Digital wallets are said to be a rapidly growing online technology, which has now reportedly experienced a particular and steady growth in popularity since the COVID-19 outbreak of 2020. This, according to a comprehensive report from Juniper Research.
Juniper Research noted that it is also important “for financial inclusion, and in the move towards cashless economies.”
The report from Juniper Research added that there are currently many different “types of wallets, fulfilling a range of uses, which makes it an extremely broad topic.”
To cover the variety of wallets available, for the purposes of this report, Juniper
Research defines digital wallets as: ‘A software-based system that securely stores users’ credentials and facilitates transfer of data from the stored credential This can apply to payment, identity or other forms of credentials.’
Digital wallets enables users to pay for both “online and offline transactions via either
stored payment credentials, such as debit cards, or currency stored in the wallet, by
utilising applications on smartphones, wearables, and other mobile devices.”
Juniper Research further noted that these transactions can be “completed by a range of contactless technology, most commonly NFC (Near-field Communication) or QR codes.”
This same information is used to transfer data “from credentials, such as a digital identity or a digital ticket, in order to use the credential.”
This report from Juniper Research has primarily focus “on the payment use case, as this presents the most opportunities for generating revenue.”
While in developed markets it is common to “carry event or travel tickets in an OEM (Original Equipment Manufacturer) wallet, monetizing this has proven difficult.”
As a result, Juniper Research pointed out that “most dedicated digital wallets that have been launched are payment wallets, as these can be easily monetized by charging a transaction fee to either the merchant or the user.”
There are three types of digital wallet technology: open loop, closed loop, and semi-closed loop.
i. Closed Loop System
In closed loop systems, digital wallet users “can top up a specific spending account which is linked to a payment source, such as a credit card account.”
These sources are therefore linked to a specific merchant, “meaning they are often used for in-store purchases.”
They can be used for online payments, but this is less common, “as general multi-merchant payment systems are more common for online transactions.”
Due to their restriction to a single merchant, closed loop digital wallets “are primarily
used for specific merchant offers, such as loyalty schemes, and discounts.”
ii. Semi Closed Loop System
Semi-closed loop digital wallets allow users “to shop using digital wallets and transfer
virtual funds to another user who has an account in the wallet network.”
As explained in the report from Juniper Research, merchants need to “enter into an agreement “with the wallet issuer to accept payments, with interoperability permitted only for full-KYC (Know Your Customer) semi-closed wallets.”
This type of wallet is not widespread, due to “both the sender and the recipient of a payment needing to have the wallet to enable a transaction.”
Juniper Research also noted that this limits “the number of potential transfers a user can make. Another issue this presents isthat until these wallets become widespread, they have limited useability.”
However, Juniper Research added that they are “unlikely to become widespread until they offer the ability to facilitate a greater number of the potential users’ transactions.”
As a result, there are very few major semi-closed digital wallets, “with primary examples being Paytm and MobiKwik in India.”
Open loop digital wallets store cards and funds “that can be used on any site or with any merchant that accepts the wallet, by tapping a mobile phone at an NFC-enabled payment terminal.”
The impact of this technology can be “seen in the fact that many of the largest digital wallets have emerged from eCommerce platforms that had to facilitate payments to multiple merchants, such as PayPal and Alipay.”
However, the report pointed out that there are reasons as to “why the popularity of a digital wallet may necessarily lead to merchant acceptance.”
Firstly, data ownership is transferred “from merchants to wallet providers; this reduces the merchant’s ability to utilise this data to improve its own business.”
Another potential issue is the transaction fees charged “by the wallet provider; this could be a particular concern for small businesses, where higher profit margins must be maintained to ensure the financial viability of the business.”
According to the report, there can also be information gaps in “the evaluation of the potential advantages and costs of accepting digital wallets.”
It is also worth noting that these advantages and costs “will vary regionally, based on consumer expectations, available infrastructure, and regulatory framework.”
Underpinned by robust methodology, the Competitor Leaderboard ranked the top 17 digital wallet platforms across “a number of criteria, including the range of payment channels covered, the different use cases they support, and future business prospects.”
The top five leaders for 2024 are:
- Huawei
- Ericsson
- Comviva
- OpenWay
- Netcetera
The key determining factor in the market leaders’ success is the “offering of advanced digital wallet capabilities, such as microloans within emerging markets.”
The leaders all include mobile financial services modules in their digital wallet platform.
Wallet providers must help their clients to “diversify their revenue by fulfilling financial services not commonly accessed through banks in developing markets.”
Loyalty schemes play an important role in encouraging user adoption.
As explained in the detailed research report, by offering schemes such as cashback on purchases “via their digital wallet, wallet providers can provide a financial incentive for consumers to adopt their wallet, which is vital in the increasingly competitive digital payments market.”
Loyalty schemes are vital in developed markets, “where there is greater competition for each user.”
The Juniper Research report concluded that digital wallet providers “must utilize users’ transaction data in order to customize rewards to the user, offering a personalized experience.”
