Payments up Your Sleeve

Players from Apple to Bulgari to multiple startups are embedding payments into rings, watches, even clothing, and now Visa and MasterCard are building platforms to run the transactions. But getting the right fit might take a while.

Consumers who own wearable technology feel a deep connection to their device. An extension of mobile technology, wearables engage consumers on a personal level by delivering relevant information about their health, such as heart rate and pulse.

They authenticate users to building-security systems, eliminating the need for keycards, and serve as personal assistants by notifying users of phone calls and text messages on their smart phone. Some devices even connect consumers to the Internet by voice command.

The expansive role wearables play in consumers’ daily lives makes the technology highly attractive to the card networks. As Visa Inc. and MasterCard Inc. see it, wearables are a way to turn everyday devices worn by tech-savvy consumers into a new digital-payments platform that allows consumers to pay by tapping their device on, or waving it near, a contactless point-of-sale terminal. The technology is expected to be especially popular with Millennials, who tend to embrace new digital initiatives.

“Wearables bring simplicity to payments and provide consumers a way to consolidate the fragmented payment and authentication data in their wallet on a device they wear every day,” says Jean-Christophe Babin, chief executive of luxury-watch maker Bulgari Group, which plans to roll out a payment-enabled mechanical watch in 2017. “It is a new and convenient way to connect consumers to their wallet.”

Moving Into the Mainstream

Projected shipments of wearable devices bear out the card networks’ optimism they can gain broad acceptance as payment devices. Shipments are expected to reach 340 million in 2020, up nearly eight-fold from 44.7 million in 2014, according to Englewood, Colo.-based research firm IHS Inc.

Devices worn on consumers’ wrists, such as smart watches, wristbands, and fitness and heart monitors, are expected to account for the majority of shipments, says Don Tait, a senior analyst for IHS and author of IHS’s five-year outlook for wearable devices, released in January.

Devices worn on the wrist were estimated to account for 91.8% of wearables shipments in 2015, according to the report. Market share for wrist-based devices is expected to hold steady, totaling 91.2% of shipments through 2020.

Already, the Apple Watch, which works with Apple Pay, is estimated to have sold about 12 million units in its first year of availability, which ended in April. By comparison, Apple sold only half as many iPhones in that product’s first year.

“Of the 92 million wearable devices in use today, 11.6 million can be used for payments,” says Tait. “As more open-loop systems supporting wearable devices come into existence, payments made using wearable devices will start to move into the mainstream.”

By 2020, IHS projects 72% of payments made using wearable devices will be made through open-loop systems.

Speed Bumps

While the card companies are betting consumers will want payment applications on their wearable devices, many payments experts caution that the road to mainstream acceptance has several speed bumps.

Some prototypes have already faltered for reasons unrelated to payments (remember Google Glass?). But even devices that try to include payments functionality may struggle. The biggest hurdle, the experts say, is that because the technology is so new, there is no compelling value proposition for consumers to embrace wearables for payments over their mobile phones, or over plastic cards, for that matter.

One barrier to mainstream acceptance is that Visa and MasterCard merchants are still installing EMV chip card terminals, most of which are capable of accepting contactless payments. With the rollout of EMV terminals taking place in stages, and with some merchants electing not to switch on contactless functionality, it is expected to be a few more years before consumers can make payments using wearables at all Visa and MasterCard merchants, payments experts say.

“Until wearables can be used as ubiquitously as cards and make payment easier and more convenient at the point of sale, payments won’t necessarily drive adoption of wearables,” says Daniel Van Dyke, an analyst for Pleasanton, Calif.-based Javelin Strategy & Research’s mobile practice.

Toronto-based wristband maker Nymi Inc. is one device maker slowing its entry into payments due to what it sees as a less-than-compelling business case. Instead of moving forward with a consumer product after a closed pilot that included payments, Nymi plans to enter the market later this year with a wristband intended to help streamline employee authentication instead. The device, which is being marketed to corporations and large businesses, will be priced at $150.

The Nymi Band uses biometrics to authenticate consumers by measuring unique physical attributes, such as heart rate. After a user creates an authentication profile, she only needs to tap her finger on the sensor to authenticate herself to the device after putting it on. The device also has a sensor on the bottom wristband that gathers daily changes in the user’s biometric data used to identify her, such as fluctuations in her heart rate.

To make a payment, Nymi users would wave their device in front of a contactless payment terminal. If a consumer loses her Nymi band, biometric authentication prevents another wearer from using it to make a payment or authenticate to a security device.

“Payment is a logical application to add to our core authentication capabilities, because employees do conduct personal commerce throughout the workday, but right now payments are secondary. Our primary focus is on innovating within authentication,” says Karl Martin, chief technology officer and founder of Nymi. “Our product has the hardware element to support payments, but the software is still being developed.”

Costly Retooling

Another stumbling block for payments, device makers say, is an absence of open standards for developing off-the-shelf applications that are interoperable with most any device certified for use on the Visa and MasterCard networks.

While both networks are moving toward open platforms, the going has been slow. As a result, bringing the first wave of payments-ready devices to market requires partnering with multiple parties as opposed to licensing the technology off-the-shelf. Such parties could include, for example, payment-application developers or cybersecurity firms that provide the applications to secure payment credentials loaded on the chip embedded in the device.

“Without interoperability standards, you can’t license an application and be sure it is compatible with your device. That’s why partnerships are necessary right now,” says Martin.

Forging partnerships can be complex, costly, and time-consuming, especially when working with the third parties that helped build Apple Inc.’s Apple Pay and Samsung Electronics Co. Ltd.’s Samsung Pay mobile-payments infrastructures.

“Those players do not have solutions that are generic enough to be compatible with your device, because they are specifically built for Apple Pay or Samsung Pay,” says Tim Mason, chief technology officer for New York-based smart-ring maker Ringly. “Getting them to retool their solution for you can be costly. That’s where Visa and MasterCard come into play because they are building a platform that lets most anyone connect to.”

Ringly plans to roll out its first wearable device with payment capability in the first half of 2017. In addition to payments, the ring will feature phone-and-text-notification capabilities and fitness tracking. Rings are expected to be priced starting at $195. The company is also testing rings and bracelets that can be used to pay subway fares, Mason says.

Open Platforms

To make plug-and-play applications a reality, Visa and MasterCard have begun building open platforms that support a wide range of wearable devices. These could enable device makers and card issuers to reach a broad audience.

MasterCard, which expects the first wearable payment devices for use on its network to come to market later this year, is connecting issuers, processors, acquirers, device makers, and application developers through the tokenization engine it built for mobile payments, the MasterCard Digital Enablement Service (MDES) platform.

“Our goal is to make payments a plug-and-play application for makers of wearable devices,” says Sherri Haymond, senior vice president for digital payments at MasterCard. “We recognize an opportunity to ensure that as payments became digital, they do so in a scalable way that makes them accessible to consumers and have an ecosystem that supports all kinds of wearables, whether it’s watches, fitness bands, jewelry or clothing. Not every consumer wants to use their smart phone to pay.”

Similarly, the Visa Ready Program provides the framework to ensure that devices, software, and solutions can initiate or accept Visa-branded payments. It also provides guidance and best practices for accessing the Visa network. Now, Visa is making its application programming interfaces for tokenization of credit card credentials on wearable devices available to software developers.

“We know that developers want access to the APIs to create new applications, so we are making them available,” says Vish Shastry, senior director and head of merchant solutions for Visa Digital Solutions. “We want to provide a platform for wearable payments that is easy to connect to whether payments are the primary application for the device or a secondary application.”

‘A Big Deal’

Not to be overlooked in the push to build an infrastructure that supports wearable-device payments is the ever-looming threat from fraudsters. “Fraud protection is a big concern for consumers,” says Mason.

To protect cardholder data as it passes through its network, MasterCard built its MDES platform to support the EMV Payment Tokenization Specification standard, established in 2014. Each time a purchase is made, MDES converts all payment credentials stored in a digital wallet into a token by replacing card account data with a randomly generated string of numbers and characters.

MDES validates the transaction by mapping the token back to the wearable device that generated it, then forwards the token to the issuer for authorization. A key advantage of tokens is that criminals cannot reverse-engineer them to obtain the actual credit card data.

In addition, MasterCard can confine a token to a specific sales channel, such as contactless payments. If the token is used outside the intended channel, MDES will automatically block the transaction, says Haymond.

Visa secures cardholder data using its Visa Token Service technology, which like MDES replaces payment-account data with a unique digital identifier that can be used to process payments without exposing actual account details. “We take a multilayered approach to security that also includes back-end security such as risk modeling,” says Shastry.

The second piece of the security puzzle is protecting cardholder payment data loaded on the chip in the wearable device. For this, MasterCard has partnered with WISeKey SA, a Geneva, Switzerland-based provider of online security and identity-management solutions.

WISeID provides an encrypted place to store user names, passwords, PINs, credit cards, loyalty cards, notes, and other information. The company has worked with Bulgari to provide the secure element in Bulgari’s Diagono Magn@sium, which Bulgari says will be the first mechanical watch embedded with contactless payments technology. The watch is expected to retail for about $5,000.

 

WISeKey’s secure chip, which it says is compatible with any type of wearable, uses a cryptographic root key to protect data loaded onto the chip, says Carlos Moreira, founder and chief executive of WISeKey.

Several smart watches, such as Apple’s Apple Watch and Samsung’s Gear, support digital wallets that enable contactless payments at the point of sale.

In addition, several device makers make it possible for consumers to disable the payment application within their device from a mobile phone, tablet, or desktop computer if the device is lost or stolen. Bulargi has added an extra layer of protection by including a prepaid wallet that contains no more than $20 and can be used for purchases without a PIN. To make larger purchases using the watch, a consumer must enter her PIN.

‘A Statement Item’

Despite the feverish work being done by the card companies and their technology partners to lay the foundation for wearables payments, not to mention the hype surrounding wearables in general, the technology still has a long way to go. “Wearable payments are still in a nascent stage,” says Mason.

Nevertheless, Mason as well as other executives at wearable-device makers and the card companies remain bullish on the technology.

“We hear repeatedly from our customers that interest in wearable payments is building because of the opportunity to remove friction at the point of sale by no longer having to fumble for their wallet or enter a PIN to pay,” says Mason. “Wearables payment devices are a statement item that exudes an air of exclusivity, and that gives them a lot of potential cachet with consumers.”

It just may take longer than enthusiasts expect for that statement to come to a full roar.

The Importance of Fashion

One way to stand out in the evolving world of wearable payment devices is to make the devices as fashionable and stylish as possible. Wearables, after all, are worn by consumers, and in some cases are considered fashion statements.

That’s the approach San Francisco-based Ringly is taking. “When your wearable device is jewelry, the product has to stay fresh from a design perspective to keep consumers interested,” says Tim Mason, chief technology officer for Ringly.

Offering multiple designs is one reason Ringly is planning to offer single-application devices, whether it be for payments or notification of incoming calls or text messages to the user’s smart phone. “The more applications that get bundled into a piece of jewelry, the bigger it must be to accommodate the technology,” says Mason. “Rings tend to be smaller pieces of jewelry.”

Ringly intends to offer several payments-only rings, as well as several other single-application rings. The company’s focus on payments stems from positive customer feedback about, and requests for, payments applications on the device. One potential payments-only ring may be dedicated to paying subway fares. The device would replace fare cards and monthly passes, enabling users to move through the turnstiles faster, Mason says.

“We see a lot of potential for paying subway fares with a wearable device because it speeds up the transaction by removing the friction of having to buy a fare card or remove it from the wallet and insert it into the card reader on the turnstile,” says Mason.

Ringly also plans to offer single-application devices focused on its core technology, notification of incoming calls and texts on smart phones. Users sync their smart phone to the transmitter in the ring using an app on their phone. As consumers set up the service, they can specify how they want to be notified of incoming calls, such as having the ring buzz three consecutive times. The ring also includes an LED light that can be illuminated using different colors to identify incoming calls or texts.

“Users can set different combination of buzzes and illumination to identify calls or texts from certain inpiduals, such as family,” Mason says. “While our devices are technology, they are still jewelry and we want the technology inside to be so discrete no one knows it’s there.”