Motley Fool co-founder David Gardner has one of the original Pebble smartwatches. I once asked him what the device's killer feature was. His response? "It tells you the time."
That simple answer is representative of the challenge that smartwatches currently face as a product category. Right now, there is no "killer" feature to really sell the devices. Sure, many will likely include health and fitness tracking, but they may lack the mainstream appeal to really drive adoption.
As Apple (NASDAQ:AAPL) prepares to jump headfirst with the iWatch, which will probably be unveiled on Tuesday, the company may have come up with a killer feature that will set the iWatch apart from the competition: payments.
Word on the Street
The Wall Street Journal reported this week that Apple's upcoming wearable device could end up playing a significant role in the company's expected payment strategy. Not only is Apple's iPhone 6 expected to finally adopt near-field communications, but the iWatch is now also said to include NFC hardware. The iWatch may use NFC to pair with the iPhone 6, and one of the devices would likely have an additional security measure that encrypts personal data.
One possibility could be the inclusion of Touch ID, since Touch ID will probably also be pivotal to Apple's payment service. Including Touch ID on the iWatch for payments could be a home run, and it would literally take rivals years to catch up. Investors haven't heard any rumors that the iWatch would get Touch ID, but then again there have been no hardware leaks of any kind for the device.
I'm on record saying that requiring NFC to use Apple's payment service could be too risky, since NFC infrastructure is underdeveloped and merchants have been averse to adopting it. But Apple could also catalyze broader adoption, given its sheer weight and massive customer base, when it decides to back a technology.
Who can make it easier?
One of the primary reasons NFC-equipped phones haven't made a meaningful impact on the payments market is that taking out your phone to tap isn't more convenient than taking out your credit card to swipe. But tapping an iWatch that's already accessible on your wrist? That could very well be more convenient than the status quo.
In the same vein, eBay's (NASDAQ:EBAY) PayPal Beacon hopes to offer "hands-free" payments experience. PayPal realizes that making something easier than swiping a credit card is a high bar, so its solution involves checking customers in with Bluetooth Low Energy beacons (similar to Apple's iBeacons). The customer can then verbally confirm purchases, as PayPal will transmit personal information to existing point-of-sale systems.
PayPal Beacon raises numerous security concerns, though. Verbal confirmations might just be too convenient ... for fraudsters. It could also be a challenge for merchants to verify that customers have paid for items before walking out of the store. Nor is PayPal Beacon compliant with Payment Card Industry standards required by Visa and MasterCard. PayPal still has some pertinent details to work out, which may be why it has yet to fully launch Beacon.
Apple, on the other hand, can add hardware-based security features such as Touch ID. Not much else is known at this point about Apple's service, so it's hard to properly compare the two offerings. That'll change on Tuesday.
All of a sudden, multiple Apple storylines that have been developing over the years are converging. Investors have been separately contemplating an iWatch and Apple payments service for ages. Now, the two ideas could be officially unveiled hand-in-hand.
Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends and owns shares of Apple, eBay, MasterCard, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.