The Implications of Using Digital Wallets
October 31st, 2023
A Digital Wallet, also known as an e-wallet, is software, an online service, or an app that allows businesses or individuals to make financial transactions digitally. It’s more commonly used through smartphones for convenience but can also be accessed through desktops.
The COVID-19 pandemic has led to an increase in the use of digital wallets. With physical contact being avoided during the height of the pandemic, digital wallets were the way for ‘contactless’ payment. In low and middle-income economies, excluding China, more than 40% of adults who made online payments did so for the first time since the beginning of the pandemic.
Digital wallets are projected to rise to 52.5% in transaction value by 2025, showing that digital wallets and the trend of contactless payments are here to stay.
The Different Types of Digital Wallets
A closed wallet can be developed by a company that sells products or services. It can allow transactions through an app or website, but only with the wallet issuer. If a transaction calls for a refund, the refund is directed to that wallet. An example of a closed wallet is Amazon Pay.
A semi-closed wallet allows users to make transactions with a list of merchants. Although it seems restrictive, online and offline transactions can be done with this type of wallet. The merchants would have to enter into an agreement or contract with the wallet issuer to qualify to be on the issuer’s list of merchants. An example of a semi-closed wallet would be Paytm Wallet.
Only banks or institutions partnered with banks can issue open wallets. Users of open wallets can use them for any transactions that a semi-closed wallet can do. In addition to that, they can also withdraw their funds from banks and ATMs.
The Growing Popularity of Digital Wallets
Even as we enter post-pandemic times, the trend of digital wallets shows no signs of slowing down. Here are just some of the reasons that contribute to the continuing popularity of e-wallets:
1. Consumers find it more convenient for store transactions.
Customers prefer the more streamlined checkout process of using a digital wallet. Digital wallets offer simplicity and speed, which people find very appealing. Quick payment, such as scanning a QR code or not needing to transact using cash, makes for speedy transactions.
Another benefit digital wallets bring to consumers is that it allows them to leave their wallets behind. A survey from Marqeta showed that 60% of people are comfortable leaving their wallets at home and taking their smartphones with them when they go out. Consumers spend about five to six hours on their devices, so bringing their smartphones around all the time is second nature.
2. Super apps are becoming even more popular.
Apps that can do more than one thing are rapidly rising in popularity. Some super apps include financial services or a ‘built-in’ digital wallet. Take Grab as an example. Grab was just a ride-hailing app like Uber, which matches a passenger with a nearby driver. Now, you can use the Grab app to deliver food, groceries, and even parcels. The app also has an e-wallet, which you can use for transactions with several merchants.
3. Contactless payments have become more commonplace.
Even as pandemic restrictions have subsided, people still use less cash and prefer their digital wallets. According to UK Finance, contactless credit card transactions in the UK in December 2021 were more than in December of the previous year.
In 2019, cash was the second most used point of sales payment worldwide. It is in fourth place with only 18% of all point-of-sales transactions. The use of cash is projected to drop even lower in half of all regions by 2025.
The Impact of Digital Wallets
It’s undeniable that digital wallets will continue to grow in the next few years. Given this trajectory, let’s examine how it impacts small businesses, consumers, and banks.
On Small Businesses
Digital wallets give their customers a better experience. Since e-wallets store basic personal information, which is usually asked for in transactions, customers can do away with filling out lengthy forms online and physically.
The option to pay with e-wallets also gives customers more alternatives if they don’t have or prefer not to use their credit cards. Some consumers hesitate to give their credit card information online for fear of fraud or phishing. An alternative payment method like a digital wallet may encourage a customer to pursue a transaction.
Another appealing feature of digital wallets to small businesses would be their ability to access real-time data and view the shopper’s profile and shopping history. This allows for better and more targeted ads. Plus, digital wallets can record transaction history, allowing the business owner access to accurate bookkeeping.
The growing momentum of digital wallets can negatively impact retail banks if they don’t keep up with these trends. Banks must create more convenient payment experiences and better customer service to attract customers or retain their current ones.
Collaboration with nonbanks will also be more prevalent in the banking industry as it will strengthen the credibility of third-party payment apps and widen the customer network of the bank.
More consumers are likely to join in the trend of digital payments. The ease of use proves to be appealing to customers as it allows them to carry just their smartphones with them everywhere. More people have found themselves more confident leaving their wallets behind.
Contactless payments also make for faster transactions. Eliminating the process of finding and exchanging loose coins or change saves time - not to mention counting payments and change. Another reason consumers love digital wallets is that they get reward points for using them. This scheme would also draw future customers to e-wallets.
Digital wallets have immensely gained popularity during the height of the pandemic, but it’s projected to grow even more as we enter the post-pandemic times. E-wallets can positively impact small businesses and consumers with their convenience. It’s an additional payment option for people who prefer not to use credit cards, so it can also drive more online sales for businesses.
On the other hand, digital wallets will be a challenge for retail banks if they don’t keep up with the changes in consumers’ behavior and receptivity towards nonbank payment options. Banks must provide a better experience for their customers to remain competitive.