Cognizant Reports

Gearing Up for the

Internet of Payments
Made 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 | november 2015

Executive Summary
Cars 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

cognizant reports

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 Payments

The 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.

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.

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.

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

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 cryptocurrencies 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.

Micropayments Enabled by Crypto-Currencies

Micropayments (i.e., payments made in very small
denominations), have been discussed for almost

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

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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
While it is the a centralized accounting
11
consumer who today system. A startup called
BlockCypher recently creinitiates payment ated an API that enables
through a card or a users to make small
12
mobile wallet, in the payments in Bitcoins. ZipChain, a social network for
future, payments Bitcoin users, has created
may be triggered an in-house tipping system
by a car or a home that allows members to tip
the website, thereby generappliance. For ating revenue.13

example, telematics
devices installed in
a car could trigger
premium payments.

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 constrained compared with conventional payment

networks.

Float management: Since blockchains function 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.

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cognizant reports

(For more on these challenges, see our latest

thinking in Perspectives https://latestthinking.
cognizant.com/all-latest-thinking.

Banks vs. Non-Banks

Many 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 customers
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.

cognizant reports

Meanwhile, the largely digitized operations of

emerging non-bank competitors allow for faster
innovation of M2M-enabled services that simplify
more aspects of a customers daily spending
routine. An example is Amazons Wi-Fi-enabled
Dash buttons, which can be configured to order
specific products from Amazon,20 with payment
made through the users 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-andwatch 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 Era

As 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.

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 todays
loopholes and anticipating tomorrows 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.

Footnotes
For more on this topic, read our white paper and book,
http://www.cognizant.com/code-halos?gclid=CI-268zhl8kCFdcYgQodJvEFgg.
1

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.

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-hit18-billion-in-2022-generating-usd13-trillion-revenue/.
3

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.
4

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.
5

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.
6

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 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-payments-internet-things.html.
7

Payment Entrepreneurs Go After MicroPayments Segment, $13B+ Opportunity Globally, Lets Talk
Payments, Jan. 31, 2014,
http://letstalkpayments.com/payment-entrepreneurs-go-micropayments-segment-13-b-opportunity-globally/.
8

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-digitalwallets-and-mobile-payment-platforms-introduce-new-patented-technology-to-handle-digital-currency-520469142.html.
9

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

10

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-financialstability-says-BoE.
11

Catheryne Nicholson, Why Cant 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.
12

Pete Rizzo, Bitcoin Social Network ZapChain Launches Micropayments Tool, CoinDesk,
March 9, 2015,
http://www.coindesk.com/bitcoin-social-network-zapchain-launches-micropayments-tool/.
13

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

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

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-arevying-to-out-nerd-each-other-for-your.
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-arevying-to-out-nerd-each-other-for-your.
17

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-appsfor-other-things-1074164-1.html.
18

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-andintel-to-bring-payments-to-the-internet-of-things.
19

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 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-ofthings-into-high-gear/.
20

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-checking-accounts-change-the-game.
21

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.
22

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-blockchain-without-bitcoin-1074622-1.html.
23

Credits
Author and Analyst
Akhil Tandulwadikar, Senior Researcher, Cognizant Research Center

Subject Matter Expert

Narayn Sridharan, Cognizant Senior Director, Projects, EBA Ventures, IoT

Design
Harleen Bhatia, CRC Design Studio Manager
Murali Krishna Adusumalli, CRC Design Studio Designer

About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing 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.

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