Episode 83 – Settlement Systems in Detail – Carol Coye Benson, Glenbrook
Payments and the Internet of Things
As the Internet of Things (IoT) gains momentum, people are starting to speculate about how it will be monetized and where payments will fit in this world of the future. Some think what’s needed is already what their company does best. How fortunate for them! Others think Bitcoin was invented just in time to payment-enable the Internet of Things. And there are already early examples of how incumbents are combining payment technology with smart devices.
Let’s explore this and see what’s really going on. First, what do people mean by the Internet of Things? Generally, they are talking about the intersection of three unrelated trends.
- The march towards semiconductor miniaturization which enables sophisticated software intelligence to be embedded in very small devices.
- The ongoing proliferation of telecommunications technologies which can be used to connect these devices to one another and to the cloud.
- The vast amount of data and signals that the devices will generate which, when combined with “big data” analytics, may provide new, valuable insights into the world around us.
Put them all together, and it’s the Internet of Things.
In layman’s terms, and for the purposes of thinking about payments, what matters in the Internet of Things is that the actors are the “things” themselves and not the people using these connected devices. So a printer that reorders its own cartridges when running low is right in the bullseye — but a wirelessly-connected parking meter that takes patron-initiated payments is not. We’ll come back to this point later, but this hands-off notion is a key part of the model.
If you believe the devices will be smart, and able to take action when appropriate, how might they make purchases? And more importantly, how will they make payments in support of these purchases? Do the “things” need new payment methods that are optimized for the necessary lights-out (no humans involved) processing environment of connected devices? Or is the Internet of Things a new payment domain for existing payment methods? This is the key question.
Bitcoin Steps Forward
If you believe new payment methods are needed, Bitcoin seems like a good candidate. Some in the Bitcoin community believe that Bitcoin is ideally positioned to meet the requirements of this new world — largely due to the programmable nature of Bitcoin payment. The payment from one party (the device) to another party (perhaps a service provider) only happens when a pre-prescribed set of conditions becomes true. Bingo. The power of scriptable payments meets the intelligence of connected devices.
The canonical example seen in all the blogs is the smart washing machine of the future. Here’s the paraphrased scenario. “We know it will have intelligence, and it will likely be connected to the Internet. When it is installed, it shops online for its own maintenance contract. And when it finds the right contract, it will use Bitcoin to lock the service agreement in place and then automatically summon support when needed.”
I can see why Bitcoin advocates like this use case. But I’m not sure Bitcoin is really needed or required to make this vision work. Why make the smart-washing-machine-of-the-future that uses a shopping bot to find a service contract even more unlikely by marrying it to Bitcoin?
Amazon’s Not Waiting
A good example of how this is already playing out can be found with Amazon.com, which is all over the Internet of Things opportunity. They have released APIs that device manufacturers can use to embed ordering functionality into their device. Productized as the “Amazon Dash Replenishment Service (DRS)”, the company is working with device providers to integrated product replenishment into their Internet-connect devices.
“DRS can be integrated with devices in two ways. Device makers can either build a physical button into their hardware to reorder consumables or they can measure consumable usage so that reordering happens automatically. For example, an automatic pet food dispenser made with built-in sensors can measure the amount of pet food remaining in its container and place an order before running out. Device makers can start using DRS with as few as 10 lines of code.”
This makes a ton of sense to me. It provides the gee-whiz convenience that early adopters love. Plus it’s a good fit between Amazon’s technology smarts and the opportunity to make money now using techniques that are known to work – card on file, default ship-to address, free shipping, expedited delivery, etc.
Where To Next?
So let’s go back to where we started. Does the Internet of Things need its own payment method? Probably not. I think the Internet of Things feels more like a new use case for existing payment methods than a new segment looking for its own unique payment methods.
My gut tells me that the IoT is likely to be service and usage driven. That smells a lot like the traditional card on file (or token on file!) subscription model. I think the payment “winners” in this new segment will be those that do the best job managing the ins and outs of a recurring billing relationship — managing plans, tracking enabled services, gracefully managing declines, etc. In fact, I would not be surprised to see some of the existing subscription enablers start to reposition for the Internet of Things. Where we might see some innovation from them is in the ability to meter usage of services.
What do you think?
This post was written by Glenbrook’s Russ Jones.