Digital Wallets & the Disruption of Payments in Financial Services
Payments represent the sum of consumer experience on a microscopic level. Digital transactions reflect what consumers can afford, their ever-changing desires, the richness, and level of sophistication of the trading environments, represented by the cities that consumers reside within.
The nearly universal adoption of mobile devices is driving the adoption of mobile payment solutions and the growth of non -cash transactions.
According to World Pay, the way consumers transact globally is changing. Alternatives to credit cards accounted for more than half of the eCommerce transaction volume in 2018.
The adoption of eWallets has grown significantly. Mobile devices are providing the entry point for the seamless delivery of payment services in the daily lives of consumers.
Although cash, is still king, across the globe. It is in a steady decline with consumers migrating from, cash, debit cards, and credit cards, to mobile payments and eWallets.
Non Cash Payment Trends by Region 2018 -2022
So, What is a Digital Wallet?
A mobile wallet is a digital wallet on a mobile handset. An e-wallet or digital wallet is essentially a wallet that contains the digital equivalent of a payment instrument. This may be credit or debit card credentials, that is stored digitally.
The technical term used in financial services is the “tokenization of money”. This is essentially the representation of real-world financial assets, digitally. It is the process of converting the rights to an asset into a digital token. In other words, a digital wallet is a software application with the following functionality:
Leveraging Digital Wallets for Automating Payments and Decision Making
So why are mobile wallets a major disrupter of traditional banking services? There are several reasons, such as the elimination of transaction costs, and complexity associated with the procurement, and delivery of retail financial services products.
According to Andreessen and Horowitz the primary factors are;
Retail Banks shift to mobile: A significant proportion of retail financial services can be delivered more efficiently and at a lower cost through mobile devices.
Payments: are important because of their frequency per consumer. Hence the entry into this market by technology firms, payment frequency, is closely tied to the level of consumer engagement. Something online eCommerce platforms that have diversified into offering multi-product platforms are exploiting.
Mobile Finance Adoption: Technology companies will be the entry point to financial services. Since smartphones and other mobile devices, such as mobile terminals have built-in Wi-Fi or a SIM card. Are becoming ubiquitous in their use.
The Ascent in Online Platforms: The ascent of online eCommerce platforms in other parts of the world. Companies such as Kakoabank, Alibaba, and Baidu offer financial services to millions of consumers. These companies, have extended their e-Commerce brands into the financial services industry.
User Adoption Growth: The growing user adoption of digital wallets which is more pervasive in emerging markets and with younger demographics. These are additional factors driving the on-going disruption of banking payments.
Personalisation & Automated Decision Making: The rise in the willingness of consumers to authorise companies under certain circumstances to automate decisions regarding how their money is managed.
And the desire of consumers, to obtain personalised offerings from financial and non- financial services organisations.
The higher adoption rates of eWallets in Asia, may be due to the history of retail finance in Asia. Which differs from the West, let’s consider China for a moment.
China’s Retail Banking Story
In the recent past, consumer finance in China was cash based. The issuance of debit and credit cards was negligible. Retail consumers were essentially underserved by the large banks.
Furthermore, the limited use of credit and debit cards could be primarily attributed to the command economy operated in China over the past 35 years. In which the Chinese government rather than free markets determined what goods and services were produced.
According to SWIFT, the majority, of investment capital, issued by Chinese traditional banks was deployed to support state-owned enterprises. The banking system in China historically was dominated by four state-controlled banks. In 1995, the government-owned 99.45% of the top 10 commercial banks in China. Compared with 0% in the US/UK and 23.2% in Sweden.
Other factors such as;
The lack of critical financial infrastructure in China. For instance, the World Development Indicator Data in 2016, stated that there were 32.7 banks branches per 100,000 adults in the US; 25.1 in the UK; 17.6 in Sweden and 8.8 in China.
The light touch of Chinese main financial regulatory bodies; the People’s Bank of China (PBOC); China Securities Regulatory Commission (CSRC); China Banking Regulatory Commission (CBRC); China Insurance Regulatory Commission (CIRC) and the Ministry of Industry and Information Technology (MIIT).
The absence, of access to capital in the financial retail sector. Coupled with the rapid adoption of mobile phones. Smartphone penetration is (51%) with 717 million users in China according to Abacus.com.
The meteoric growth of the Chinese economy. For instance, in 2011, the growth rate of the world economy was 2.73%, of which 0.56% was due to China.
The urbanisation of the Chinese economy. The urban population share of the total population, from 1960-1978 increased from 16.2% to 18.6%. By 2000, it had doubled to 35.9% and by 2011 it had reached 50.5%, exceeding the rural population for the first time.
The emergence of a large middle class, open to innovation in finance. The Chinese middle class is equivalent to the size of the European Union.
Created the fertile ground necessary for radical innovation within the Chinese fintech sector. And left the retail market wide open for, the democratisation of finance. Through the provision of more accessible financial services.
This pent-up demand was exploited, by Fintech entrepreneurs, in the private sector. Fintech platforms, incumbent in this sector, such as, (Alipay, Ant Check Later, Baizhong and Baidu Wealth Management). Are primarily, concerned with obtaining a greater share of the Chinese consumers monthly disposable income and their high levels of savings.
These fintech behemoths, incentivised retail consumers, to bypass credit cards and migrate straight to digital wallets. Through the delivery of convenient, low cost, ways to transfer, borrow and invest, their hard-earned cash.
In 2018, China’s mobile payment transaction volume hit US$25.9 trillion according to iResearch Analysis. The mobile payments sector, in China, in 2017, was split between; WeChat at 54%, AliPay at 8% and Others at 38%.
China's Mobile Payment Market Split, 2017
Because of the factors listed above, the fintech business models that emerged in China and the West are radically different.
Mono Vs Multi Product Platforms
Chinese fintech firms are consumer-focused, with multi-product platforms. In contrast, in the West, the models tend to be, mono -product platforms, that are business to business in their orientation.
To illustrate, in the savings category of fintech. Yu’e Bao a savings product platform forms part of Alipay’s payments platform. The company invests spare change, from Alipay wallets.
The platform attracted 185 million customers, creating 60obn Yuan of assets under management. In just, 18 months, according to consumer international. Making the money market fund the largest in the world.
The money put into Yu’e Bao is invested in money-market funds managed by Tianhong Asset Management Company, in which Alibaba Group owns a stake. The platform is viewed by the younger generation, as an excellent substitute for bank deposits.
Chinese fintech platforms, such as Zhima Credit, are leveraging social networks and payments history to create credit scores. At the end of the first quarter of 2017, it had 260M users.
In a study by the Economist Business Unit. Transactions on Alipay, linked to e-commerce giant Alibaba, and Tencent’s WeChat, increased 20x in four years. With payment via non -banks growing 60%, in the first quarter of 2017.
Also, both wallets feature apps within apps. This allows users to purchase flights, train tickets and more from third parties without ever leaving the Alipay or WeChat ecosystems.
In 2018, according to Statista, digital payments and alternative lending (including P2P lending) were the largest Fintech segments. Chinese firms dominate three areas in Fintech; online (P2P) lending, mobile payments and artificial intelligence
Mobile Payments in Europe
If we were to consider what mobile payments looks like in Europe. We would find the following, according to Visa:
Areas where mobile wallets add value is centred around convenience, and automated-decision-making, which can be scaled across multiple financial services suppliers and non-financial merchants simultaneously.
The primary goal of these companies is to embed their products, into the day to day, moment to moment activities of millions of consumers.
As a result, technology first organisations and start-ups are racing to unbundle and digitise key elements of the value chain of the retail financial services industry.
Digital financial services products, empower consumers to optimise their decision making. Through automation algorithms deployed by the providers of innovative financial services organisations to exploit in – the -moment opportunities.
Enabling consumers to save or make money through automated investments that creates wealth for retail finance consumers. For this to work effectively consumers are removed from the decision-making-process, once the consumer has opted-in as a customer.
There are innovative start-ups that round-up money after each transaction which is then diverted into a savings account on behalf of retail finance organisations.
Mobile Usage Across Europe 2018
In Europe with the enactment of GDPR, firms operating in this space can only use the personal data of consumers for the specific services consumers signed up to.
To offer additional services, to consumers, organisations must obtain permission prior to executing on a service. Consumers cannot be automatically opt-ted in without their explicit authorisation.