Machines paying machines: how machine economy is changing payments

The machine economy (Internet of Things) is growing rapidly. More and more machines and devices are connected to each other. In 2025, a worldwide network of 75 billion devices can be expected. According to figures of the American IoT provider BizIntellia, IoT-related solutions are expected to contribute a total of about 14.2 trillion dollars to the global GDP by 2030.

IoT will thus play an increasingly big part in our life and society. This raises the question how IoT will affect payments and which potentials can be uncovered in implementations of machine-to-machine payments (M2M payments).

How are IoT and payments connected? Machines are enabled to transfer not only identities and information, but also values. They send payments to other machines autonomously, without the need for authorisation by a human. However, if these business transactions cannot run without interruptions (say, for example, the machines have to wait for a manual action such as a payment confirmation), freeze periods or even abnormal terminations can be the result – both scenarios would have to be avoided in order to fully exploit the potentials of M2M payments.

But M2M payments are not merely visionary dreams of the future. Concrete solutions are already being developed, for example, in the automotive industry. Some companies are already establishing the required ecosystems. The idea is for automobiles to have their own wallets with electronic money and thus be able to pay for fuel or toll charges without human interaction.

To analyse these effects, challenges and opportunities, we have conducted a study on the subject "Machines paying machines" that deals with the following questions in particular:
  1. Which prerequisites must be met in order to enable implementation of M2M payments?
  2. What are the challenges of implementing M2M payments?
  3. How strongly will payment transaction numbers increase due to M2M payments?
  4. Which payment methods are best suited for M2M payments?
  5. Which impact do M2M payments have on payment service providers?
  6. How should payment service providers respond to M2M payments?
For M2M payments to become reality, the participating machines must first receive their own machine identity with individual attributes distinguishing them from other machines. A secure machine identity cannot be manipulated, forged or misused. The machine is given a unique, secure identity it can use to authenticate itself within the productive network towards other machines, instances and participants.

The current legal framework is not prepared for autonomous machines either and must thus undergo further development. Both clear assignment rules for actions of autonomous systems and specific allocations of the risks involved in using autonomous systems are required. Last but not least, new liability systems are needed that take into account the particularities of autonomous machines.

In terms of practical implementation, we have identified the following fields of action, the solution to which will be especially challenging:
  1. Mapping the identification of machine payments
  2. Compliance checks in relation to a machine (KYO instead of KYC)
  3. Processing returned information (including disruptions of the processes)
  4. Taking into account a more complex and comprehensive reporting
  5. Increased security of machines and interfaces
  6. Consistent implementation of digital onboarding and digital processes
Many analyses suggest that the number of transactions will rise dramatically with M2M payments. We agree with this assessment and also expect a significant increase. Taking into account compensation effects, we estimate that by 2027, there will be about 12 billion additional machine-to-machine payment transactions in Germany and about 50 billion in the EU.

Not all currently common electronic payment methods are suited equally well for M2M payments. We believe that digital money (stablecoins, "unbacked" coins and e-currencies) and e-money are the most suitable for M2M payments.

Established payment methods generally have more or less high transaction fees. Crypto money and e-money solutions, in contrast, enable inexpensive transactions even for the smallest amounts and make them appealing for use in the IoT. After all, they offer the opportunity to economically settle even small payments for services, as far as below one cent; such as, for example, the use of a light bulb in a smart home. E-money solutions and crypto money can also be integrated independently of traditional financial service providers.
This leaves the question how the payment service providers should position themselves in the future. The Internet of Things will further reinforce the trend towards differentiation of specialist providers with a data-based business model and infrastructure providers.

Specialist providers can use the data volume increase due to the IoT to their advantage in market competition and develop additional business potentials or completely new business models. For example, precisely customised additional services can be offered to customers on the basis of detailed usage data. This depends on whether the payment service providers can manage to place themselves "on top" of the machines or at least to act as data aggregators that compile the relevant usage data into figures and transfer it.

Regarding the positioning as data aggregator or data hub, payment service providers could also ensure the necessary trust between the participating persons, companies and machines, and act as a sort of clearing instance for secure digital identities and valid data.

In summary this means that the traditional payment service providers must overcome considerable challenges. The functional and above all the technical requirements for the infrastructure of payment service providers will entail massive changes. They must meet the following prerequisites:
Completely uninterrupted availability, increasing the importance of 24/7/365 operating models and real-time transaction processing
  • Downtimes for the installation of new releases are no longer possible.
  • Ability to handle very high loads due to billions of additional transactions
  • Possibility of distinguishing between automatic and non-automatic payments, as they will be processed by different rules
  • Possibility of complete digitisation and machine onboarding
  • Future compliance with KYO for machines, which is currently not yet regulated, in combination with KYC, mapping in the corresponding systems and, in particular, organisational regulation
  • Possibility not only to trigger payments, but also to process feedback information from system and process disruptions accordingly. Based on the feedback, the machines must be able to draw the right "conclusions" in real time and select alternatives if necessary.
In addition, payment service providers must decide how they want to position themselves and adjust sales structures, as ecosystems in IoT will become increasingly important.

Author: Michael Titsch


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