Risk and Payments in the Internet of Things (IoT) Part One – Use Cases

According to Statista, the total number of Internet of Things (IoT) devices worldwide is projected to exceed 30 billion by 2025. This is a sharp jump from the 13.8 that was projected for 2021.

The payments industry will be among those impacted the most by the widening adoption of IoT. This is because many of the technology’s use cases rely on payments to deliver value. In this series of blog posts, we will discuss the intersection of IoT and payments and the main challenges it brings in connection with financial crime. We will also cover what fraud and risk management teams in e-commerce and financial services can do today to prepare for the future of IoT payments. 

IoT – Payments Use Cases

1. Around the home. Amazon’s Alexa and Google’s Echo paved the way for IoT payments’ mass adoption. They are small devices that can, among other things, initiate payments on behalf of their users. However, they are not the only use case as smart devices such as refrigerators are becoming increasingly popular in some markets. In the future, all homes are likely to become smart homes.
2. Automobiles. Modern cars roll out from assembly lines with full internet connectivity capabilities. Automakers are developing technologies that unlock the power of in-car payments for parking, gas, tolls, food, and other goods and services. 
3. Virtual or augmented reality. VR and AR provide immersive experiences for people and unlock new horizons for digital business, especially e-commerce. Using AR, retailers can provide enhanced in-store customer experiences. On the other hand, they can emulate in-person interactions with customers who are miles away using VR. 
4. Wearables. Here too a few pioneer companies have opened up new business niches that were science fiction a few years ago. Apple’s iWatch is an example of this, allowing users to initiate payments from their wristwatches.  As this technology grows and is perfected, wearables will decrease in size. For example, companies like McLEAR already offer rings with payment functionality. 
5. Industrial equipment. In what can only be described as an operations specialists’ dream, modern factories nowadays use connected machinery to run at efficiency levels that were unthinkable just five years ago. Not only can these machines talk with each other, but they can schedule their own predictive maintenance in real-time and order spare parts to minimize downtime.  Industrial equipment can also be connected to the internet and programmed to perform specific tasks like managing purchasing orders for the supplies needed to produce the desired outcome. This can dramatically reduce waste and lead to near-perfect handling of inventory levels to maximize efficiency.
6. Retail. Similar to industrial equipment, retail giants use IoT technology to optimize their supply chains. They use smart shelves to track stock levels and trigger replenishment orders at the exact moment considering live lead times, sales velocity, seasonality, and other factors.  Again, Amazon has pioneered the use of IoT technology in retail with its in-person no-checkout convenience stores. Amazon Go’s stores rely on artificial intelligence, machine learning, and RGB cameras with boards that enable computer vision to perform motion detection and basic object identification. They can recognize users, associate them to an existing account, detect what they are purchasing, and bill them without the need for a checkout line or process. Amazon is reportedly building dozens of new stores at the time of this writing.

Ok, so IoT technology and payments do have an intersection that will inevitably become greater and greater. But what does this have to do with the topic of risk and fraud?

1. User Authentication Issues – The value of IoT payments mostly lies in allowing humans to disengage from transactions. This is a common thread in the vast majority of the use cases that we described above, where there is little or no direct user interaction with the payments system. The IoT thus poses challenges for user authentication policies which will need to be revised to fit these new scenarios. The need for improved user consent disclosures, delegation, and authorization processes should be top of mind for all parties involved in IoT-enabled transactions.
2. The Need for Payment Device Intelligence: The proliferation of devices that interact with payments systems and online retailers raises important concerns for those in charge of the already challenging task of establishing reliable device identities. Fraud and risk teams everywhere require intelligence about the devices that communicate with their systems in order to make informed decisions, or they risk falling prey to fraud attacks. If you are curious about how advanced device intelligence can help your business today and in the future, check out this page.  
3. Payment Liability Determination Concerns: There will inevitably be disputes about payments, and the IoT does not change this issue. If anything, it might exacerbate it. Retailers and financial institutions face important questions about where the ultimate liability for payments initiated by devices lies. Again, user delegation policies and authorization measures will be key here. Retailers can also expect an increase in the chargebacks filed due to user error. This includes when cardholders forget about their purchases and then dispute them when they receive their statements or when children use their parents’ credit cards without their consent. In IoT scenarios, it is harder for cardholders to retain control over their spending.
4. Device and Connection Security Requirements: More connected devices mean more points of entry for fraud in payment systems. Suppliers developing these devices must pay special attention to the security measures they embed in them. This is especially important when developing assets that are likely to be used over long periods of time, such as automobiles and industrial equipment. 

In our next article, we will cover what fraud and risk teams can do today to prepare for the future of IoT payments. Stay tuned!