves with location-based, personalized advice or an analytics-based rewards program.

• Partnerships are a key component of an IoP strategy, whether with device makers, retailers or third-party app developers. Banks need to identify and partner with players whose products add value to their own offerings. This will improve customer retention and, more importantly, help ward off non-bank competitive threats.

• Payments infrastructure should be continually scaled up as new devices and sensor types are added to the mix.

• Security is a key concern for consumers when it comes to digital payments. With more devices added per consumer, closing today’s loopholes and anticipating tomorrow’s will be crucial for banks seeking to regain and/or retain customer trust.

• Embed Code Halo thinking to derive insights from combing traditional and new sources of data, such as connected devices. Such insights will enable banks to innovate across all lines of their business, maximize operational efficiencies and enhance the customer experience.

Footnotes1 For more on this topic, read our white paper and book, http://www.cognizant.com/code-halos?gclid=CI-268zhl8kCFdcYgQodJvEFgg.

2 M2M technologies allow wired and wireless systems to communicate with other devices of the same type. M2M provides the capabilities upon which the IoT is built.

3 “Machine-to-Machine Connections to Hit 18 Billion in 2022, Generating USD 1.3 Trillion Revenue,” Mchina Research, Dec. 20, 2013,

https://machinaresearch.com/news/press-release-machine-to-machine-connections-to-hit-18-billion-in-2022-generating-usd13-trillion-revenue/.

4 Jaclyn Brandt, “50 Billion Connected IoT Devices by 2020,” SmartGridNews, April 21, 2015, http://www.smartgridnews.com/story/50-billion-connected-iot-devices-2020/2015-04-21.

5 “The Impact of the Internet of Things: The Connected Home,” GSMA and KRC Research, March 2015, http://www.gsma.com/newsroom/wp-content/uploads/15625-Connected-Living-Report.pdf.

6 John Heggestuen, “The Mobile Payment Industry Is About to Explode, with Apple Leading the Way,” Business Insider, Nov. 17, 2014,

http://www.businessinsider.com/the-mobile-payments-industry-update-2014-10.

cognizant reports 7

7 Ross Dawnson, “The New Layer of the Economy Enabled by M2M Payments in the Internet of Things,” Trends in the Living Networks, Sept. 16, 2014,

http://rossdawsonblog.com/weblog/archives/2014/09/new-layer-economy-enabled-m2m-pay-ments-internet-things.html.

8 “Payment Entrepreneurs Go After MicroPayments Segment, $13B+ Opportunity Globally,” Let’s Talk Payments, Jan. 31, 2014,

http://letstalkpayments.com/payment-entrepreneurs-go-micropayments-segment-13-b-oppor-tunity-globally/.

9 “As Bitcoin Slowly Gains Mainstream Acceptance, Digital Wallets and Mobile Payment Platforms Introduce New Patented Technology to Handle Digital Currency,” PR Newswire, Aug. 3, 2015,

http://www.prnewswire.com/news-releases/as-bitcoin-slowly-gains-mainstream-acceptance-digital-wallets-and-mobile-payment-platforms-introduce-new-patented-technology-to-handle-digital-cu-rrency-520469142.html.

10 PayPal defines a micropayment as a payment less than £5/$7.6.

11 Warwick Ashford, “Digital Currencies No Risk to UK Financial Stability, Says BoE,” ComputerWeekly, Sept. 12, 2014,

http://www.computerweekly.com/news/2240230479/Digital-currencies-no-risk-to-UK-financial-stability-says-BoE.

12 Catheryne Nicholson, “Why Can’t I Send $1 Over the Internet?” BlockCypher, March 17, 2015, https://medium.com/blockcypher-blog/why-can-t-i-send-1-over-the-internet-c90d2773fd9a.

13 Pete Rizzo, “Bitcoin Social Network ZapChain Launches Micropayments Tool,” CoinDesk, March 9, 2015,

http://www.coindesk.com/bitcoin-social-network-zapchain-launches-micropayments-tool/.

14 Jose Pagliery, “The Tipping Point of Bitcoin Micropayments,” Coindesk, Nov. 15, 2014, http://www.coindesk.com/tipping-point-bitcoin-micropayments/.

15 “Reinventing the Bank for the Mobile World,” Verizon, August 2014, https://d2uthp3k407uvc.cloudfront.net/files/2015/01/Verizon-Banking-Trend-Report-FINAL1.pdf.

16 Jennifer Elias, “Banks Are Vying to Out-Nerd Each Other for Your Attention,” Fast Company, Dec. 2, 2014,

http://www.fastcolabs.com/3039036/internet-of-things/with-cardless-atms-and-vr-banks-are-vying-to-out-nerd-each-other-for-your.

17 Jennifer Elias, “Banks Are Vying to Out-Nerd Each Other for Your Attention,” Fast Company, Dec. 2, 2014,

http://www.fastcolabs.com/3039036/internet-of-things/with-cardless-atms-and-vr-banks-are-vying-to-out-nerd-each-other-for-your.

18 Mary Wisniewski, “Beyond Apple Watch: Banks Explore Apps for Other ‘Things’,” American Banker, May 5, 2015,

http://www.americanbanker.com/news/bank-technology/beyond-apple-watch-banks-explore-apps-for-other-things-1074164-1.html.

19 “Ingenico Group and Intel to Bring Payments to the Internet of Things,” Intel Newsroom, April 2, 2015,

http://newsroom.intel.com/community/intel_newsroom/blog/2015/04/02/ingenico-group-and-intel-to-bring-payments-to-the-internet-of-things.

World Headquarters

500 Frank W. Burr Blvd.Teaneck, NJ 07666 USAPhone: +1 201 801 0233Fax: +1 201 801 0243Toll Free: +1 888 937 3277Email: inquiry@cognizant.com

European Headquarters

1 Kingdom StreetPaddington CentralLondon W2 6BDPhone: +44 (0) 207 297 7600Fax: +44 (0) 207 121 0102Email: infouk@cognizant.com

India Operations Headquarters

#5/535, Old Mahabalipuram RoadOkkiyam Pettai, ThoraipakkamChennai, 600 096 IndiaPhone: +91 (0) 44 4209 6000Fax: +91 (0) 44 4209 6060Email: inquiryindia@cognizant.com

© Copyright 2015, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.

About Cognizant

Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-sourcing services, dedicated to helping the world's leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 100 development and delivery centers worldwide and approximately 219,300 employees as of September 30, 2015, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world.

Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.

Credits

Author and AnalystAkhil Tandulwadikar, Senior Researcher, Cognizant Research Center

Subject Matter Expert Narayn Sridharan, Cognizant Senior Director, Projects, EBA Ventures, IoT

DesignHarleen Bhatia, CRC Design Studio ManagerMurali Krishna Adusumalli, CRC Design Studio Designer

20 Dave Altavilla, “Amazon and IBM Just Kicked the Internet of Things into High Gear,” Forbes, March 31, 2015,

http://www.forbes.com/sites/davealtavilla/2015/03/31/amazon-and-ibm-just-kicked-the-internet-of-things-into-high-gear/.

21 Susan Johnston Taylor, “Will Wal-Mart's New Checking Accounts Change the Game?” U.S. News & World Report, Oct. 21, 2014,

http://money.usnews.com/money/personal-finance/articles/2014/10/21/will-wal-marts-new-check-ing-accounts-change-the-game.

22 Balaji S. Srinivasan, “A Bitcoin Miner in Every Device and in Every Hand,” Medium.com, May 18, 2015, https://medium.com/@21dotco/a-bitcoin-miner-in-every-device-and-in-every-hand-e315b40f2821.

23 Penny Crossman, “Why Banks Are Testing Bitcoin's Blockchain (Without Bitcoin),” American Banker, June 1, 2015,

http://www.americanbanker.com/news/bank-technology/why-banks-are-testing-bitcoins-block-chain-without-bitcoin-1074622-1.html.