by Markus Eichinger
January 24, 2018

A world without internet? Nowadays, this would almost be like a world without electricity – both seem completely unimaginable. This is why most people take the internet for granted, using it daily, without really thinking about it.

However, in order to understand how internet technology is enabling the Internet of Things (IoT), a major innovation that will fundamentally change our world and also the way we pay. That’s why it is worth to take a closer look.

Internet technology – the three layers enabling the modern world

Internet Technology is a term commonly used to describe a collection of standards, protocols and topologies that are used in the internet and are particularly popular. This starts with the lowest layer, the physical layer, and ends at the highest layer, the application layer. This layer model has existed since the early days of the internet and was already published back in 1983.

This graphic is taken from the insightful blog article “OSI Model - How Internet Works” by Zbigniew Gargasz.

This graphic is taken from the insightful blog article “OSI Model – How Internet Works” by Zbigniew Gargasz (click to enlarge).

The layer model describes the protocol stack that is used to establish a communication or data exchange between two hosts (most commonly, you would say a “computer” and a “server”). The most widely used protocols that can be referred to as “internet technology” are:

  • Ethernet
    Physical layer (layer no. 1 in the graphic above) – defines cables, plugs, and basic protocols
  • TCP/IP (“Transmission Control Protocol / Internet Protocol”)
    Networking and transportation layer (no. 3) – defines how packets of data are transmitted between hosts in order to assure, for example, data consistency
  • HTTP, MQTT
    Application layer protocols (no. 7) that allow for specific applications (Hypertext Transfer Protocol) or machines and devices (Message Quing Telemetry Transport – for machine-to-machine communication) used to exchange data

Now why is this model so powerful?

Simply put, each layer does not have to care about all the other underlying layers. You experience that yourself when you surf the internet: Your websites look the same, regardless if you are using a cable, are on Wi-Fi or using your mobile phone.

The APIzation of the world: the triumph of Application Programming Interfaces

In addition to these standards, “Internet Technology” also means that application-based exchange of data is done through (published) APIs (Application Programming Interfaces). APIs allow for the simple and standardized exchange of data between two applications.

All of this might sound a bit nerdy, especially if you have grown up with no memory of what it used to be like to get your internet up and running in the early days – but in fact, it’s not. A core element of the EU payment directive PSD-2 (which I wrote about in my recent blog article) is “access to accounts” – that’s nothing else than the “APIzation” of bank accounts that were up to now hidden within core-banking applications.

Here’s another example: A new breed of cash register software such as Enfore allows for easy integration of external applications through programming interfaces. For web shop systems this has always been standardized, but for brick-and-mortar, open APIs are just now evolving.

Source: https://www.enfore.com/de/assets/press/enforeDasher-packaging.png

Open APIs allow for a new geneneration of cash register software – this is one example (Source: Enfore)

A cashless payment is just an API call and sending data packets

This technological and legal development is changing the whole industry: what was formerly a closed system (the bank, the retail store) can now be accessed more easily by 3rd parties such as startups to provide new services and applications.

This also applies to payments. In the ecosystem of internet technology, a payment transaction is nothing more than an API-call and packets of data sent from one host to another.

Why not add more data to this exchange of information and use that data for services that complement the value chain, such as loyalty services? I think it will be paramount for payment companies in the future to allow for this flexible exchange of data in single calls, by also assuring compliance, data integrity and security.

Affordable sensors and wireless technology enable IoT anywhere

How does the “Internet of Things” (IoT) play into this? The IoT is a vision in which physical and virtual objects communicate among each other.

Here’s an example: Checking and controlling the room temperature within an app on your smartphone. The IoT received a big push within recent years (and this will continue into the near future) as it becomes cheaper and cheaper to produce sensors and actors that can independently access the internet. Before that, you’d have to wire all the different sensors and actors and integrate them to a proprietary server system and then connect the system to the internet – that was costly and tedious.

IoT technology, instead, allows each single device to become a host within the global internet. That’s why it is so easy nowadays to automate your home, just install Amazon Echo or Google Home. Are you using the Amazon Dash buttons? That’s IoT at its best.

Whether for detergents, coffee, razor blades or any other consumables – thanks to IoT technology, Amazon’s Dash button allows you to order replenishment with just one click

Whether for detergents, coffee, razor blades or any other consumables – thanks to IoT technology, Amazon’s Dash button allows you to order replenishment with just one click (Source: Wikicommons)

For payments, this also means quite a lot of changes. More and more purchase decisions made by humans in stores or online will in the future be made by machines.

The most commonly used example is the fridge that automatically re-stocks goods. And indeed: Last year, LG was one of the first companies to integrate WebOS and Alexa into a fridge:


There are many more use cases that are not so obvious, but will also significantly change the payment industry: Just think of the car that automatically pays for gas at the filling station – no need for terminals nor tapping cards. Or look at Wirecard’s Connected Store concept or at Amazon Go, which after a testing period has now been opened to the public: Just walk in a store, take goods and walk out – no more cards or cash required.

What does this imply for payment companies?

In my opinion, central storage of payment instruments, tied to a user account, is absolutely key – in the IoT world, there is no need to enter card numbers, expiry dates nor CVC codes. Without the payment instrument already linked to the user account, payment companies will not be involved. The best solution is not only a centralized account, but a centralized wallet that is loaded by the user. Besides, Amazon is currently introducing such accounts and adding incentives to top them up.

The reason is simple: Many IoT transactions are small or micro transactions, and in some cases money is not only debited, but also credited. It is far cheaper and quicker to do that with central e-money accounts than going all the way through card schemes.

To conclude, I firmly believe payment companies will have to offer a fully digital eco-system of acceptance solutions and loadable user accounts in order to be ready for the IoT age. These must all be easily accessible through programming interfaces and built on one single digital platform.


Other Articles of the Payment Megatrends series: