By 2020, 45% of Wearables Owners Will Use Them for Payments, Mostly Open-Loop

Payment with a wearable device, such as a smart watch, wristband, or fitness monitor, has the potential to be used by 45% of wearables-owning consumers by 2020, finds the IHS “Wearable Payment Devices Report—2016” issued Wednesday.

In four years, the global market for wearables will reach 340 million devices shipped, a 271% increase from 91.5 million in 2015, the report says. With 45% of these devices used for payments, the potential for electronic-payments growth is significant, says Don Tait, senior analyst at IHS Inc., an Englewood, Colo.-based research firm.

Much of that potential may lie in wearables relying on open-loop payment services. Tait forecasts that, by 2020, such devices will account for 72% of wearable-device shipments. In 2015, closed-loop payments accounted for 82% of wearable-device payments, he says, with Disney Inc.’s MagicBand wristband and similar devices for theme parks, cruise ships, and music festivals accounting for large portions.

Closed-loop wearables are more popular today than open-loop ones because of the reduced complexity to set up and use the devices, Tait says. A prime example is Disney’s MagicBand. The consumer receives a MagicBand upon check-in at a Disney Resort hotel. With it, she can unlock her hotel room, enter theme parks, and charge food and merchandise to the hotel room. Consumers also can order a MagicBand online. Other than linking a payment card to the device (and paying for a Disney vacation), the steps required to use a MagicBand are few.

“Closed-loop applications will help to add interest in wearables in the payments market,” Tait wrote in his research note.

Conversely, current open-loop systems, such as Apple Inc.’s Apple Pay, Samsung Electronics Co. Ltd.’s Samsung Pay, or Alphabet Inc.’s Android Pay, require multiple steps and involve multiple providers. Apple Pay on the Apple Watch requires a Bluetooth connection to a companion iPhone.

“Having both an Apple Watch and an iPhone ties you to the Apple ecosystem,” Tait says via an email to Digital Transactions News. “Buying both devices can be expensive. For an Android smart-phone user who buys an Apple Watch, they will also have to buy an iPhone to use Apple Pay.”

Growth in payments made with wearable devices could come at the expense of cash, Tait suggests. “Wearable payment devices are more likely to displace cash than any other payment method, as they are expected to account for a majority of transactions at the low end of the payment spectrum,” his research note says.