Digital Wallets: Convenience is King!

Author: Sumit Misra, SVP, RS Software (India) Limited

The primary driver for Digital Wallet (DW) is Convenience; convenience for mom-and-pop stores to have a business account when they are new and do not have history of operations, convenience for small businesses who would like to support digital modes of payment acceptance but prefer to sidestep high interchange fees, convenience for consumers who want to avail digital payments but do not have a credit card and in some cases not even a bank account, convenience for commerce itself as the payments are more predictable with fewer surprises, convenient for governments that can use it to drive financial inclusion, real-time payments, CBDC and more.

The PYMNTS.COM article Connected Wellness: The Next Prescription for Healthcare Providers (Oct 2022) highlighted that in a recent survey in USA, 24% of consumers made their healthcare payments through digital wallets, which is the same as the number that used the digital wallet to pay for their groceries. Moreover, the number of consumers who made their healthcare payments through digital wallets rose 30% from those that had done the same in Q1 2022. The transaction could well have originated from digitized credit / debit card stored in the wallet, or from alternatives like PayPal balance, but it was a digital wallet all the same. Among all the digital wallets like Apple Pay, Samsung Pay, Google Pay, etc. PayPal was the leading healthcare payment mode with 13% transactions made from it.

How does DW achieve this convenience for all? Simply put – by extending ease of business while limiting the risk of operations.

Before we move on, let us look at the various types of DWs. Primarily there are three types:

1. Closed Loop DW (CLDW): The payer and payee need to have their account with the same DW, and money moves from one account of DW to another account of DW. It needs a prepaid amount in the account of the payer. It is evident that unless a large number of merchants are signed up with the DW, the consumers would find it difficult to use the system. PayPal started as a CLDW and then went on to open up; now it is an OLDW.
2. Open Loop DW (OLDW): The OLDW uses bank accounts or credit/debit cards to source the funds and these payment credentials are stored in the DW. Payer uses the DW for convenience and the payment source information is exchanged at the point of purchase from the DW. One need not carry cards or cheques or remember account numbers in order to make the payments. Security is a key aspect of this OLDW to instil trust and foster adoption of the same.
3. Semi Closed Loop DW (SCDW): Here it tries to provide the advantages of the DWs mentioned above. Moreover, it allows part of the wallet balance to be transferred to the legit bank account of the account holder.

Let us dig a bit deeper into the convenience aspect of the digital wallet.

Convenience of On-boarding Small Merchants: Large payment acquirers / aggregators have to screen merchants before signing them up. They need to verify if the merchant is safe and whether they have taken adequate measures to contain fraud. Hence, they cannot sign up a new mom-and-pop outlet easily. However, DW providers can take that risk and monitor the merchant closely and allow a limited amount or number of transactions to contain the risk. The small merchant gets to avail the convenience of digital payment acceptance.

Convenience of Low Fees for Merchants: In CLDW, the money movement across accounts is virtual, hence the cost of operation is low. In case of SCDW, where open-loop instruments are used to top-up the wallet balance and that balance is used for payment, the number of open-loop transactions (which typically attract higher fees) is low in number and hence overall the cost of transferring money is low. This aspect of low fees is attractive to merchants and consumers alike.

Efficient use of Loyalty Points: DWs are hyper-personal systems. This provides a convenient way to maintain loyalty points in one place. Moreover, consumers forget to use their loyalty points at the right moment, and this is where DW can help immensely thus improving its efficient usage. DW can remind the consumer to apply the loyalty point applicable for food and beverage during the weekend restaurant ordering!

Understanding consumer behaviour digitally: DW keeps track of the payment behaviour of the consumer on a per-consumer or hyper-personal basis.

This enables very targeted up-sell and cross-selling options which can provide better results. This is something merchants love to leverage.

On the other hand, DW may be able to send reminders to the DW account owner that a payment is due in a few days and can even obtain preapproval from the owner to disburse the payment on the due date. This “assistance” mode increases the stickiness of the DW and consumers love it.

Driving Adoption and Financial Inclusion: DW enables direct benefit transfers to even citizens with no-bank accounts and can let them transact digitally with controlled usage on permitted goods (food, fuel, medicine, etc.) and can bar them from wasting money on items like alcohol, cigarettes, etc.

M-Pesa in Kenya drove financial inclusion by enabling mobile device based digital wallet. Since its launch in 2007 by Vodafone and Safaricom, the largest mobile network operator in Kenya, M-Pesa had been praised for giving millions of people access to the formal financial system. Moreover, it had reduced crime in an erstwhile cash-based society.

DW is essential for initiating real-time payments. Based on the type of real-time payments in the country of reference, the DW can be implemented with ease with minimal points of integration with source accounts (bank accounts, card accounts, etc.) or may need point-to-point integration with participating member banks.??

UPI (India) allows externalization of payment authentication for a real-time payment; DW in India thus needs minimal integration to build an OLDW. However, for Zelle (USA), which is also an OLDW, it needs point integrations with the member banks.

DW becomes the de-facto container for digital monies like crypto and CBDC (Central Bank Digital Currency). Thus, DW is a futuristic payment vehicle as well.

Before we conclude this part of the series, we would like to leave you with a thought. How interoperable are the DWs in a country? Can one transfer money from one DW to another?