Digital wallets’ evolving purpose

 Digital wallets, or e-wallets, have come a long way since the launch of M-PESA in Kenya, which turned 18 years old in March. In 2007, a time when nearly two-thirds of Kenyans lived entirely outside the traditional financial system, two telecom providers saw an opportunity to offer an alternative payment method to cash.

Built on Vodafone and Safaricom’s extensive infrastructure, wide coverage, and large customer base, today M-PESA has become a broad ecosystem, including bill payments, savings and loans, overdrafts, international remittances, and merchant payments. Today it operates in eight countries in Africa, with more than 51 million customers and allows transactions in 174 countries.

M-PESA’s transformative impact sparked a digital wallet wave across the world, particularly in emerging markets with large unbanked populations and financial inclusion challenges that necessitated an alternative to traditional banking and payment cards. In Asia, for example, many countries effectively leapfrogged cards straight to digital wallets.

In a recent report, Juniper Research predicts that over two-thirds of the global population will own a digital wallet by 2029.

Purpose beyond payments

Consumers and businesses use digital wallets for a variety of reasons. In some countries, customers are looking primarily for access to a digital means of storing value and paying digitally. In others, the main driver is the need to access convenient payment methods that either traditional banks don’t offer, for example remittances, or are expensive for a given segment, such as point-of-sale terminals. Reluctant to pay the high fees associated with card acquiring, many micro and small merchants are opting for alternative payment methods, such as QR codes, using digital wallets.

Another potential application is a super app, which brings together multiple functionalities and services onto a unified platform. By using an alternative payment provider, a consumer can receive additional discounts and convenient digital services as part of a digital wallet. In Asia, many digital wallets emerged as super apps because the region had a larger gap in the availability and accessibility of digital services compared to more developed markets.

Today, many non-banks are launching digital wallets because they have seen an opportunity to do something better than the traditional banks, such as onboarding customers faster or onboarding customers that banks typically overlook.

An emerging trend among new digital wallets is combining banking capabilities with another business activity. These built-for-purpose digital wallets are being developed to solve a specific, contextual problem for a targeted market segment, creating additional value beyond payments or remittance services.

For instance, several digital wallets are helping entrepreneurs, microenterprises, and small businesses to navigate the complexities around accounting and tax reporting by combining – or embedding – these services together with standard banking services. Previously they would have hired a certified accountant, which incurs an additional cost, but now they can access these services through a digital wallet.

One example is Portugal’s FIZ, which provides accounting and tax services designed for companies, self-employed workers, and individual entrepreneurs. FIZ markets itself a “mobile first neo accountant”, putting its solution related to a business pain point at the forefront, whereas banking is viewed as only a small part of the overall solution.

French payment institution Qonto is also doing something similar, offering financial management tools for freelancers, startups, and small and medium-sized enterprises. Its solution combines different business activities, such as expense management, bookkeeping and invoicing. Banking is just one among many products.

Buy or build?

To develop a built-for-purpose digital wallet, a non-bank has a choice between building everything from scratch or buying a white label solution. The latter is pre-built and restrictive, as it comes with a set view of a digital wallet’s functionality.

Instead of an either-or approach, it’s possible to both build and buy. With a truly open platform, it’s easy to combine standard banking capabilities with bespoke features and capabilities to create a unique digital wallet offering. An open platform also allows for collaboration with other solutions, so it’s not necessary to develop everything from scratch. With an open and composable architecture, it is possible to combine buying for feature parity, such as banking, and building for a competitive advantage.

It would usually take more than 12 months for a digital wallet to embed banking, combine it with non-banking capabilities, and reach a point of feature parity with others on the market. However, with the buy-and-build approach, businesses can use that time to build unique features while deploying the standard digital banking capabilities readily available from an open platform.

It’s important to note that solely signing a contract with banking-as-a-service provider is not sufficient, as there’s much customer-facing functionality still needs to be built.

Riding the second wave

While the first wave of digital wallets was focused on banking and bringing the unbanked into the financial system, the second wave is turning the concept on its head. Instead of financial services driving digital wallet adoption, other business activities are motivating demand, with banking embedded as an extra capability.

In this next wave, many opportunities are developing for digital wallets beyond solely serving financially excluded populations in emerging markets. The term ‘digital wallet’ can be used to describe a broader set of banking capabilities combined with another activity or highly contextualized to solve individual use cases. As such, digital wallets aren’t losing their purpose as they are now being built to solve specific problems.

Digital wallets will continue to evolve with banking services becoming less visible and more embedded. The wallets that will survive longer term will be the ones that are laser-focused on solving clearly defined, actual problems for consumers, rather than providing yet another way to store value and pay.

• Read more under:
• BankingTech
• Digital Banking