Contactless payments are a relatively new but well known phenomenon; in the UK consumers spent more than £2.5bn via the technology in the first half of 2015. Transport for London adopted the technology in September 2014, and in the first year of operation 180 million journeys were paid for by contactless. Since July of this year, customers have been able to use Apple Pay via their iPhones to pay for travel or after work drinks.
However, to use their “mobile wallet” the customer must still extract their phone, authenticate the payment with a fingerprint, and in doing so advertise that they are carrying a device worth upwards of £450.
Arguably this is no more efficient (or safe) than tapping a contactless debit or credit card onto a card reader.
Indeed in North America, where consumers have access to the largest range of mobile payment systems, just 18% of people regularly make payments via their smartphone. Apple takes the lion’s share (68%) of these transactions, over Samsung and Android, however 83.4% of those who have access to Apple Pay still have not even tried it.
This would suggest that smartphone-based mobile wallets have yet to gain widespread acceptance.
Whilst smartphone wallets move toward mainstream adoption, the wearable technology market continues to grow too. 2015 was heralded as the “Year of the Wearables,” and that year we saw a shift away from fitness devices aimed at the health-conscious toward more desirable, fashion-conscious tech with daily functionality. Research suggests that over 250 million wearable devices will be in use globally by 2018, with the smartwatch leading the charge.
There are already a number of smartwatches currently operational as wearable payment devices, from the high-end Apple Watch to more budget-friendly options. By making payments entirely hands free, smartwatches greatly enhance the daily functionality of the mobile wallet.
However, wearable payments will not be limited to wrist wear in the future. A U.K. start up recently exceeded their fundraising target on Kickstarter to produce the world’s first contactless payment ring. The ring is designed to make payments, store contact and emergency medical information, and unlock doors all without the need for a smartphone. The fashion designer Henry Holland even showcased payment-enabled jewellery on the catwalk during this year’s London Fashion Week.
Risks and Opportunities for the Financial Sector
Wearable devices offer both significant opportunities and risk for the financial sector. Financial institutions are already facing challenges from nimble financial technology (FinTech) firms. For example, payments and processing, traditionally the preserve of financial institutions, have been disrupted by companies such as PayPal and iZettle. Banks will need to consider how to respond to these changes by taking advantage of wearable devices.
Some financial institutions have already embraced wearable technology. One large U.K. bank has developed a wristband that operates via its contactless system. It has joined forces with a clothing brand, to create a payment-enabled jacket, and a U.K. train operator, to offer free wristbands to passengers. By hooking into this innovative space, the bank has demonstrated its desire to embrace technological advances, an attractive quality for younger, tech-savvy customers and prospective account holders.
As we move forward, the next step is wearable technology embedded in clothing, which looks set to provide real-time data and feedback about anything from heart rate to ultraviolet exposure. This real-time data can be harnessed to create unique service offerings delivered direct to customers, particularly for the insurance sector, as it continues to diversify and offer services as well as products.
For example, wearable technology embedded in skiing or mountaineering clothing could immediately notify rescue agencies of the customer’s location, and the insurer about the accident, enabling them to swiftly coordinate rescue efforts and medical treatment.
Wearable technology embedded into uniforms in the workplace could allow insurers to create innovative employee benefits and wellbeing programs for clients. Through the use of such technology in high-risk employment (such as construction) or in extreme geographies, data could be used to monitor workers and prevent accidents.
Furthermore, by continually feeding back data, wearable devices and clothing might allow insurers to make better data-driven decisions, assess and price risk.
In its entirety, this vast wealth of data could create an incredibly rounded picture of a human being, which in turn may determine risk models, thus revolutionising traditional pricing models.
Risks of All This Data
Nevertheless, the increased utilisation of data does pose certain risks. Companies that gather vast amounts of personal data are exposed to hackers looking to exploit this information for a plethora of reasons.
In 2015 90% of large organisations and 74% of small businesses suffered online security breaches. Last year’s cyber-attack on TalkTalk has demonstrated the devastating reputational and financial effects of failing to adequately protect consumer data (the company’s market value fell by £360 million).
Effective management and mitigation of data security risks will therefore be central to preserving an already fragile trust in financial institutions. This is ever-more pertinent due to the nature of the data at risk. Biometric and health data is highly confidential and personal, and could cause significant distress if disclosed.
As technology continues to develop at a furious pace, wearable payment innovators will need to focus on enhancing security, particularly through the development of user identity checks. We already have fingerprint recognition to unlock our smartphones, but a smart watch could measure the pattern of our heartbeat, which is as unique as a fingerprint, and therefore the device would only be operational while on the owner’s wrist.
Wearables are here to stay. While sophistication increases, the cost of technology continues to decrease, meaning that wearables will have more of a mass market appeal over time.
Innovators will continue to seek new ways to improve their functionality, and to push the boundaries on ever-more personal data collection.
For some, however, the development of wearables is no longer the forefront of technological innovation. The designers of FitBit, a fitness-tracking wristband that sold 11 million devices in 2014, are moving towards an “embeddable” device – a small “digital tattoo” implanted underneath the skin. This technology could not only understand what you are doing at any one time, in the way a FitBit can, but it would be aware of how you are, both emotionally and physically. Such invasive wearables could gain an unprecedented insight into our daily lives further multiplying opportunities associated with wearables, and putting risks right under our skin.
This article first appeared on the Willis blog
Jagdev Kenth is Director of Risk & Regulatory Strategy in Willis Towers Watson’s Financial Institutions Group