This article has been contributed by Nathan Hew.
Digital payment methods are on the rise globally. In regions like Asia Pacific (APAC), where e-commerce is booming and online sales are as popular as brick-and-mortar retail, more consumers are choosing to use digital wallets, and the numbers prove this to be true.
According to Worldpay FIS Global Payments Report 2023Digital wallets were the leading payment method globally, accounting for 49% of transaction value in e-commerce and 32% at the point of sale (POS) in 2022. Mobile wallets are expected to remain the leading payment method in e-commerce (54%) and POS (43%) in 2026, with fintechs, banks, neobanks, super apps, big tech and device manufacturers competing as digital wallet providers.
While APAC remains an outlier with the overwhelming majority of wallet share, digital wallets are now the leading e-commerce payment method in Europe (having taken the lead in 2021) and North America (where wallets They overtook credit cards to become leaders in 2022). Major global e-wallets such as PayPal, Apple Pay and Google Wallet have established a strong presence in these countries as more consumers shop online.
But to really understand the importance of why digital wallets are becoming an increasingly popular payment method, let's first delve into the mechanics of a digital wallet.
Coca-Cola arguably implemented the first solution that seems close to a digital wallet in 1997: two vending machines in Helsinki, Finland, accepted payments via text messages. (Source: Shutterstock)
Digital wallets: What is it and how do they work?
Digital wallets are applications designed to take advantage of the capabilities of mobile devices to improve access to financial products and services. What sets them apart from traditional payment methods is that they eliminate the need for consumers to carry a physical wallet. Beyond this, digital wallets contain the consumer's payment information to facilitate making multiple payments on the same device.
It all started 25 years ago, when 21-year-old businessman Dan Kohn in Nashua, New Hampshire, sold a CD through the Internet through credit card payment. Since then, the technology has evolved. Digital wallets now use a mobile device's wireless capabilities, such as Bluetooth, Wi-Fi, and magnetic signals, to securely transmit payment data from your device to a point of sale designed to read the data and connect via these signs.
Some of the best-known wallets on the market include Apple Pay, Google Wallet, Samsung Pay, PayPal, Venmo, and Doku, each with unique features that help set them apart from their competitors. Apple, for example, held a Strategic partnership with Goldman Sachs to issue Apple credit cards and expand its Apple Pay services.
As cryptocurrencies have become part of a financial system, companies like Bitpay invented cards that allow you to pay with cryptocurrencies. Digital wallets like Apple Pay and Google Pay allow consumers to add a Bitpay debit card. The Bitpay card converts cryptocurrency to dollars at the current market value, allowing the wallet to complete the transaction.
The growing popularity of digital wallets in Asia
Asia is โat the forefrontโ of innovation in digital payments, leading developments in areas such as cross-border payments and central bank digital currencies, according to Yvonne Szeto, vice president of payments processor Worldpay, which acquired FIS. โIt is also the region where digital wallets first gained a foothold as the dominant payment method, and that dominance shows no signs of abating,โ Szeto said.
Of the factors driving the current growth of digital wallets, three elements in particular stand out. A big talking point is that more and more people are using the Internet for the first time to participate in paid offers. In Southeast Asia alone, more than 40 million people did exactly that in 2020, according to a study by Google, Singapore state investment company Temasek and consulting firm Bain.
The figures also show that digital wallets will encourage more e-commerce transactions. Euromonitor data suggests that Asia will be responsible for 40% of an estimated $13.3 trillion in global retail sales this year, while accounting for 47% of the $2.9 trillion in e-commerce transactions and 65% of m-commerce (worth $1.6 trillion).
What does this mean? Mobile commerce is likely to grow eight times faster than traditional retail in APAC, resulting in an additional $600 billion in annual spending for the digital wallet economy in Asia by 2025.
It results in an efficient economy and transparency for governments, regulators and financial institutions. Beyond this, the World Bank has shown that greater use of digital payment methods can help reduce the size and impact of the shadow economy. The increasing use of cost-effective solutions such as QR codes and the adoption of uniform payment standards will continue to enable digital wallets to reduce costs for merchants while increasing electronic and traceable acceptance.
Both regions have a distinctive approach when it comes to adopting digital wallets. (Source: Chip Somodevilla/AFP)
Digital wallets in the East and the West: what's the difference?
In the West, wallets designed and offered by big tech companies take advantage of existing payment behaviors, creating a digital interface for physical payment cards that do not require downloading an app for payments on portable devices, unlike "super apps" that have emerged in China. and in other places.
Asia, on the other hand, lacks existing banking and payments infrastructure. Coupled with the widespread use of cash, it prompted emerging payments companies such as Grab, Gojek and GCash to start from scratch, using QR code-based apps and features to drive scale and access.
They approach this opportunity from a 360 point of view, offering a range of services covering areas such as e-commerce, entertainment, social services, remittance facilitation and even, in some cultures, delivery of seasonal good luck gifts known as โred packetsโ.
Chinese tourists walk past a QR code for Chinese digital wallets displayed on a street in Kathmandu. (Source: Prakash Matheme/AFP)
Pros and cons of using a digital wallet
As with any technology, using digital wallets has advantages and disadvantages.
A digital wallet can:
- Limit exposure to financial and personal information.: Like standard credit or debit cards, most digital wallets have some type of fraud protection or tracking. Some digital wallets employ biometric data, such as facial and fingerprint recognition technology.
- Eliminates the need to carry a physical wallet and cards: While cash is king, the convenience that digital wallets offer complements the current digital landscape. Additionally, having fewer cards reduces the chances of losing those items.
- Improve access to financial services: Consumers can use digital wallets without needing a bank account or credit card. It makes them a valuable tool for people living in poverty or in remote areas with few traditional bank branches.
That being said, digital wallets have their downsides.
- Not all countries or regions adopt digital wallets: Take Japan as an example. While the country offers abundant options for digital payments, Japan remains a cash dependent economy, according to a source cited in Research and Markets' Asia-Pacific Mobile Payment Methods 2022 report. Much of this is due to its extensive ATM network and relatively higher credit card fees, making smaller merchants reluctant to accept cashless payments.
- Digital wallets are vulnerable to identity theft or fraud: According to Kaspersky research titled โCharting a secure path for the future of digital payments in APAC"Almost all respondents in Southeast Asia (97%) were aware of at least one type of threat against electronic payment platforms, while almost three in four (72%) have personally encountered at least one type of threat associated with this technology.
