Puttin’ on Payments

Wearables, a hot sector within the booming Internet of Things, are being outfitted with new payments technology. Will wearables generate a tide or just a trickle of new electronic payment transactions?

The idea of enabling smart watches, fitness trackers, and other Internet-connected wearable devices to make contactless electronic payments is still young enough to be a novelty, but it’s rapidly becoming a requirement for one of the hottest sectors within the exploding Internet of Things.

Business Insider, a New York City-based media and research firm, predicted last March that payment functionality would be included in 62% of wearable device shipments by 2020.

“That could be a catalyst for adoption, particularly in markets where users are already accustomed to paying contactlessly, because it’s putting features in the users’ hands,” Business Insider said in a report.

Later in the year, Stamford, Conn.-based technology consulting and research firm Gartner Inc. predicted that 310.4 million wearable devices would be sold worldwide in 2017, up 16.7% from 265.9 million in 2016, and that sales would increase 12% to 347.5 million units this year. Bluetooth headsets accounted for nearly half—150 million units—of 2017’s wearables, Gartner estimated.

Wearables clearly are staking out valuable territory as the IoT universe of connected cars, household appliances, toys, all manner of other devices, and even clothing, expands.

Boston-based research firm Aite Group LLC forecasted in a May 2017 report that the total number of devices connected by the Internet of Things globally will hit 15.7 billion by 2021, up 127% from an estimated 6.93 billion in 2017.

Standing in the way of widespread adoption of payment-enabled wearables, however, is a less-than-slam-dunk use case, hefty price tags for many devices—Apple Inc.’s high-end Watch Edition Series 3 goes for $1,349—and lingering security issues that could turn off some consumers.

Randy Vanderhoof, executive director of the Princeton, N.J.-based Smart Technology Alliance trade group, says payments have become “table stakes” for wearables. If a device can’t make payments, “it’s viewed as not being as good.”

“Consumers identify with payments, so it becomes an attractive feature to have,” he says.

33 Million Watches

That strong identification is a major reason payments leaders such as Visa Inc. and Mastercard Inc., some big banks such as the United Kingdom’s Barclays Bank PLC, and manufacturers of fitness trackers, smart watches, and other personal devices, such as Fitbit Inc. and Garmin Ltd., are vying to establish early leads in the payment-enabled wearables niche.

Visa, a long-time sponsor of the Olympic Games, has teamed up with Lotte Card, the financial arm of Korean retailer Lotte Department Store, to roll out three wearables for the 2018 Winter Olympic Games in PyeongChang, South Korea, which start Feb. 9.

They include gloves outfitted with near-field communication technology, commemorative stickers, and an Olympics pin, all of which are capable of making contactless payments through a tap at an NFC-enabled point-of-sale terminal.

The devices, which became available in November, will be sold online until March or when supplies run out. They are the successors to wearables Visa unveiled at the 2016 Olympics in Rio de Janeiro, including a payment-enabled ring.

The most famous wearable is probably Apple’s Watch, a smart watch that the Cupertino, Calif.-based smart-phone and computer behemoth introduced in 2015. Watch, like Apple’s iPhone, uses NFC technology so that wearers can make purchases through the Apple Pay mobile-payments service.

Apple keeps key statistics, such as Watch’s unit sales and Apple Pay transactions, as closely guarded secrets, but research firm Asymco has estimated that up to 33 million Watches have been sold since their introduction.

‘Security Exposure’

One big reason for payment companies’ enthusiasm for wearables is the growth of NFC-enabled contactless payment infrastructure. Sweden-based technology research firm Berg Insight estimated in late 2016 that the installed base of NFC-ready POS terminals in the U.S. and Canada would hit 9.2 million by the end of that year, a 92% increase over the previous two years.

A big reason for that increase is the U.S. conversion to EMV chip card payments since 2015. Most of the new EMV terminals also can handle NFC transactions, although many merchants have yet to turn on that functionality.

Worldwide, Berg Insight predicted the installed base of 45 million NFC terminals in 2016 would grow to 86.9 million in 2020. It’s upon that foundation that wearables payments are rising.

“This is essentially becoming a globally relevant capability,” says Stephane Wyper, Mastercard’s senior vice president of new commerce partnerships and commercialization.

Other technological developments are working in wearables’ favor, too. With the IoT rapidly expanding, the cost of the device’s embedded sensors, which collect and transmit data, is declining steadily, according to Aite.

Citing data from Goldman Sachs and Business Insider’s BI Intelligence, Aite predicts that the average cost of an IoT sensor will have fallen from about $1.30 in 2004 to approximately 39 cents in 2020—a drop of 70%.

Furthermore, many payment-enabled wearables rely on the tokenization engines of Visa and Mastercard. These systems protect online and mobile-payment transactions by replacing primary account numbers with digital characters useless to hackers.

“Because of tokenization, which goes hand-in-hand with wearables, it’s really taken down the security exposure [from] what it was before,” says Vanderhoof of the Secure Technology Alliance.

‘A Significant Gap’

The road for wearable payments is not exactly wide open, however. Despite protection during transactions because of tokenization, wearables still are not immune to payment fraud. The original provisioning of tokens into the wearable is a potential weak spot, Vanderhoof notes.

In addition, the sensors in IoT devices, including wearables, all have an Internet Protocol address, says Thad Peterson, a senior analyst at Aite. “A lot of them have default passwords on them,” which translates into an “exponential” increase in risk, he says.

The larger risk at the moment, however, is not the theft of payment data, but other types of mischief such as digital denial of service (DDoS) attacks. A massive DDoS attack in October 2016 temporarily slowed down or disabled many popular Web sites. Most fraudsters will find that hacking IoT devices in hopes of stealing payment card credentials is a waste of time, according to Peterson.

“There’s probably a lot easier way to get a card; we all know you can go to the Dark Web and buy active live cards,” he says. “The theoretical exposure [with the IoT] is there, but realistically … there’s a whole ecosystem already there and working just fine to get you that.”

Still, IoT security issues can never be ignored. Beyond that, the case for wearable-generated payments has to be made to consumers. Are they better and faster than old-fashioned payments with a plastic card?

“Right now we still have a significant gap in terms of numbers of places where contactless and mobile are accepted,” says Vanderhoof. “The muscle memory of the vast majority of consumers is, insert their card and leave.”

Adds Peterson: “It has to make things easier and less complicated.”

‘Sweaty Money’

But wearables manufacturers and payments companies eager to help them are seeing mostly green lights. The payments use case for wearables is pretty straightforward, according to Avin Arumugam, Visa’s senior vice president of the Internet of Things.

“Right now it’s the convenience factor,” he says. “Nobody wants to carry these bulky wallets.” And when you’re working out, “cash is harder to carry,” creating the risk of what he calls “sweaty money.”

So, if you’re in the gym or running on a lakeshore path, what better way to avoid sweaty money but still be able to buy some Gatorade or other refreshment than by putting on a Fitbit Ionic, the first smart watch from Fitbit, or a Garmin Forerunner Music 645? Those devices not only store music, but they also come with the Fitbit Pay and Garmin Pay apps, respectively.

Both Visa and Mastercard announced last August that Garmin and Fitbit were using their tokenization systems to protect payment transactions on their newest wearables.

“We saw an opportunity to integrate payments into those,” says Mastercard’s Wyper. He adds that wearables are “sort of the first generation of IoT commercial devices. You’ll find that wearables is complementary to a much broader effort we’re doing around the IoT space.”

Neither Visa nor Mastercard will say how much purchase volume they’re generating from wearables so far. The manufacturers, meanwhile, have quite a way to go before their payment services become ubiquitous.

Garmin’s Web site shows that only 10 U.S. general-purpose card issuers enable their cards for use with Garmin Pay. Some of the participating financial institutions are big, however, including Bank of America Corp., Capital One Financial Corp., and U.S. Bancorp’s U.S. Bank.

As of mid-January, Fitbit Pay’s roster of U.S. issuer partners was just a shade higher at 11. Besides the three aforementioned banks, they also include American Express Co. and Wells Fargo & Co. Fitbit gained an entrée into contactless payments in May 2016 when it acquired Coin’s wearable-payment assets.

Fitbit users add their credit or debit cards via the Fitbit Pay app. To use the service, consumers enter a card number and billing address, and verify their identity through a one-time password or through a card issuer’s call center. The issuer verifies enrollment and, upon approval, the consumer’s card appears in the Fitbit Pay app. Card data is tokenized within the app.

“We know health and wellness is a top priority for our card members, so we are excited to be part of Fitbit’s first payment-enabled device,” Matt Sueoka, AmEx’s vice president of digital partnerships, told Digital Transactions News last summer by email. “This gives American Express card members a convenient checkout experience while they are on the go.”

Neither San Francisco-based Fitbit nor Garmin, which has its U.S. headquarters in Olathe, Kan., responded to Digital Transactions’ requests for comment.

No More Than a Blip

By no means do either of those two companies have a duopoly on the payment-enabled wearables action. Other contenders include watchmaker Movado Group Inc., which last March announced it was working with Alphabet Inc.’s Google unit on the launch of Movado Connect, a line of NFC-enabled watches powered by Google’s Android Wear 2.0 platform, according to Business Insider. These watches don’t come cheap—prices range from $595 to $995.

Over in the United Kingdom, Barclays, the country’s second-largest bank by assets, in 2015 unveiled a set of wearables. The lineup currently includes a wristband, watch, sticker, and other products that include the bank’s NFC-based bPay service. The wearables can be used for purchases of up to £30 ($41.38). Users don’t need to have a Barclays payment card for funding; any Visa or Mastercard card registered to a U.K. address will do.

While it can be exciting to watch the rollouts of intriguing new wearables, the lack of a compelling payments use case for most consumers, the lofty pricing of many products, and a lack of participating issuers in manufacturers’ payment systems so far have prevented wearables from registering more than a blip on the payments-volume screen.

“Until the wearable use cases achieve critical mass, it will be a very small percentage of IoT volume,” says Peterson. “The price has to come down, and the value has to come up, has to be proven.”

—With additional reporting by Kevin Woodward