Imagine a world in which vehicles can pay for their own fuel and repairs, shipping containers can bid for their own routing between pick-up and delivery points, and wind turbines can manage their own profit and loss and distribute revenue to their crowdfunding shareholders—all without human intervention.
Driven by the growth of the Internet of Things (IoT) and advances in connectivity, automation, and data technology—including APIs, 5G, robotic process automation (RPA), AI, and ML—a new era of physical objects operating as autonomous financial actors is quickly approaching. Dubbed the "Thing Economy," this shift promises to create new business models, ecosystems, and opportunities for a variety of industries, including banking and financial services. Financial institutions that wish to facilitate the Thing Economy will need to create new technology, systems, and partnerships that enable trust and verification and allow them to conduct micropayments and other transactions at unprecedented scale.
Once that infrastructure is in place, objects ranging from postage labels to electric cars will be able to conduct unattended, programmable transactions in a seamless, end-to-end manner—unlocking new ways for banks to offer and embed their products and services.
Just as the maturation of technologies such as touch screens and rechargeable batteries allowed for the proliferation of modern smartphones, improvements in the connectivity, reliability, and cost of wireless digital networking are creating an explosion in the number of objects that can communicate with each other. Currently, there are more connected devices than people in the world—and by 2025 the IoT is expected to grow to 41.6 billion devices.
This vast network will include sensor-equipped "smart labels" that give businesses a more timely and complete view of goods moving through the global supply chain, allowing firms to affordably track large quantities of items in ways that previously weren't possible.
For example, a global leader in the life science fields of health care and agriculture partnered with a leading technology communications company to create a smart label that features a microprocessor, iSIM identification, a modem and antenna for mobile network connectivity, and a printed battery with a two-year lifespan. The size and thickness of a conventional postage label, the smart label can report its whereabouts, sense temperatures, and record and transmit when it has been cut through. The new smart label is currently being used on packages of seeds for smart logistics: through real-time monitoring of package location, spoilage risk, and the amount of seeds and packages it has in its supply chains, the company can better assess its manufacturing needs.
In the future, the data produced by smart labels and other IoT devices could be trusted to autonomously trigger events such as invoicing, payments, and lending—enabling a Thing Economy in which banks can embed financial services into objects that are capable of doing business with each other directly.
Before billions of machines can be given the authority to transact on their own, financial institutions will need ways to trust them and the machines will need ways to trust each other. Therefore, developing secure and reliable digital identity systems for machines making autonomous transactions will be a fundamental enabler of the Thing Economy. Alongside legislators and regulators, banks almost certainly will play a key role in creating these Know Your Machine (KYM) systems built on existing Know Your Customer (KYC) protocols.
Driven by regulation, KYC leverages legal documents to verify the identities of people and businesses to prevent fraud and other illegal activities. Assuming that machines are banked like businesses or subsidiaries, they will likely undergo similar KYC processes with fundamentally the same rules. KYM will improve understanding and enforcement of permissions—as well as verification and trust that unscheduled, autonomous machine transactions are legitimate—by answering questions in three key areas:
For every IoT platform, banks will need to find solutions for onboarding, detecting, maintaining, and repairing trust with objects ranging from wristwatches to farm equipment. The Citi Ventures portfolio company Car IQ is building just such a solution for vehicles, which will allow them to autonomously connect to banks and pay for their own services. Using a particular vehicle's sensor data, Car IQ develops a "digital vehicle fingerprint" that allows the car to validate itself to the bank and transact with service providers. The fingerprint helps the bank verify the vehicle's identity without needing a person to manually check each credit card transaction, augmenting the payment layer with a secure and direct transaction process. Citi currently is working with Car IQ to test KYM and understand its impact on transactions.
As the fundamental capabilities enabling KYM mature over time, a much larger spectrum of smaller objects will be able to participate in the Thing Economy. Today, Citi has established rails for bank transfers and credit card transactions, which typically are aggregated and processed in batches. Even as APIs become more prevalent, payments are still processed through batches, with all instructions going through one aggregated pipe. In the Thing Economy, by contrast, we could have separate APIs into each transacting machine. This would greatly increase the number of API connections and calls we process and make the ability to process large volumes of low-value, unaggregated transactions essential.
By better synchronizing the physical and digital worlds and eliminating existing processes and paperwork, the Thing Economy has the potential to unleash machine-to-machine (M2M) commerce across industries—spurring innovation, creating economic opportunity, and revolutionizing how business is conducted.
Pay-per-use products and services, such as usage-based auto insurance that allows insurers to monitor how much and how well a customer is driving—and charge them accordingly—could become much more widespread. Similarly, the "sharing economy" of users sharing their idle capacities and resources with each other on demand could expand to a wider variety of physical objects.
Another example of this is the emergence of "Embedded Trade," the integration of financial services via technology into physical supply chain activities such as ordering and shipping goods. Within the global trade ecosystem, logistics and financing traditionally have operated in parallel universes, each consisting of a complex web of players using paperwork-intensive processes to facilitate each step in the supply chain. In recent years, however, trade ecosystem players have begun merging logistics and financing into a single, automated process.
Trusted objects that can autonomously and securely transact on their own behalf—for instance, a pallet of smart-labeled seeds en route to a farm—are the logical next step in this evolution. Similarly, the rapidly growing electric vehicle (EV) charging industry is primed for identity and payment solutions.
Financial institutions that facilitate trillions of dollars in global transaction flows daily are well-positioned to lead and grow in the Thing Economy, which could dramatically increase payment volumes. In the short term, the merging of the physical and digital worlds presents a major opportunity to work with partners on innovations that can become new ventures and products. And in the long term, M2M commerce will allow financial institutions to embed and offer products and services and even consider new business models that have yet to be imagined.