The Wearable Future: Revolutionizing Digital Payments

Nov 05, 2015

Earlier this week, MasterCard announced its partnership with several hardware vendors to enable payment functionality in Internet-connected everyday objects such as wearable bands, rings, key fobs and clothing. Connected objects are transforming all aspects of everyday life and the financial sector wants an important role in this digital revolution. Just as mobile-based contactless payments start gathering traction globally, the digital payments market is ready to take the next plunge into the wearable payment opportunity.

In early 2015, Apple set the market abuzz with the introduction of Apple Pay on the Apple Watch. However, this is not without competition. Samsung also announced the launch of its payment application, Samsung Pay, which is currently available on Galaxy S6, Galaxy S6 Edge, Galaxy Note 5, and Galaxy S6 Edge smartphones. Android Pay is expected to cover a larger device footprint, when it launches on Android Wear devices.

The hype around payment enablement on wearables is understandable. Wearables make payments frictionless. There is no need to pull out a bag or a wallet or a phone, just wave your wrist over a reader and the transaction is complete. Payment convenience is the advantage Jawbone aims to deliver with its new fitness tracker, UP4, in partnership with American Express. Now, there is no need to carry your wallet when you go for a run. Despite the ease of making payments using wearables, there are a couple of major obstacles preventing mass adoption.  

1)      NFC terminals are expensive

Most wearables use NFC to enable contactless payments.NFC technology for payments has been around for a while. However, one of the reasons it has not taken off is because of the heavy cost of replacing traditional payment terminals with newer ones that accept NFC payments.

Interestingly, Samsung has found a way around this obstacle, with the acquisition of LoopPay’s Magnetic Secure Transmission (MST) technology. MST helps convert magstripe payment terminals into NFC terminals, thereby enabling contactless payments.

With increased consumer awareness about NFC and proliferation of NFC-enabled devices in the market, it is only a matter of time before retailers are forced to upgrade their point-of-sale (POS) systems.

2)      Consumer concerns about security

As with any new technology or application, consumers have security concerns. With digital payments, these concerns are further enhanced. This is partly because of the lack of knowledge about the underlying payment process. It is important to educate consumers that their financial details remain secure. The device does not store account numbers; banks assign a unique number for every registered card, which is stored in an encrypted format on a secure element embedded on the device.

Moreover, devices also use some authentication mechanism to ensure that the person using the device is indeed the owner. Nymi is a wearable band that identifies the user based on his unique electrocardiogram (ECG). Apple employs fingerprint authentication on the phone and a four-digit PIN code every time the user wears the Apple Watch.

However, consumers’ concerns are not entirely misplaced. Early this year, it was found that many Apple Pay transactions were completed using stolen payment credentials. As a result, US banks have now tightened their verification procedures, ensuring identification of the card owner via authorization codes, security questions or a call with the bank’s representative, every time a credit card is added to a new device.

It’s not just technology providers but also financial institutions that need to focus on filling security gaps in wearable payment processes.

Wearable Payment: Growth Potential

Integration of a payment application onto a wearable device will make it more attractive for consumers and work as an effective strategy to ensure sustained use of the device. With increased customer education, security advancements and retailer acceptance of NFC payments, wearable payments will leapfrog NFC-enabled smartphones to emerge as a strong alternative payment modality by 2020.

Tags: wearables
Category : Mobile & Wireless

Shuba Ramkumar


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