The wearables market is quickly gaining momentum.
The value of contactless non‐card payments is set to rise by 171 percent between 2015 and 2018, according to Juniper Research. The trend will be led by payments made with mobile phone handsets, to be used by an estimated 148 million consumers in 2016, primarily using Apple and Samsung handsets which will account for 70 percent of new users.
The attraction of wearable devices for consumers can hinge on their type. Some are specific to events such as festivals or sports games, where they provide a useful alternative to cash or carrying a bank card. These may also support other functions, such as access to the event. Lifestyle wearables are often tied to exercise or a specific clothing item from a wristband to sportswear. Functionality can include anything from monitoring a heart rate to GPS tracking. These two sets of devices tend to focus on passive, prepaid functionality built into a chip, which uses NFC to pay for small items, with a spend limit acting as a security buffer against losses from theft.
Designer wearables tend to be the most complex devices, for example smart watches, which often have a range of functions. Payment methods via these devices can often be supported by interaction via a smartphone, allowing apps and virtual card wallets to be employed.
Apple and Samsung have launched smart watches – the Samsung Gear S2 uses G&D’s eSIM management technology – that enable payments, and most recently Swatch has worked with Visa and partner G&D to launch the ‘Swatch Bellamy’ wristwatch that contains an NFC chip to allow low value payments.
The approaches each firm takes determines the level of security and functionality available to the user. Visa offers a secure site to top up funds on the Swatch Bellamy. Both Apple and Samsung require a phone to be used to store bank card details. These can make secure NFC payments authorized by fingerprint or PIN number, and Samsung’s phones can additionally be used with mag‐strip machines by emitting a magnetic secure transmission.
Both companies’ smart watches can then be enabled by the phone to make payments from cards held in a virtual wallet. When a payment is made a token is sent to the contactless payment device to authorize a transaction, rather than passing on the card information.
This prevents the loss of the customer’s data in the event that the shops records are breached by a hacker, as happened to US retailer Target in 2013. That affected some 40 million customers and cost the firm $116 million in settlement pay‐outs to customers, Visa and banks who had to reimburse customers.
Most contactless transactions are limited with or without tokenization. This includes cards too. The limitation can be the amount, accumulated amount or number of transactions.
For consumers, wearable payment devices promise greater convenience than ever in their capacity to carry transferable wealth without risk of considerable loss.
In some cases wearables are being used for specific events such as sports matches and music festivals; in others they are a permanent payment device.
For financial institutions wearables pose an interesting development. Banks can authorise their cards to be used on wearable devices from the likes of Apple or Samsung, or they can launch their own systems, including stickers, key fobs or wearables.
Competition between device providers will make wearables more commonplace and desirable, while pushing down fees from intermediaries and offering alternative sources of data, which the banks value in supporting customer relationships. In combination these make wearables a winning tool in banks’ digital strategy.