Would you let your fridge have your credit card?


In the criminally underrated science fiction novel One Of Us, by Michael Marshall Smith, the hero Hap Thompson is never able to get any peace and quiet. He’s nagged constantly by his artificially intelligent alarm clock, his toaster, and a microwave oven. It’s more than a man should have to bear — and it’s pretty prescient for a book written in 1998.

In 2017, we don’t need to worry that your alarm clock will track us down to the bar we’re hiding in to tell us we need to get up (the clock was set to the wrong time). But the Internet of Things is about to make our lives a lot more complex.

Along with all the concerns about security, we’re going to need to think about how we pay for things bought over the Internet of Things, the “IoT”. We’re not far from having a fridge or a coffee machine that can automatically order more milk, butter, or coffee when you run out. Very convenient. But do you want to let your fridge have your credit card details?

Just imagine, for a moment, the security implications of having dozens of devices in your home all able to spend to the upper limit on your Visa or Mastercard.

APMs are the answer

The answer is not to connect your IoT devices to your credit card or bank account. Instead, use an alternative payment method (APM) to segregate your IoT devices from your main financial accounts. That way, if there’s an error or a security breach, your funds are protected.

Applying an upper spending limit to an e-wallet or other APM is easy. It makes these payment methods ideal for the IoT. We expect this use case to be one reason why APMs will become increasingly popular over the next five years. But it’s not the only reason why APMs are the future of payments.

Right now, 41% of the world’s population has access to the Internet. According to research by Cisco, by 2020 over 4 billion people will be online worldwide. This explosion in the number of Internet users is driving a rapid growth in e-commerce. But only 18% of people worldwide have a credit card. And almost 40% of people worldwide do not have a bank account.

How can consumers who have an Internet account but no means of connected payment, shop online? By using APMs. Using cash-based payments, for instance through a unique code generated at checkout to pay for online purchases in a local convenience store, millions of unbanked or partially banked people will be able to participate in online commerce.

The explosion in cross-border e-commerce

Another factor driving the adoption of APMs, is the growth of e-commerce. In this case, however, the adopters aren’t consumers — they’re payment service providers and merchants. With growth in mature European and North American markets slowing down, many Western e-commerce companies want to expand into global markets. At the same time, merchants from China and other developing markets want to cut out the Western middle-men and sell direct to consumers in mature markets.

The good news for both sides is that conditions give them a good chance of success. Not only are more people coming online all the time, but average Internet speeds are also rising. In 2016 alone, the average global Internet speed rose by 23% to 5.6Mbps [1]. At the same time, package carriers are investing significant sums in improving global courier networks. According to McKinsey, the volume of parcels shipped is growing by up to 300% annually in some major markets [2].

Propitious as these factors might be, merchants’ plans to go cross-border are all for nothing if customers in the new markets they’re targeting can’t pay them. Many US and UK companies in particular, are only set up to accept payment by credit or debit card. In many world markets, this accounts for less than 50% of online payments made. If they want to succeed in cross-border commerce, merchants and payment service providers need to support preferred local payment methods for every market in which they operate.

The legislative framework: challenges and opportunities

The final reason to expect both volumes of cross-border e-commerce and the adoption of APMs to continue growing is quite simply that legislators want it to happen. The EU has made clear, in the framing of the PSD2 (Payment Service Directive 2) that it wants to create a single European market both for payments and for e-commerce.

Of course, this doesn’t mean that there are no challenges on the horizon. In the US, the mooted repeal of the Dodd–Frank Act may jeopardise the access of US PSPs to consumer data, which could threaten existing business models. The European Banking Authority’s (EBA) proposed ban on screen scraping could, if it’s framed restrictively, also disrupt the European APM market, which could in turn have a minor braking effect on the growth of cross-border e-commerce in the EU.

But these are, at most, tactical challenges. Viewed from a strategic perspective, the stage seems very definitively set for a growth both in global e-commerce and in the alternative payments industry. Whether or not this growth materialises, depends on us. The industry needs to put the thought, the investment, and effort into getting the underpinnings right now, so that we can all reap the rewards tomorrow.

[1]. Global internet speeds up 23% in just one year, March 29, 2016,
[2]. Parcel delivery: The future of last mile, McKinsey & Company, September 2016