Like other digital aspects of financial services, the use of digital wallets has expanded during the pandemic.
A new study from Juniper Research has found that total spend through digital wallets will exceed $10 trillion in 2025, up from $5.5 trillion in 2020. The research found that this dramatic 83% growth in spend will largely be fueled by the heightened adoption of digital payments during the pandemic.
Prior to the pandemic, consumers wouldn’t think twice about handing a cashier a credit card then signing with a store’s pen, or swiping a debit card and entering a PIN. But now waving a phone over a payment terminal — a completely contactless process — is intuitively the safer option.
“As a result, contactless payments have witnessed a dramatic upsurge even within inherently cash-based economies, such as Japan and Germany, and amongst new user groups, such as older shoppers,” says Juniper in its report.
Research from Experian highlights the rise of digital wallets: Three out of every five consumers are now using a mobile wallet to make digital payments.
Studies have shown that the COVID-19 virus can survive on banknotes for 28 days.
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Digital Wallets Threatening Dominance of Plastic
The definition of “digital wallets” can encompass a wide range of different tools and technologies — from Starbucks-style stored value cards and P2P payments platforms like Venmo, to membership and loyalty programs such as frequent flyer accounts — all using various identity verification methods (e.g., biometric face scans, touch ID, passcodes).
However you define digital wallets, Juniper doesn’t believe they will fully eliminate the use of cards, especially in the U.S. where cards have such a long history. However, digital wallets have real potential to radically disrupt the balance of power across the financial industry — from banking to payments.
“The benefit of digital wallets is that they are ready to go,” explains Nick Maynard, lead researcher at Juniper. “You don’t need a contactless credit card.”
For instance, PayPal can process payments directly from a coupled bank account, exposing the potential for the role of traditional credit card providers to be usurped.
Still, Maynard added, cards have a powerful position.
“Cards are here to stay,” he states. “They will make sure they stay in consumers’ wallets and that they don’t lose primacy.”
Who Owns Consumers’ Data?
For banks and merchants, digital wallets present both a threat and an opportunity — who gets the customer information from the wallet?
“Where, with whom, and how much customers spend is a treasure trove of profitable data,” Juniper says in its report. It’s looking more like wallet providers will hold that data, the research firms states.
Maynard thinks the fight over data ownership will be “really interesting.”
“If Google is partnering with a bank, the bank will not want to lose control of the customer,” notes Maynard.
Maynard says banks letting big tech gain footholds in the payments space is an interesting strategy. If it makes the user experience better, that’s great for banks. But the danger is that banks let big tech go too far, loosening banks’ stranglehold on consumers to the point that tech firms might ultimately steal relationships.
Consumers’ Privacy and Security Concerns with Digital Payments
All payment apps share some personal data with third parties, such as with banks or fraud-monitoring services. Thorin Klosowski with the New York Times examined the security and privacy policies for various digital payments platforms to assess how transaction data may be used for marketing, because sharing data with third parties may expose users’ data in ways they may not appreciate.
In Thorin’s analysis, he recommends that users who are worried about transaction privacy should stick to Apple or Google.
“Apple and Google don’t share data beyond what’s required to make transactions, and don’t use what they collect internally for marketing,” explains Thorin. “Facebook Pay also doesn’t share data with third parties, though it may use some data to target internal ads.”
However, Thorin says it’s difficult to predict the other ways these tech giants may be leveraging transactional data internally.
“Every other service we looked at shares or sells data for marketing purposes,” Thorin cautions. “PayPal Mobile Cash, Square Cash, Zelle, and Venmo share data with third parties to track internal marketing.”
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Fractured Payments Space Spells Chaos for Traditional Players
If a customer doesn’t care about their bank but just likes that it works with Google, banks may see their customers leave for another Google bank partner. After all, if digital onboarding makes switching banking providers easier, then the old rules of inertia and attrition no longer apply.
If big tech wins customer relationships, banks could lose what remains of their insight into customer spending. Indeed, they already have lost much of that to card issuers who are often wholly independent from banks.
As Forrester noted in a 2016 report, “Banks run the risk of becoming funding vehicles, ceding primacy during payment and control of the customer experience to others’ wallets. The current fragmentation of the digital wallet landscape obscures the scale of the threat.”
For merchants, the challenge is figuring out which digital wallets to accept, since each one has to be installed separately, not to mention how cluttered a payment terminal would look with all those stickers. Amazon, for example, has chosen three: Apple Pay, Masterpass, and Visa Checkout.
“You must integrate each of the three digital wallets that we support one at a time,” Amazon explains to would-be sellers on its site. “There is no automatic way to offer access to every popular digital wallet in one step.”
“Merchants must base their payment strategies around wallet acceptance in order to support a digitally-engaged addressable market, but must also judge the right wallets to target, or they will be lumbered with increased costs and limited benefits,” cautioned Alexandria Sadler, co-author of the Juniper report.
Removing Friction and Sidestepping Complexity
The role of merchants in the digital payments space can’t be overstated. According to Junpier’s Maynard, the growth of digital wallets hinges almost entirely on merchants. After all, a digital wallet has little value to consumers if there aren’t many places where they can use them.
“They are the drivers of wallet acceptance,” Maynard explains. “If they want to accept wallets, they have to choose [which ones to offer]. The more methods a merchant accepts, the more expensive to facilitate.”
To fuel greater adoption of digital wallets, merchants are looking for platforms that remove friction and complexity from the process.
PayPal, which has mostly been an online eCommerce payment player, launched a QR code payment system in May 2020 allowing small retail merchants and restaurants to take contactless payments. The merchant can generate a QR code and display it on a card next to the cash register, or on their menu. Patrons can then open the PayPal app on their smartphone, scan the QR code, and enter the amount of their purchase.
“Make it easier for customers to pay touch-free with custom business cards, banners and tabletop displays from our partner, Vistaprint — all printed with your QR code,” PayPal says on its web page. No need to buy a terminal and configure software.
Juniper’s report recommends taking advantage of the heightened awareness in digital payments afforded by the pandemic. Digital wallet providers should view the coronavirus as “a uniquely simple and effective messaging opportunity” that can be harnessed to encourage uptake of contactless payment by “promoting the sanitary benefits of tap to pay and online wallet usage.”
Further Reading: You can download Juniper’s research report, “Digital Wallets: Transforming the Way We Pay“, including an analysis of the current competitive landscape, key trends, and a leaderboard featuring 22 key player driving digital wallets adoption.