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Digital wallets: The future of payments

Digital wallets: The future of payments

By Anil Malhotra, CMO of Bango

Just as paper paying-in books and cheques fell out of favour as the digital revolution took over the banking sector, mobile phone payments are now set to squeeze-out cash almost completely and even rival credit cards in a new wave of digitisation. But mobile phone payments are nothing new.

In 1997, Coca Cola set up vending machines that allowed users to pay by text, in the first noted mobile phone payment in history. Within 10 years a mobile money transfer system called M-Pesa launched in Kenya in 2007 and in 2011 Google embraced mobile phone payments fully, launching the first ever, mass-market digital wallet.

Now, physical wallets are set to be cast aside in favour of digital ones, as mobile phone payments continue to grow faster than any other payment method.

Mobile network operators bill over a trillion dollars to more than 5 billion people every year. There has also been a reported 54% decline in the number of cash transactions in the UK from 2010 to 2020, and payments initiated from mobile phones are predicted to become the second most common way to pay in the UK (after debit cards) by 2022.

Why are digital wallets so popular?

Convenience plays a big role in the rising popularity of digital wallets. They can store multiple payment methods in one digital home that can be used quickly and easily from your phone, smart watch or tablet.

Users can just tap and go, and their device will give them an instant notification recording how much they spent in each transaction. You can even link your loyalty schemes to your digital wallet so that any points, stamps and rewards are automatically calculated and applied at checkout.

Anil Malhotra

Anil Malhotra

Digital wallets are powerful in many markets because they allow users to turn cash into electronic money, which can then be spent on-line or instore, helping foster greater financial inclusion. This feature increases the amount of people who can use a digital wallet and therefore adds to the global popularity of mobile phone payments.

Although some digital wallets such as Apple Pay or Samsung Pay, essentially act as a vessel for existing payment methods — like a physical wallet — the trend for digital wallets that allow users to generate balance through “cash conversion” is growing. This change has been especially prominent in Southeast Asia, Africa and Latin America where these “cash conversion” digital wallets have been gaining government support.

Are digital wallet payments safe?

But despite the increasing popularity of digital wallets, some remain wary of mobile phone payments, questioning whether digital wallet payments are safe. In reality, digital wallet payments are just as safe as any financial transaction, don’t suffer from accidental loss like cash, and can call on multiple points of authentication, through user verification and network verification methods..

They cannot be accessed without inputting the password and/or face ID requirements of the smart device they live on, meaning that the user has a level of control over how their payment information is stored. Key payment identification data is also commonly tokenized, meaning that personal identifiable information and financial identities can be hidden.

In fact, the UK treasury reported that there was no significant rise in reported fraud when the contactless limit was raised from £30 to £45 at the height of the pandemic last year. As a result, the contactless payment limit has now been increased even further to £100.

So, it’s clear that consumers and even the government are embracing digital wallets more than ever before, but what about merchants and financial institutions?

Growing Digitisation and the impact on financial services

The increase in popularity of digital wallets speaks to the growing digitisation of the financial services industry. First it was online banking, then app banking and now it’s digital wallets.

Financial institutions have already begun to embrace this change with many banks offering virtual cards to business customers. These virtual cards are stored in digital wallets, where card details like 16-digit card number, CVV code, and date of expiry are kept safe without the need for a physical plastic card.

And it appears this digital wallet-first thinking is soon to spread out to the consumer, with three big banks, four community banks, two credit unions, and two digital banks having signed on to work with Google on the launch of its consumer facing digital accounts later this year.

How can merchants benefit from the rise of digital wallets?

The increase in use of digital wallets is also good news for merchants, only 37% of which are currently supporting mobile payments at the point of sale, according to a recent survey. More demand means more justification to invest in the technologies that not only make digital wallet and mobile payments possible, but actually save merchants money in the long run.

Wallets offer lower processing costs than other methods, such as carrier billed payments using airtime and even card processing. They also offer fewer limits on transaction values and frequency.

Working with companies that enable merchants to accept digital wallet payments also allows businesses to increase their scale with ease.

Most large merchants operate in more than one country as standard, but with different financial processes, regulation, laws and of course varying types of digital wallets, merchants need to work with companies that can unify and centralise payments.

Payments companies like Bango offer mobile payments capabilities on a global scale and take a unified approach to global digital payments, which helps merchant stay competitive in the online market and grow their businesses.

Using commerce platforms like Bango, also allows businesses to analyse wallet users’ payment choices and have a clear insight into what they are buying. This information can be used in a marketing segmentation tactic called purchase behavior targeting and provides opportunities for merchants to incentivize the use of wallet payments by linking to special offers.

With digital wallet spending estimated to exceed $10 trillion by 2025, there’s no denying that digital wallets are the future. And as financial institutions are already embracing this change, merchants who aren’t supporting mobile payments need to catch-up soon or risk loss of business as a result of not giving customers the easy payment experiences they expect.

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