Digital Wallets and Beyond: The Future of Financial Services in the Mobile Era
Key Takeaways:
- Open wallets could be the most coveted and impactful over time.
- Digital wallets will continue influencing traditional banking innovation and overall product development.
- GenAI and Agentic AI will continue enhancing digital wallet capabilities.
- Users will seek more than security, affordability and user-friendliness, wanting to do a lot more in one app.
Digital Wallets
Digital wallets are applications that store payment information on network devices like cloud servers so you can access it from anywhere using an online device. They are most commonly operated on mobile devices and started with a few traditional banking services like money transfers.
However, they’ve since evolved to support more actions, such as paying bills, borrowing, shopping, investing and verifying buyer and seller credentials. Juniper Research predicts that global digital wallet transaction volume could reach US$9,419.63 billion by the end of 2025. That said, let’s explore the different types of digital wallets, what makes them so popular and where they could go.
Types of Digital Wallets
There are three main types of digital wallets:
Closed Wallets
These typically exist as accounts that can only transact with the wallet’s issuer. They are used to pay for goods and services only from a specific brand/provider. Some companies prefer closed wallets due to the control they can have over customer service actions directly related to customer funds.
For example, in many closed wallets, once money is deposited, it has to be spent on a product. This lack of withdrawals means customers are more likely to wait for restocking instead of buying from elsewhere.
Open Wallets
These handle various types of transactions involving different parties. For example, you may use the wallet to buy from an e-commerce store and send money from one of your bank accounts to another person’s account. One advantage of open wallets is limiting cart abandonments related to payment methods.
Sometimes, a buyer’s preferred payment method fails at checkout due to network downtime, low balance or another reason. Fortunately, they can quickly switch to another method and complete the purchase. Open wallets also help users organize their transactions in one place.
Cryptocurrency Wallets
These are used to view or transfer digital assets on a blockchain network. They are unique because they don't usually store security information like passwords or private keys on a remote server but rather encrypt them on your device. However, some offer the option to keep pieces of a private key with the wallet provider for recovery purposes.
Currently, cryptocurrency wallets are mostly restricted to crypto transfers, with a few having partnerships that enable users to buy crypto using traditional methods like bank cards. However, cryptocurrency wallet innovation is enabling fund transfers to banks and merchant payments in some cases.
Key Features
Payment Processing Capabilities
These allow the wallet to be an administrator, instructing the entity holding your money to send funds to the party you’re trying to pay. They relay payment-related information like the amount to pay, the card number specifying the account to draw from and more. This is a starting point for checks like the account balance and eligibility to send to a specific destination before finalisation.
Security Measures
These may include two-factor authentication, where additional information is required to unlock an account once you enter the password. They also extend to encrypting payment-related data in transit and One-Time Passcodes (OTPs). Some even rely on biometrics to prevent unauthorised access.
User Experience Enhancements
Some wallets offer integration capabilities enabling the wallet issuer and third parties to offer discounts, run loyalty programs and more. Other wallets have basic analytics features, giving summarised expenditure reports.
Wallets may also have social features such as broadcasting payment activity to shared feeds, commenting on transaction posts and forming spending groups. Many wallets have push notifications for various uses, such as advertising or transaction progress updates.
Benefits of Digital Wallets
1. Convenience
Users can avoid lining up at physical spots like bank branches or ATMs for hours for basic transactions. They also don’t have to carry multiple bank cards wherever they go since all that information is in a smartphone app.
2. Enhanced Security
With a wallet app, whoever accesses the device may have to provide a fingerprint or re-enter a password, which can help keep your funds safe. Digital wallets can also protect you from fraud associated with payment methods like cheques.
3. Financial Inclusion
When a bank doesn't directly offer payments to a specific merchant, a digital wallet can house an intermediary solution. It may also provide options like a business account for receiving customer payments. This is very helpful where traditional financial institutions charge more fees or have more requirements to offer the service.
Impact on Traditional Banking Models
To appreciate the impact of digital wallets on traditional banking models, we need to understand where these models were lacking:
Speed
Actions like cross-border money transfers or getting loans were often very lengthy (filling out physical forms, presenting additional documents and more). With digital wallets, most of what is needed is already in one place. Moreover, understaffing would slow things down, and some services may face delays due to weekends and public holidays.
With digital wallets, several requests are received and processed simultaneously at a similar pace. Consequently, traditional banking entities focus on converging data and eliminating unnecessary steps. They also experiment with options like memorising choices (where a user doesn’t always have to select a specific choice or give permission if they’ve already done so once).
Security
Digital wallets have created more points of attack for malicious actors. Banking institutions now deliver more innovations and communications that promote cybersecurity and combat fraud throughout the payments lifecycle. Those who can give customers security without sacrificing convenience win big.
Cost-Effectiveness
Open wallet users can connect various payment methods. Eventually, many customers will choose the cheapest option, while others also consider the more available and widely usable one. Accordingly, traditional banking had to find cheaper ways to serve more people in various scenarios.
This could include extracting more from their existing workforce and paying only for the computational resources they use. They also often have to embed their technology in more service points (e.g. providing P.O.S. machines to different businesses). Occasionally, they've had to lower fees even when they don't have cheaper ways to offer the service.
The Future Trends in Digital Wallets
The future of digital wallets looks very bright and will involve:
Integration with emerging technologies
Digital wallets will embrace artificial intelligence and machine learning more. They’ll have automated assistants offering customer support along the customer journey. AI agents will also make transactions on customers’ behalf based on predefined rules. GenAI and machine learning tools will help refine models that detect suspicious activity and preempt fraud.
Digital wallets will also integrate biometric authentication. We are already seeing some services adopt passkey options driven by fingerprint scans and soon, voice activation, facial recognition and others will become more common.
Digital wallets will also further integrate with Internet of Things (IoT) devices. For example, systems that experience repeated wear or depletion of inputs like cooling fluid or ink can have sensors in them. These sensors can detect changes and help trigger maintenance appointment scheduling or refill purchases.
Blockchain Technology Implications
Digital wallets will tap into blockchain technology, but not just to provide fiat-crypto on/off-ramps. They will use decentralised networks to weaken certain attack vectors and promote transparency to improve transaction tracking and dispute resolution.
Expansion Beyond Payments
Digital wallets already offer additional services like investment, borrowing and lending, insurance and more. The bigger race will be in linking these different offerings. For example, a digital wallet may enable a user to invest funds immediately sourced from a lender within the app in fewer clicks. Then, the loan could be automatically repaid using periodic earnings from their investment.
Regulatory Considerations and Challenges
These challenges exist on three major fronts:
Data Privacy – Digital wallet providers must have proper systems to show that they aren’t mishandling user data. This includes sufficient encryption to avoid exposing personally identifiable information and other sensitive data. It also involves proving data isn't given to third parties without consent.
Know Your Customer and Anti-Money Laundering – Wallet providers must implement measures to prevent money laundering and make it easy to detect, stop and report the movement of illicit funds.
Appropriate Licensing – Wallet providers must ensure they have all the required permissions for every product or service they offer. They should also avoid providing services that clash with conditions in other licenses. This includes the relationship between securities, custody, clearing, underwriting, market-making, etc., and possible conflicts of interest.
Global Perspectives on Adoption
While demand for digital wallets will increase, adoption may occasionally suffer. In some low-income markets with low literacy levels and poor smartphone and internet penetration, digital wallets may remain rare. Additionally, as some digital wallets branch out into services that could interfere with government monetary policy, regulators may hinder their progress.
Future Outlook
As digital wallets branch out into more fields, one area where they’ll continue to grow rapidly in the near term is e-commerce. According to Statista, digital wallet transactions in e-commerce will grow at a CAGR of 15% until 2027. So, for anyone building or running a business selling goods and services online, it's crucial to watch digital wallet transaction trends and innovate accordingly.
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