Do you want to pay with your watch?

Posted on: March 15, 2016 by Henrik Hodam

The huge current sales push regarding wearables such as smart watches, bracelets or rings directly leads to the major question about the related use cases for these new devices. In addition to the more health and wellbeing related use cases such as a fitness tracker, we can see many attempts to use wearables for payments. Here we refer to proximity payments at the point of sales, where we see market potential for person-to-merchant and person-to-person-payments.

One report from Tractica states that the transaction volume for wearable payments will grow from $3.1 billion in 2015 to $501.1 billion in 2020. This would represent 20% of the traditional mobile proximity payments but still only approximately 1% of all cashless retail transactions.

Before looking into the possible use cases, we should investigate the nature of mobile payment transactions. Today, most existing solutions for mobile payments use NFC technology to implement the communication between the buyer and the seller. At the moment, the shoppers mostly use their smartphone and the merchants use their payment terminal (both have to support NFC technology).

The introduction of wearables will not change many aspects of this process. Looking at the usage of wearables for mobile payments immediately leads to the question of their advantage over using smartphones for mobile payments. This question is important because all known challenges of mobile payment using smartphones will still exist for wearables:

  • Technology : NFC or Bluetooth
  • Acceptance: rollout of NFC-enabled payment terminals in the retail stores
  • Scope: open or closed loop payments
  • Technology compatibility of the different device vendors (standard)
  • Payment process without power (low battery) and internet connection

We see the additional new challenges due to the limited functionality of wearables in comparison with smartphones to be problematic:

  • Display: very limited display functionality for confirmation / questions
  • Large Amounts: how to enter PIN for larger payment amounts
  • Security: how to fulfill the necessary payment security standards

With these constraints in mind, the need for uses cases that could bring the customer significant advantages to use a wearable instead of their smartphone, is significant.

Hands-free or limited pocket size

In some situations the customer is not able to take the cash, the chip card or the smartphone to make the payment. For example, places such as swimming pools, sauna, ski resorts or amusement parks. Looking in these use cases, we can see that there are already closed loop payment solutions in place, like the NFC-chip we get within the swimming pool to register the sauna usage or to purchase food or beverages. Here the wearable will only be used to identify the customer and to register the usage. The payment will be made at the end of the visit.

Combining payment with other services

Wearables could also be used to combine payments with other services like access control or legal limitations. Access to certain services such as public transport, hotel rooms or VIP areas in stadiums can be seen as a form of ticketing. This can be enhanced by the possibility of fulfilling certain legal rules such as checking the age limitation for specific services and goods (tobacco, adult entertainment or the advanced rollercoaster).

Outside of such very specific use cases, wearables have to compete with the existing traditional payment means like cash and chip cards and with its “advanced brother”, the smartphone. Due to the challenges mentioned, it will be difficult to find a positive business case for payment via wearables.

To summarize, the usage of mobile devices for payment is a very reasonable use case which still has to face many different challenges. Wearables as dedicated mobile devices have to face the same challenges as smartphones but could bring a much improved ergonomic usage for their users in certain situations. In such niche markets, wearables will bring value to their users. One of the major questions will be if these niche markets will need open-loop payment means or could live with appropriate close-loop solutions.

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About Henrik Hodam
Portfolio Manager and member of the Scientific Community
Henrik is head of Portfolio Management for the Public, Transport and Utility industries at Worldline in Germany - the European leader in the payment and transactional services industry. He is member of the Atos Scientific Community and the global track leader for Electromobility. As portfolio manager he is responsible for the definition and the development of Worldline offerings within these markets. This function includes the transformation of innovative ideas into products and business implementations.

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