How to Unleash the Full Potential of Digital Wallets

For all the talk about digital wallets like Apple Pay, Google Pay and Amazon Pay, less than four in 10 consumers say they’ve used a digital wallet to make a purchase in a physical store in the past 90 days, according to J.D. Power research. What’s holding digital wallets back from more widespread adoption?

The digital wallet is a leading tool for payments in many ways, yet still lags at the point of sale.

How quickly digital wallets make the shift to the mainstream will depend partly on how well marketing efforts can extol their advantages to nonusers and light users. Another factor will be whether nascent payment options — including instant payments and pay by bank — become available through digital wallets.

A J.D. Power study on consumer payment preferences shows that fewer than two in five consumers have used a digital wallet to make a purchase at the point of sale in the past 90 days.

When asked about payment methods, 78% of consumers said they’ve used debit cards for at least one purchase, followed by cash, at 74%, and credit cards, at 66%. Far behind all those options are digital wallets, at 36%.

Digital wallets did come in ahead of gift cards (33%), buy now, pay later (28%), merchant apps like Starbucks (20%), checks (19%), prepaid cards (14%), pay by bank (7%) and cryptocurrency (3%).

The study divides consumers into six behavioral categories, rather than traditional demographic groups. Those who J.D. Power labels as “experimenters” showed the highest level of usage of digital wallets, as described in more detail below.

Miles Tullo, the managing director for banking and payments at J.D. Power, says he expects digital wallets will gain momentum as more consumers become familiar with the advantages of using them.

Access to digital wallets at the physical point of sale requires the use of a smartphone, and this particular constraint is easing with each passing year. Figures from Juniper Research indicate that 68% of people worldwide had smartphones in 2022, a percentage it forecasts will increase to 80% by 2028.

What Is a Digital Wallet? And Is It a ‘Type’ of Payment Like a Credit Card?

What sets digital wallets apart from other types of payment methods is that typically they are a “container” for things like debit cards and credit cards.

Rather than being a payments method on its own, a digital wallet in most cases is just a streamlined way of using each payment option that the consumer has loaded into the wallet.

A digital wallet could be thought of something like traditional Russian stacking dolls. For example, consider the Apple Pay digital wallet, which can, in turn, contain the Apple Card (also available as a physical card). This functions as a credit card, but can also be used for buy now, pay later service, called Apple Pay Later.

Besides multiple payment cards, digital wallets can also store items like driver licenses and concert tickets.

A Juniper Research white paper defines the term “digital wallet” as follows: “A software-based system that can act as a storage mechanism for a user’s payment, identity, loyalty or ticketing information, enabling these credentials to be used in a digital environment.”

Read More: Is CFPB’s Mobile Payments Salvo at Apple & Google Good for the Industry?

Key Advantages of Digital Wallets That Could Spur More Consumer Use

Tullo says the storage of those credentials is one of the key advantages of digital wallets.

“Digital wallets will autopopulate mobile purchase payments,” streamlining transactions rather than requiring people to type in long account numbers, addresses and other data on a phone, he explains.

This is likely why consumers prefer digital wallets for making a mobile purchase more so than for in-person purchase. The J.D. Power research found that 22% of consumers prefer to pay with a digital wallet on a mobile app (behind debit, 37%, and credit, 28%). Only 7% prefer to use a digital wallet in-person.

Tullo thinks the ease of mobile shopping with a digital wallet will eventually win over more consumers. He also expects the use of digital wallets to pick up at the physical point of sale. The pandemic already helped generate more interest in contactless or tap-to-pay payments, which are facilitated by digital wallets.

To traditional financial institutions, the digital wallet is as much a channel as a payment method. If someone is using a credit card or debit card that’s been loaded into a digital wallet, there’s still a card transaction happening, says Tullo. So the transaction is traveling on card system rails in order to be processed.

However, if pay by bank catches on, that could shift things because those transactions don’t rely on card rails, Tullo points out. The growing availability of instant payments — via the Real-Time Payments service run by The Clearing House and the recently launched FedNow service — introduces an additional option, says Tullo.

Experts are anticipating that RTP and FedNow will become more like a functionality to consumers, rather than being thought of as a payment option along the lines of Early Warning Services’ Zelle. They say instant payments could end up being embedded in banking institutions’ own apps or perhaps in digital wallets, without consumers even seeing the actual names of the services.

Read More: FedNow Turns Instant Payments into a Must-Have for Banks and Credit Unions

Who Are the Biggest Digital Wallet Fans?

Payment studies frequently compare consumer behavior by age range, but J.D. Power used a series of questions to divide respondents into assorted “personas.”

Here are the findings for each of the six personas the study used, with the categories ordered by level of digital wallet usage:

• Experimenters: These early adopters mix their payment methods to include both old and new. They skew younger and come from all socioeconomic groups. They tend to like digital wallets for speedy transactions. However, the research also found that many experimenters are not completely satisfied with the ease of using digital wallets. This suggests they could be a source of fresh thinking on design. Among the people in this category, 48% of them say they used digital wallets for a payment at least once in the last 90 days.

• Borrowers: These consumers are heavy users of credit cards and buy now, pay later programs. They also favor speed in transactions. 42% of them say they used digital wallets.

• Minimalists: They select payment channels based on ease of use and tend to stick to them out of habit, once the habit gets formed. 37% of them say they used digital wallets.

• Reward Optimizers: These consumers are financially healthy, tend to have higher incomes and like to chase rewards. As such they lean toward credit cards and merchant apps to reap the most fringe benefits from their buying. Many find digital wallets relatively easy to use. 35% of them say they used digital wallets.

• Budgeters: Staying out of debt is key for the people in this category, so they favor debit cards and some use of cash. But some will use digital wallets, often because they feel doing so simplifies the payment experience. 32% of them say they used digital wallets.

• Security Seekers: Compared to other groups, these consumers tend to be older, more educated and more security conscious than most. 29% of them say they used digital wallets.

The curious fact that security seekers have the lowest level of usage of digital wallets among all the personas bolsters the argument that digital wallets may need some fresh marketing ideas.

Digital Wallets: Better Than a Superapp?

The Juniper white paper makes the point that when making purchases with cards online, account ID and more must be entered. “Digital wallets can make this same payment, using the same card but without revealing the card details to the merchant, reducing the risk of the card being compromised,” Juniper writes.

The paper makes another key point for product designers and marketers: For all the talk about what might be the first American superapp, the question is, could it manage to be a success with consumers?

“An issue with superapps is that it is harder to create a great user experience, due to the number of services that they possess,” Juniper writes. “When a wallet only offers payments, it is very easy to create a user experience that is simple and seamless.”

Sometimes less is more.

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