Beyond transactions: The rise of mobile wallets. But consolidation is coming

Source: Supplied. Pieter De Wet, business development lead at FutureBank.

Sergio Barbosa, CIO of enterprise software development house, Global Kinetic, and CEO of its open banking platform, FutureBank.

These digital payment platforms are not only streamlining transactions but also unlocking a wealth of opportunities for organisations looking to out-innovate the competition.

But banks and businesses must be wary of interoperability challenges and the risk of vendor lock-in if they hope to benefit from the inevitable market consolidation that is coming.

Digital wallets are enjoying robust growth. Worldpay, Global Payments Report 2024, estimates that digital wallets will account for 61% of e-commerce payments and 46% of point-of-sale payments worldwide by 2027.

The card schemes are also throwing their weight behind the payment method.

Mastercard has just announced Mastercard Pay Local which will allow consumers to make payments at more than 35 million merchants that accept these wallets. The company says the service has been geared towards markets where digital wallets are widely used including Latin America, Eastern Europe, the Middle East and Africa.

“Digital wallets offer a seamless, convenient way to manage consumers’ finances, store their identification, and make payments with a simple tap or click.

"This level of integration and accessibility is particularly appealing in emerging markets, where traditional banking services have often fallen short in reaching under-served populations and are viewed as expensive," says Pieter De Wet, business development lead at FutureBank.

“For businesses, the integration of digital wallets presents a unique opportunity to enhance customer engagement, drive loyalty, and unlock new revenue streams.

"By linking their services to these digital wallets, banks and retailers can tap into a wealth of customer data, enabling them to develop personalised offerings and targeted marketing campaigns.”

Opportunities abound when wallets open up

One of the most significant trends in the mobile wallet landscape is the proliferation of closed-loop wallets, which are tightly integrated with specific use cases, such as transportation or loyalty programmes.

“Closed-loop wallets, like public transport cards, have wide adoption, but money in the wallet is trapped. The true potential lies in the ability to ‘open up’ these closed-loop wallets, allowing users to leverage their stored value beyond the initial use case.

"By integrating closed-loop wallets with open-loop payment networks like Visa and Mastercard, organisations can unlock a new revenue stream through interchange fees, while also providing customers with greater flexibility and convenience,” says Sergio Barbosa, chief information officer of enterprise software development house, Global Kinetic, and chief executive officer of its open banking platform, FutureBank.

If you can’t beat them

Historically banks have viewed digital wallets with some scepticism. Traditional banking models rely heavily on the interchange fees generated from card-based transactions.

Digital wallets, especially closed-loop systems, can bypass these interchange fees, posing a direct threat to a significant revenue stream for banks.

The disintermediation of the customer relationship could also pose a threat. Digital wallets have the potential to become the primary interface between consumers and their financial services company, potentially diminishing the direct customer relationship that banks have traditionally enjoyed.

“Rather than fighting it, banks should be finding ways to participate in the very big upside wallets offer. What’s more, the entry of non-traditional players, such as tech companies and retailers, into the mobile wallet space can introduce new competitive dynamics for which banks must be ready.

"However, ensuring compliance and protecting customer information can be a complex and costly endeavour. The integration of sensitive personal and financial data within mobile wallets also raises significant regulatory and security challenges that banks must navigate,” De Wet cautions.

Overcoming the interoperability challenges

The number of wallets in the market is growing exponentially, but the FutureBank leadership believes this is not sustainable, and consolidation will be the natural result. However, this process will undoubtedly be hindered by the interoperability challenge.

“The wallets have to either consolidate commercially, or there needs to be a technology solution. The schemes aren’t going to do point-to-point integration with every wallet offering.

"There will need to be consolidation around the payment rails and tech infrastructure for market consolidation to really work. Unfortunately, interoperability is a major challenge at the moment,” Barbosa shares.

Barbosa says a large part of the problem is vendor lock-in. When a business is locked into a single vendor's platform or solution, they lose the ability to easily integrate with other providers or platforms. This can hinder their ability to adapt to changing market conditions or customer needs.

Vendor-locked solutions often come with a predefined set of features and functionalities, leaving little room for customisation to meet the unique requirements of the business.

“Our clients are acutely aware of the need to stay agile. Our pre-built adapters and integrations with all the major payment schemes and banks have been a big help to streamlining the onboarding process. This agility is particularly valuable in the rapidly evolving mobile-wallet space, where time-to-market can be a critical differentiator,” says De Wet.

“Beyond the core integration, our clients want the ability to design and implement additional features and services on top of the wallet platform. This includes everything from gamification and loyalty programmes to AI-powered enhancements, enabling businesses to create a truly differentiated and engaging customer experience.”

Barbosa says banks and retailers must be proactive in embracing these transformative technologies.

“Choosing the right integration partner means businesses can navigate the complexities of wallet integration, unlock new revenue streams, and enhance customer loyalty – all while maintaining the flexibility to adapt to the constantly evolving market demands.

"The future of payments and identity management is undoubtedly digital, and digital wallets are at the forefront of this revolution,” he says.