5 insights into wearable payments

May 1, 2019 10:53 AM

While the payment volume from smart wearable devices may not have achieved the initial euphoric predictions made by analyst firms — such as over $500 billion in annual volume by 2020 expected by Tractica research — things are about to change for the better as several market dynamics have shifted.

The global market for smart wearable devices is growing quickly, although not necessarily in the U.S., as Asian countries such as China are prodigious buyers of these devices. There are two big drivers behind the growing Asian smart wearables demand: lower prices and willingness to forgo premium brands for everyday products. For example, AliExpress, an online retail store based in China and owned by Alibaba Group, is selling the Xiaomi Huami AMAZFIT Bip smartwatch for $76.79 and the Xiaomi Huami AMAZFIT Verge 3 for $153.59. Compare that to the current Apple Watch Series 4 which starts at $399 and goes up to $799.

Consumer attitudes, bank willingness to support wearables and retailer accessibility have all improved in the last few years. Retailers and transit systems around the globe have made major strides and committed future investments for putting the infrastructure in place to accept NFC-based and QR code-based wearable payments. The growth of contactless card usage as well as the slow, but steady rise of mobile wallets such as Apple Pay and Alipay signal a growing consumer interest.

The global market for smart wearable technology is expected to more than double in annual unit sales over the next five years to reach 260 million units in 2023. According to research firm CCS Insight’s 2019 Wearables Forecast, the market experienced explosive growth in 2018, rising 29% to 121 million units over the 2017 record pace of 94 million units. CCS predicts that greater adoption of smartwatches, smart hearables and smart shoes will dramatically expand the market creating an annual value of almost $30 billion in 2023.

In 2018, smartwatches gained significant ground on fitness bands, posting units sales of 74 million, of which Apple was a significant beneficiary. CCS Insight estimated that Apple sold 26 million Apple Watches in 2018, growing 63% over 2017 sales. Since the Apple Watch is sold at premium to competitive brands, CCS Insight calculated that Apple’s sales accounted for 65% of the total value of the smartwatch market in 2018.

While Android phone owners have lagged in adopting smartwatches, CCS Insight says significant ground was made up in 2018 by Fitbit, Fossil, Garmin, Huami, Huawei and Samsung. The firm estimated that Fossil led the overall Android smartwatch market with 3.5 million units sold in 2018.

While smartwatches are often positioned as an adult gadget or piece of jewelry, the children’s smartwatch segment is often overlooked, especially since it is mostly a China-based phenomenon.

CCS Insight’s 2019 Wearables Forecast reported that globally, 27 million children’s smartwatches were sold in 2018, of which 25 million were sold in China. In general, these watches are intended to be used by children between the ages of 4 – 12 years old and serve as a technology stepping stone. But as with the history on toys and dolls, what may work for a 10 year old today is likely to be become quickly outdated and serve only a younger set of consumers.

The functionality of a child’s smartwatch is very different than a feature-rich $799 Apple Watch and is priced accordingly. Amazon sells children’s smartwatches in the $40 range, Walmart has them for $20-25 and AliExpress sells them as low as $12. Most children's smartwatches do not need to be paired with a phone.

Children’s smartwatches have become popular because they allow children as young as age four to become part of the connected world, have the ability to make phone calls to a set of predetermined phone numbers and allow remote monitoring by parents. While few children’s watches have NFC functionality, as they grow in adoption, it would be very easy to add it in order to enable school lunch purchases or bus fare.

A major challenge to the initial growth of wearable payments was the lack of availability of point of sale terminals that could process NFC transactions. The one saving grace was that most EMV-enabled terminals being shipped to U.S. and overseas merchants were already dual interface, i.e., they could accept both EMV and NFC transactions.

The installed base of NFC-enabled terminals is experiencing rapid growth and is forecast to continue unabated. According to Berg Insight’s NFC Report, the number of globally installed NFC-enabled terminals reached 54.5 million in 2017, up by 24.7 million from 2016 – more than doubling in one year alone. Berg Insights estimates that 90% of European and 88% of North American terminals have their NFC capabilities turned on.

Berg Insight predicts that the installed base of NFC-enabled terminals will more than double by 2022, reaching 112.3 million units. This signifies that over 78% of the world’s POS terminals will be NFC-ready in 2022, up from 50% in 2017.

Once infrastructure is enabled, the next challenge that remains for driving wearable payments growth is convincing consumers to use it.

According eMarketer’s 2017 Proximity Mobile Payment User Penetration Forecast the number of people making at least one mobile proximity payment in the last six months has been experiencing a slow and steady uptick. North America should reach one-quarter penetration by the end of 2021, with Asia Pacific having a near identical growth curve (not shown in chart) and Western Europe slightly behind.

After years of trying to build out contactless cards targeting transit, Mastercard sees Apple Pay an active user base that uses transit every day. Transit could be the key for wearables payments growth as demonstrated by the London Underground, which brings in 53,000 new contactless users each day.

Currently the majority of proximity payments (including mobile wallets and wearable payments) are largely utilizing closed loop systems which allows them to be used at only one or a small set of merchants such as at a coffee shop or a transit hub.

According to a Smart Payment Association whitepaper, as wearable payments grow in volume there will be a shift away from the “transit only” or “coffee shop only” closed loop system to one where the majority of transaction will be using open loop systems on card network rails such as Visa and Mastercard. A major driver of this shift will most likely be lead by the broader set of the “Pays” or mobile wallet payment enabled services such as Garmin Pay, Apple Pay, Samsung Pay, Fitbit Pay and Google Pay.

Consumer interest in using wearables for making purchases is strong, although it has not reached a majority. Based on a 2018 study conducted by Mastercard, 26% of British shoppers expect to start using “tap and go” contactless payments with a smartwatch, bracelet, keyring or other form of wearable payments in the near future — a positive sign of interest.