What sounds like a sci-fi movie is now playing at a home near you. Are you ready?

Editor’s Note: CSCU Director of Payments Strategy, Lou Grilli, presented at the Reach Conference in November 2016 on the topic of payments, and how they are changing with the advent of the internet of things. The following is a summary of his presentation.

The internet of things (IoT) is changing payments, that is, in the IoT, payments «disappear» behind devices or become invisible. What do credit unions need to do to remain relevant in the IoT? First, it’s important to level set on what exactly IoT is.

IoT is widely misunderstood and has many different definitions. The person credited with coining the phrase, Kevin Ashton, spoke at the Payments Innovation Project earlier in 2016, and provided a thoughtful grounding to understand the concept.

Ashton pointed out that since computers were first invented, interaction was between the computer and a person. Punch cards, later keypads, and more recently speech, was how humans spoke to the computer, while paper reports and computer monitors were how the computer spoke with us. In 1999 there was research conducted at MIT in which computers independently interacted with other computers. These were not just networked computers, but one computer producing results and another computer independently reacting to those results. This led to devices interacting with other devices, and since then, the growth of these connected devices has been phenomenal. The Wall Street Journal, the Gartner group, and Cisco, each independently provide a prediction that by 2020, there will be 50 billion or more connected devices. And the economic driver behind this growth – according the Wall Street Journal report and the Gartner group is the $1.9 trillion dollars that’s at stake; this number is derived from cost savings, increased productivity, and selling these connected devices which presumably will make all of lives easier.

Almost any device with an on/off switch and intelligence can connect to IoT

While connected devices initially were full computers they now consist of seemingly anything that has an on/off button combined with intelligence and communications capability.  The smart refrigerator, for example, is probably the most talked about connected device. The Samsung refrigerator, with an android tablet built-in the door, enables the busy family to remotely see inside, electronically leave notes for each other, and most relevant to payments, keep the current shopping list and with the tap of a button, send the shopping list off, along with payment credentials, to an online grocery delivery service.

There are many other examples of connected devices, many having nothing to do with payments. The Nest smart thermostat knows when no occupants are home and saves electricity by adjusting the temperature. The smart door lock which allows the owner to get an alert if the door was left unlocked or remotely allow a repairman to enter without having to leave a hidden key under the mat.

These connected devices aren’t all talking with each other. There’s usually a central hub that acts as the central control point. The most popular home hub is “Alexa”, the name given to the Amazon Echo. If you watched the Super bowl earlier this year, you may remember Alec Baldwin showing off his new Amazon Echo to Dan Marino. He tells Alexa to stop the music, turn up the lights, and order a pair of Bresciani socks. The Amazon Echo has many capabilities. You can say “Alexa, pay my credit card bill in full”, or “Alexa, send $50 to my friend Bill with a note that says, “this is for my half of the golf lesson.”

Google just launched their version of a connected home hub, the Google Home. So now you can say “Okay Google, did I leave my garage door open” or “Okay Google, did I pay my rent this month?”

Devices answer questions and learn skills

These devices answer questions and perform actions by having what are called “skills” – these are application programmatic interfaces (API) provided by the lights, the stereo, the garage door opener, the bill pay vendor, the P2P application, etc, in order to turn up the lights, or send money to a friend, or pay a bill. These last item are a hint as to how the IoT is changing payments. We have always thought of payments in terms of an action made by a person. In the IoT, payments are made by a device. This change probably sounds more profound or futuristic than it really is. We have been using devices to make payments for a while now. Paying at Walgreen’s using Apple watch, or sticking an Amazon Dash button in the laundry room, and pushing the button to order more detergent, are examples of devices making payments.

But there is a change happening with the way payments are made in the IoT that is far more profound. Up until now, a payment is initiated by a person; it’s a person who is tapping the watch at the terminal in Walgreen’s, or pushing the button to order the detergent.

Move over humans.  Connected devices are taking over.

With IoT, devices can initiate payments, without a person involved. A pool pump is monitoring the water flowing through the system and when the pH balance is out of limits, the pool pump requests service from a pool service company, specifies what chemicals are needed, and provides payment. The owner doesn’t need to be home. The owners may be gone for the summer, and the device is requesting service and making payments.

Many technologies still need to mature to make it easy to set up a connected home and allow compatibility across devices. With that said, there are a few technologies that are highly relevant to financial institutions that need to happen to make the payments price of the puzzle come together.

Three of those are tokenization, embedded commerce, and APIs.

1. Tokenization. I don’t want my credit card number stored by my refrigerator. Security of the connected devices is still relatively immature. But replacing the credit card number (the PAN) with a limited use token, one that can only be used by that specific fridge, to only buy groceries, is a way to secure that payment.
2. Embedded commerce. The fridge requires an app that can make payments. The pool pump need an interface to provide payment credentials to pay for service.
3. APIs. There needs to be interfaces provided by the pool service company to receive the request from the connected pool pump for service, and more importantly, to receive the payment.

What steps can credit unions take to remain relevant in the IoT? 

• Tokenization. Many credit unions have already tokenized their credit and debit BINs, but many more have not. Tokenization, which allows the credit card number be replaced with a limited use token to be used for authorization for payments, is typically a matter of completing paperwork with your processor to enroll your BINs with the token service providers: Visa and MasterCard. This is a prerequisite for the next step.
• Credit unions need to be enrolled in all of the “Pays”, Apple/Android/Samsung Pay are in use today, Microsoft is nearing readiness, and IBM Pay was just announced at Money 20/20, with likely more to come. These mobile wallets, along with the online and digital wallets, Visa Checkout, MasterPass, and Amazon, will be the most common wallets that connected devices will use for payments.
• Assess your vendors’ readiness to support the “skills” needed by the connected home hubs. Bill pay vendors need to provide the API to allow Alexa and the Google Home and the many other similar hubs to query and to initiate payments. P2P application need to accept requests to pay another person.

This holiday shopping season some of your tech-savvy members will purchasing connected devices and home hubs. It is likely that the most financially savvy and your younger members will also jump in as early adopters of the technology. And if your members are not asking for this now, they soon will be. Because the internet of things, is quickly becoming the internet of payments.