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For members of a certain generation, the expression “digital wallet” is an oxymoron, transforming reassuringly cold, hard cash into the uncertain and possibly vaporous virtual world. And, in fact, the term digital wallet is a bit of misnomer, generally referring to an “app,” or downloaded online application, that is accessed through that new ubiquity of the modern age, the smartphone. Thus, digital wallets are also dubbed “mobile wallets” or “e-wallets.”
There are any number of digital-wallet purveyors on the modern scene, including such titan household names as Apple Pay, Google Pay, Samsung Wallet, Microsoft Wallet and PayPal, joined by plenty of others, including Cash App, Dwolla, Venmo and Zelle.
The downloaded applications allow the smartphone user to tap a few on-screen keys and transfer money to buy groceries, help a wayward cousin, pay the utilities, or make the mortgage payment. Even direct deposit by employers into employees’ digital wallets is possible, as long ago implemented by PayPal. In short, an employee can get paid into his or her digital wallet, then spend the money by clicking on the smartphone, never interacting with a traditional commercial bank.
However, there are also digital wallets that are linked to a consumer’s bank account. A consumer might have the Bank of America or Bangkok Bank digital-wallet application loaded onto their smartphone, which they can access to send money to other bank accounts, vendors or retailers.
And some larger retailers, such as Walmart, issue digital-wallet apps that allow shopping at stores and online.
INDUSTRY DISRUPTION
The buzz phrase “industry disruption” has become hackneyed, but in the case of digital wallets, the cliche may understate the situation. Digital wallets have already become the most common consumer payment method, eclipsing cash, credit and debit cards, reported ARK Investment Management, in a 2022 report. In particular, consumer use of debit cards and cash is in steady decline as the digital wallets ascend, with the virtual purses now making up about one-third of all point-of-sale transactions.
And of online sales, digital wallets now own one-half of the space — that is nearly 50 percent of online sales are consummated through a digital wallet.
As consumers become more familiar and accepting of mobile smartphone banking, the use of digital wallets will likely only expand, and is already dominating in China and Southeast Asia.
Fintech industry denizens foresee the rise of “super digital wallets” through which consumers not only make point-of-sale purchases, but handle their full range of financial activities, including document storage and stock market investing.
This is not so hard to imagine. For example, the online commission-free brokerage Robinhood is most easily accessed through the iOS or Android software systems, which is to say though Apple iPhones or other smartphones.
In the future, digital-wallet purveyors contend a limited number of smartphone “super-apps” will win consumer acceptance, through which not only retail purchases, bank transfers and credit-card payments will be made, but also investments, insurance, mortgage and utility activities will be handled.
The battle for the super-app space will be and is being waged by those with brand names and technical sophistication to make it work, such as Apple, PayPal, SoFi and others.
It is this digital-wallet universality that could entirely remake the retail banking landscape.
EXPLOSIVE GROWTH
Digital wallets “could scale at an annual rate of 69 percent in the United States, from more than $400 billion in market capitalization to $5.7 trillion, and 78 percent globally, from $1.1 trillion to $20 trillion, during the next five years,” wrote ARK Investment, in its report.
The number of consumers moving to smartphone banking boggles the business mind: Consider J.P. Morgan Chase, founded in 1875, one of the oldest and most successful of U.S. banks, and one that gobbled up any number of former household-name banks, including Washington Mutual, Bank One and Chase Manhattan. A behemoth of the traditional commercial banking world, today J.P. Morgan has about 60 million deposit-account holders.
Compare and contrast that to not one but two digital wallet apps, each on the market for only about 10 years, that already have more customers than J.P. Morgan — Square’s Cash App with 74 million annual active users and PayPal’s Venmo with 82 million such users. Thus, in a short decade, the digital-wallets upstarts are elbowing aside the venerable banking giants in the battle for customer accounts, according to ARK.
Globally, the numbers are also eye-opening. The number of unique digital wallet users is expected to top 4.4 billion by 2025, up from 2.6 billion in 2020, according to a report from Juniper Research, and digital wallet-based spending is expected to strike $10 trillion annually by 2025, up from $5.5 trillion in 2020.
Thus, when a restaurant patron gazes about at other diners and sees all the noses buried in their smartphones, it might not all be about TikTok or texts. Some diners may be banking, investing, or paying the food or light bill.
Or perhaps transferring a modest sum of money internationally, a cumbersome and expensive process through traditional banks, but a few button taps through digital-wallet applications such as PayPal.
BRICK-AND-MORTAR COSTS MONEY
While consumers are moving into digital wallets for ease of use, viewed from the provider side, the case for e-purses is, if anything, even more compelling. The problem is that bank branches, headquarter offices, marketing and compliance with exacting federal regulations cost traditional banks a lot of money. When these bills are plugged into the cost of acquiring a new customer, it becomes clear that orthodox commercial banks are running into a real wall.
“On a net basis, traditional banks in the U.S. spend roughly $750 in paid marketing and roughly $2,500 in total, including the occupancy expenses for branch networks, to acquire a new customer,” estimates ARK Investment, while digital-wallet providers “spend as little as $1” to acquire new customers, giving virtual banking crowd much more room to invest and move up-market in the years ahead.
Why such different business models?
In part, it is because regulated commercial banks in the United States accept federally insured deposits and then make loans. On both ends, commercial banks must assure federal regulators they are operated prudently, to which end they are regularly examined by federal banking agencies. Think compliance costs.
In addition, of course, commercial banks are “legacy” businesses that have operated their business models through the generations. And on a practical level, banks do provide certain services that require a physical presence, preferably at street level, such as safety deposit boxes and strong vaults to store properly counted and recorded paper cash.
Think lots of employees and security guards and street-level frontage, when you think of commercial banks — as well as an industry that through much of the post-war operated in a heavily regulated environment with high barriers to entry.
Indeed, larger banks have enjoyed economy of scale “moats,” reports the consulting house McKinsey in a recent survey. Getting larger was the competitive edge, and squeezing little banks out of the industry the result.
None of this has positioned banks to battle digital wallets.
NO MORE TRADITIONAL BANK?
There are many pundits ready to forecast the demise of traditional commercial banks, at the hands of digital walleteers.
“The traditional banking sector is in serious trouble,” advises management consulting firm Arthur D. Little. “Customers are falling out of love with conventional high street banks and are starting to embrace new, more agile financial service providers.”
The pundits’ patter seems to run a little thin when it comes to real-world options in the face of the digital onslaught. Traditional banks are endlessly advised to innovate, digitize, improve customer experiences and upgrade workforces, and to do so while cutting costs. And, of course, imitation is the most sincere flattery — hence, the digital wallets offered by most major commercial banks.
There are yet some strongholds for commercial banks, such as in most forms of lending beyond credit cards, and in relations and services for corporate clients.
Nevertheless, a sign of the times: In 2021, giant global bank HSBC announced it would exit the retail and small business banking market in the United States to focus on corporate and investment banking in Asia.
THE FUTURE OF VIRTUAL PURSES
The trend is for purveyors of digital wallets to keep piling on additional functions into their apps, allowing customers to do more through the smartphone.
For example, China’s AliPay and WeChat digital wallets started out as payment platforms, which have matured by adding messaging services and record keeping and, lately, nearly the full range of financial services, including insurance, stock trading and bonds. Helpful calendars are embedded into the apps, allowing automated payments, and ticklers for business and social events.
In China, Alipay and WeChat both have more than 1 billion accounts and have siphoned off huge amounts of service-fee income from banks, as well as deposits, the Washington think tank Brookings Institution wrote in a recent report. In China, the use of the smartphone to transfer funds through a QR code — those square patterns that look like no-signal static on old black-and-white TV sets — is becoming standard.
Despite the slow start in the United States, such names as PayPal and its subsidiary Venmo, among others, are also vying to provide “one-stop shopping” digital wallets.
DISINTERMEDIATION AND FRACTIONAL BANKING
There are even concerns in some circles that so much money could end up outside the commercial banking sector, and that “disintermediation” could result in a potential loss of monetary policy-making capabilities by central bankers.
In general, disintermediation occurs when depositors place cash outside the commercial banking system, reducing the funds available for lending.
The fintech world “may threaten the banking sector with disintermediation if substantial retail deposits were to move” outside the system, warned the Organization for Economic Co-operation and Development.
If the commercial banking system withers enough, the usual macroeconomic stimulus plan of central bankers — get commercial banks to essentially print money and make more loans — could be undermined, warned OECD. It could mark the “end of the fractional [banking] system,” particularly if digital wallets continue to rise and eclipse commercial banking.
All that said, at present commercial banks are still largely profitable and plenty of corporate customers are staying put. Moreover, at least in the United States, commercial banks are sitting on near-record-high piles of deposits.
But the future may require business model adjustments by commercial banks, as well as policy adjustments by central bankers.
BIG BROTHER IS COUNTING
There are many other aspects to digital wallets, including that their emergent ubiquity allows digital-wallet purveyors to track both aggregate and individual consumer spending patterns.
Fintech denizens talk of AI-enhanced deciphering of consumer tastes and needs, although in practice that might only mean if the consumer buys some baseball tickets, they will get ads on the smartphone for more sporting-event tickets, or maybe coupons to stadium-adjacent restaurants. Another example might be consumers graduating into certain age brackets receiving pitches for retirement-oriented financial products and so on.
There are concerns that smartphone digital wallets will aid in the construction of a panopticon state, in which all purchases, investments and savings, and texts and conversations, are recorded and retrievable.
Big Brother or not, it seems clear that in ever-increasing stages, citizens, commercial banks, consumers, monetary authorities and governments will have to negotiate life with smartphones and digital wallets, for better or worse.
Benjamin Cole (7continents7@gmail.com) is a freelance writer based in Thailand.