Digital Wallets: The Catalyst for a New Payments Ecosystem

May 2022

Fintech & Payments

Nick Maynard

VP of Fintech Market Research

What Development Paths Are Driving Digital Wallets Adoption?

Driven by brands such as Apple Pay and Google Pay, and supported by smartphone and mobile device penetration, digital wallets are becoming go-to payment methods; offering convenience, speed, and security over traditional cash and contactless as well as the ability to store identity documents and serve as a primary interface for cryptocurrencies.

The business opportunities that digital wallets present means that multiple vendors across multiple fintech segments are prioritising their development so much so that four distinct development paths have emerged:

The eCommerce Path

The path refers to digital wallets aimed at simplifying online payments and reducing frictions during checkout processes; with the ultimate goal of boosting customer conversion rates and alleviating potential security concerns.

The primary vendor example for this pathway is PayPal, who launched P2P PayPal.me functionality in late 2015; which enables users to create personalised PayPal links that can be sent via text, email, and/or across social media platforms. In a similar vein, PayPal also owns Zelle, an app integrated into users’ bank accounts that enables P2P payments to be completed within a matter of minutes.

The Domestic P2P Payments Path

Usually viewed as a tool to boost financial inclusion, these wallets developed from the idea of simplifying mobile money transfers between users who otherwise have no to very limited access to banking services.

In recent years, a new model named PaaP (Payments-as-a-Platform) has emerged, offering a superapp-like business model for services that place payments in their core; for basic day-to-day activities including transport and food delivery, to more lifestyle-related activities. This model allows mobile network operators and other providers to diversify their products by adding additional revenue streams and cutting costs to serve customers.

The POS Payments Path

These wallets developed out of the need to facilitate in-store payments and, as such, gravitate towards employing specific technologies such as NFC, Bluetooth, and MST.

Increasingly, providers of these wallets employ technologies tailored towards specific domestic market trends. In India, for instance, wallet adoption was driven by UPI; a local system that integrates multiple bank accounts into a single mobile application of any participating bank.

The Social Payments Path

In recent years, numerous digital wallets have emerged from social messaging and media platforms, initially based upon the premise of domestic P2P payments.

These wallets are prolific in China and Asia Pacific, and exist in the form of superapps combining online shopping, communications, and transport payments. In other countries, however, development pathways are less apparent, such that two companies, WhatsApp Pay (owned by Meta) and Venmo (owned by PayPal), dominate this space.

Where Do Digital Wallets Go Next?

Despite differences in their development pathways and characteristics of the markets in which they operate, digital wallets are progressively adopting similar, near-identical capabilities; including embracing the ‘superapp’ approach.

However, these capabilities do not automatically translate into merchant acceptance. This is for several reasons, ranging from transaction fees to unfavourable data ownership structures to simple apprehension as to the benefits of accepting wallet payments. While we believe that acceptance of wallets amongst merchants will only grow, this cannot occur without merchant education and fee-based incentives.

• Digital wallets transactions will exceed $12 trillion in 2026, from $7.5 trillion in 2022.
• Leading digital payment vendors will diversify their payment products to include new solutions, such as buy now pay later and cryptocurrencies.
• APIs that connect financial institutions to local retailers will be key to the international growth of digital wallets usage for large, cross-border eCommerce merchants.
• Digital wallets vendors must look to offer value-added services, such as loyalty rewards and credit, to diversify their revenue streams; capitalising on a highly active user base.