Mobile phones are becoming inseparable parts of our routines, helping us navigate and run our daily lives. They are increasingly the first choice for how we research and buy products. It’s no surprise that mobile and digital wallet purchases are becoming more and more popular.
In 2017 debit card transactions surpassed cash transactions for the first time, thanks to contact-less payments. This, however, is expected to change in the years ahead as digital wallets with enhanced value-added services and biometric security will overtake card payments and become increasingly the standard payment method.
Significant increase in digital wallet acceptance
The predicted increase in the digital wallet as the main mechanism for making payments is driven by powerful social, technology and regulatory market trends. The increasing penetration of smartphones across the population — but especially the technology-dependent customer segments such as Generation Y and Z — means that smartphones will increasingly be looked to as a means of making payments as well as used for searching and purchasing products. Added to this is a regulatory environment that is opening up the payment market to competition from non-banks through such regulations as Open Banking in the United Kingdom and the second Payment Services Directive (PSD2) in Europe.
The digital wallet will grow in importance as more companies enter the payment space, including smartphone device manufacturers such as Apple and Samsung, technology firms such as Google with Google Pay, and social media-based companies such as WeChat Pay and Alipay in China. With enhanced biometrics such as facial and fingerprint recognition, the limits on transaction values are likely to increase, since they are viewed as more secure than card payment transactions.
With the potential of adding other value-added services to the digital wallet, it is clear this will increasingly be the favoured mechanism for paying for services.
Lessons from China
The Chinese market offers a good glimpse into the future of digital wallets and mobile payments. China’s mobile payment market is now the largest in the world and is 50 times the size of the U.S. mobile payment market. The Financial Times reported a 2017 Forrester study which forecast that these mobile payment transactions in China would exceed the equivalent of 10 trillion dollars in 2018.
China’s mobile payment market is dominated by two companies, and surprisingly neither one is a bank. Alibaba, the retail giant, is one of the market leaders with the digital wallet Alipay. The other is the social media company WeChat, which offers the digital wallet WeChat Pay. The Chinese banks have basically been excluded from the digital payment market by these non-traditional banking competitors. Why? These companies invest in good customer experience, offering products and services from a range of other vendors. Those products and services can be paid for with the digital wallet, thereby reducing friction in the payment experience.
The main point here is that the digital wallet in China is fundamentally different from the existing concept of the digital wallet in the United States and Europe. In these regions, the digital wallet is a mechanism for paying for small-value goods at the point of sale. In China, the digital wallet is embedded in so-called super-apps, which provide the ability to pay for goods and services off-line through Quick Response (QR) codes and on-line, covering a huge range of products and services — all based around the digital wallet as the default payment mechanism.
The extent to which digital wallets have replaced credit/debit cards and even cash in China is also interesting. A 2017 study by Jan Lukas Korella for Deutsche Bundesbank showed the prevalence of digital wallet payments across retailers in China. In the sample, over 56 per cent of customer transactions at these merchants were from digital wallets, and cash was the second most prominent payment method with a share of 17.8 per cent, while debit and credit cards had shares of 10.4 per cent and 9.6 per cent, respectively.
Seize the opportunity
There is significant opportunity to embed the payment mechanism provided by digital wallets into our daily lives as the digital wallet becomes the default mechanism for paying for goods and services on the web and off-line. Creating this superior digital payment experience, coupled with providing additional services through the mobile app in which the digital wallet resides, can provide a huge market opportunity for increased revenues. Such an app can use knowledge gained from China but should not try to replicate that system fully because of the many regulatory and cultural differences. The Chinese method, though, does illustrate the opportunity presented by a digital wallet embedded in an app connected to many services, providing a great customer experience and a frictionless buying experience.
Strategic-thinking banks that want to take advantage of digital and a new regulatory environment could seize this opportunity. But, if some banks would rather sit firmly in the traditional banking space, non-bank players such as social media companies, tech companies and new disruptors may take this opportunity and make it their own.