Surging Digital Wallet Use Threatens Traditional Credit Card Market

Digital wallets are an increasingly competitive space for card issuers. In fact, without 'top-of-wallet' status cardholder activity can plummet. Here are key ways bank and credit union card issuers can grab and hold consumers' attention at the point of sale.

Digital wallets have been hyped as the future of payments for so long it would have been easy to dismiss them as marginal even just a couple of years ago. Now, that has become a risky bet, because digital wallets — often referred to as mobile wallets — are finally catching on in a meaningful way with consumers.

Not only is competition growing among card issuers to be “top of wallet” at the point of sale with these digital wallets, but because of the way consumers tend to use them — keeping fewer digital cards in their mobile wallet than they keep plastic cards in their physical wallets — the balance of power in the card business is shifting.

Spurred on by habits created during the pandemic, consumers globally, and in the U.S. particularly, sharply increased their usage of digital wallets in the last 12 months, according to a survey from Marqeta. The payments company surveyed more than 4,000 consumers in early 2022 — 2,000 from the U.S., 1,000 from Australia, and 1,000 from the U.K. — on their usage of digital wallets, which the survey described as “a virtual wallet that stores payments information on a mobile device.”

Digital Debutantes:

Many people who never before used a digital wallet began doing so during the pandemic-related lockdowns of 2020.

75% of those who were surveyed globally said they have used a digital wallet within the past year. While the U.S. is slightly behind the global average, where 71% reported using a digital wallet within the last 12 months, the rate of adoption is still up from the previous year (64% in 2020).

“The pandemic accelerated a shift that was already happening, albeit in fits and starts,” the report stated.

Convenience Is a Big Plus

Marqeta noted that prior mobile wallet adoption had been restricted to certain regions or to certain demographics and groups such as younger digital natives.

“What the pandemic has done is force a global shift in behavior where even many who are traditionally slow to adopt new technologies were forced by external events to adapt,” the report continued. “And while it’s clear that the increased awareness of hygiene may have been the accelerant for this change — it appears it is very much convenience that will keep the trend moving along.”

More than half (56%) of the consumers polled said they’ve gotten so used to contactless payments they find it irritating if they have to enter a PIN number. Whether a payment made with a mobile wallet is more convenient than one using a contactless card is still debated. Universally across all the regions surveyed, however, mobile wallets were rated highly for convenience when making purchases — 85% in the U.S., 89% in the U.K. and 90% in Australia.

Ease of use is another big factor in the increased adoption of mobile wallets. Even those that may consider themselves technophobes find them simple and convenient to use. Cards certainly are not difficult to use, so the convenience bar is high. Yet, payments made with mobile wallets, when used in conjunction with facial recognition, can be very fast.

Read More: Taking Digital Wallets Beyond Payments by Turning Them Into ‘Super Wallets’

While new technology can often be perceived as complex, Marqeta stated, this isn’t the case with mobile wallets: “88% of survey respondents globally said they found their mobile wallet simpler to use than they imagined prior to adoption.”

In fact, a majority of consumers are so comfortable with using mobile wallets that they say they would be confident only taking their phone with them out shopping and leaving their physical wallet at home. 81% of people surveyed globally said they could make mobile wallet purchases everywhere they wanted to. In the U.S., more than three quarters (78%) of respondents agreed with this, up from 62% in a different Marqeta survey of U.S. consumers in 2020.

Based on anecdotal evidence, there are still many places that don’t accept mobile wallet payments, including many restaurants and hotels. As that changes, the likelihood of digital wallet use becoming habitual, will rise further. And that could bring significant change to the card business.

Competition for Card Issuers Increases

In theory, any number of credit and debit cards can be loaded into a digital wallet. Significantly, however, most consumers tend to only keep a few in there. A majority (61%) of consumers reported that they had just one to two cards in their mobile wallet, according to the Marqeta data.

“For card providers, this will be concerning,” Marqeta stated “Given that consumers will typically spend four times more on their top-of-wallet card choice than other payment methods, this represents a significant potential drop in their revenue.”

Fierce Competition:

The increase in the popularity of digital wallets means issuers will have to work harder to retain consumer mindshare.

“What’s more,” the report states, “losing top of wallet status can result in cardholder inactivity, which in turn ends in around 40% of customers being lost to other banks or payment methods. Consequently, card providers are working harder than ever to ensure that they can provide a smooth digital experience for their customers by removing friction wherever they can.”

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Ways to Become (And Stay) Top of Wallet Digitally

As digital wallets create a more competitive card market, there are a few key differentiators card issuers can employ to stand out, John Mitchell, co-founder and CEO of payments infrastructure technology company Episode Six told The Financial Brand.

One is ease of use and convenience, such as allowing users to finance a purchase immediately “on their terms,” Mitchell states. A buy now, pay later (BNPL) option embedded into digital wallets that consumers can use at the point of sale is one way to do this. The newly launched Apple Pay Later, which resides in the Apple Pay mobile wallet, is an example. It is presented as an option to consumers at checkout.

Another differentiator is seamlessly integrating rewards and loyalty programs into the card, says Mitchell. “Loyalty and rewards programs create stickiness, and if these can be seamlessly integrated [into digital cards] it can be very helpful.”

The Apple Card, for example, pays 2% cashback immediately for any purchase made within the Apple Pay mobile wallet. (The reward cash is stored in an Apple debit card within the wallet and can be used for any payment or purchase.) Such rewards help to keep cards “top of wallet” amidst increasing competition.

To even have a chance to compete with virtual cards in a consumer’s digital wallet, however, a financial institution has to allow its customers to load the institution’s cards into digital wallets. The fact is, thousands of banks and credit unions still do not enable this, particularly with Apple Pay, notes payments expert Richard Crone, CEO of Crone Consulting.

“At least you have a chance of consummating a transaction on your card if you’re in a mobile wallet,” says Crone. “Once you’re there, then you can figure out how to make sure your card is top of the wallet.”

Moving Toward An ‘Everything is Currency’ Mindset

Perhaps the biggest differentiator in the quest to be top of wallet will be issuers that enable consumers to use any store of value they own to pay for purchases. This can include loyalty points and crypto holdings.

Mitchell points out that this idea really came to the forefront during the pandemic, when millions of people were sitting on travel points that were essentially useless.

The consumer, says Mitchell, is increasingly thinking of the concept that “everything is currency” and wants a digital wallet experience that enables this.

The Marqeta survey backs this up. 82% of cryptocurrency owners surveyed say say they would be interested in spending cryptocurrency, rather than simply holding it as an investment.

The unification of multiple types of currencies, such as crypto or rewards points and more, is the next evolution of digital wallets, and those who enables it will be the winners in the future, Mitchell believes.

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