Even though it is still the very early days of mobile payment wearables, consumer use of the devices is poised to reach a transaction volume at $501.1 billion by 2020.

That type of adoption translates to a compound annual growth of 177% in five years from the 2015 starting point of about $3.1 billion in transaction volume, according to research from Boulder, Colo.-based Tractica.

The independent market research firm contends the payments wearables industry, in combination with increasing Near Field Communication contactless technology present at the point of sale, created a "perfect storm" for consumer adoption.

Tractica developed its forecast through interviews, vendor briefings, product demonstrations, and quantitative and qualitative market research focused on consumer and business end users.

It concludes that wearable payments will account for 20% of total mobile proximity transaction volume in retail by 2020, but less than 1% of total cashless transactions, which is expected to cross $50 trillion.

"We believe payments are the killer app for the smartwatch, making it a 'hard to leave behind' device," said Aditya Kaul, research director for Tractica.

Apple Pay "is the best candidate" for delivering that killer app, which is why the Cupertino, Calif., technology giant unveiled its mobile wallet at the same time it announced the development of a smartwatch, the report stated.

Overall, a smartwatch that is a multi-function device like the Apple Watch is likely to resonate with more consumers than other technology, Kaul said. "In the long run, payment is a feature rather than a form factor," he added.

Even much less complicated payment-capable wearables such as the Disney MagicBand don't rely on payments as their sole feature. The band is used as a wireless hotel key and park admission pass; though it can make payments at any terminal in Walt Disney World, the payment capability is optional.

Barclaycard is taking a different approach. Though it offers payment-only wearables, it offers them in a variety of form factors, including a wristband and a glove, to suit the fashion tastes of different consumers.

Swatch Group AG recently revealed it would introduce a less expensive smartwatch model called the Swatch New Gent watches for NFC transactions. Tractica took into account that Swatch is expected to deploy the device with UnionPay this summer.

The surge in mobile wallet transactions with the introduction of Apple Pay, Android Pay and Samsung Pay will ultimately trickle down to wearable devices connected to those wallets, the Tractica report stated. At the same time, the adoption of contactless cards in Europe and Asia has enabled the use of 250 million contactless cards globally, meaning consumers are becoming accustomed to "tap and pay" technology.

Despite all of the positive signs, the biggest barrier for wearable payments remains the need for merchant support for contactless payments, the report said.

Contactless terminals are much less common in the U.S. than they are in Europe and Asia.

In addition, the merchant joint venture Merchant Customer Exchange is planning to launch its own CurrentC mobile wallet in the U.S. in the coming months, and some MCX members blocked use of Apple Pay in their stores.

Rather than supporting their own payment solution, merchants should expand their support for all approaches, Kaul said. "They are better off opening up support for Apple, Samsung and Google wallet solutions that are better equipped to drive the market in the long term, especially when it comes to mobile and wearable payments," he added.

The best strategy for merchants is to tie their loyalty cards to digital wallets, which will then be integrated into a wearable device, Kaul said. "Apple Pay is already enabling this, and the other solutions will follow suit," he added.

In addition, banks will have to continue to collaborate with wearable device technology providers, card companies and merchants to foster wearables growth, Kaul said.

"At the moment, banks, merchants and device vendors are all pushing for their own individual solutions," Kaul added.

Tractica considers the forecast of more than $501 billion in wearables payments by 2020 a "safe estimate" based on all of the positive and negative factors taken into account, Kaul said.

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