A Bank in your (Digital) Wallet

If there is a recent fintech innovation that can be compared to sliced bread, it has to be digital wallets. In less than the time that it took for people to start banking online, secure, fast and convenient digital wallets have taken over how people store and use money.

Our physical wallets consist of a mix of cards that confirm our identity, cards issued by financial institutions allowing debit or credit as well as cards that collect loyalty points. A digital wallet seeks to combine all of the above, and then some.

A digital wallet, or an e-wallet as it sometimes called, is a software-based financial account that securely stores users’ payment information and passwords. With this technology, users can quickly complete transactions and pay for them. Digital wallets can be cloud-based or use near-field communications (NFC) technology. When used on mobile phones, they enable smartphone payments. A digital wallet can also be used to store tickets, loyalty cards, and coupon information.

It appears that while digital wallets were already becoming popular, in 2020 their growth – like with that of eCommerce – got another push. Market research firm Apptopia says that mobile app sessions on the leading money remittance apps – such as PayPal, Remitly and Xoom – surged 10.7% in the first two and half months of the year alone.

Digital cash for digital wallets

Before digital wallets, there were contactless stored value cards using RFID and NFC technologies such as the FeliCa cards in Japan, developed by a subsidiary of NTT DoCoMo and Sony. The technology is used by millions of commuters around Asia on rail networks and was used as the basis for NTT DoCoMo’s Osaifu-Keitai, Japan’s de facto mobile payment system.

The idea of digital cash – and the term eCash – however, was floated in a paper in 1983 by researcher David Chaum. Chaum tried to commercialize his concept – named eCash – in a startup that anonymized and encrypted transactions using public key digital signatures. eCash was the basis of cryptocurrencies such as Bitcoin. However, it took until 1989 and the launch of PayPal for the idea of digital wallets to become widespread. Available for both Android and iOS users, PayPal’s relative ease of use has made it the widest used digital wallet globally. Customers have the option of paying with the app, which uses the same process as tap-to-pay options like Apple Pay, or swiping a PayPal Mastercard to make purchases in-store. PayPal also owns Venmo, the popular peer-to-peer payment app.

Technology companies were early into the payments game too. In Asia, communication apps WeChat, LINE, KakaoTalk, and Naver, all have embedded digital wallets. WhatsApp’s version is undergoing trials in India and Brazil first. Samsung Pay can not only be used with NFC but even with traditional magnetic stripe technology. Tech behemoths Google and Apple were later to the game but Google Pay – a combination of Google Wallet and Android Pay – and Apple Pay, supported on iPhones, iPads, Apple Watch, and Macs, are lumbering up to take on the competition. Apple Pay’s two-factor authentication including fingerprint (Touch ID) and Face ID means amounts that can be authorized are higher.

In the US, Walmart Pay uses QR codes – also used by Alipay in China – as opposed to tap-to-pay that relies on NFC technology. This wallet can also be used to organize Walmart gift cards, create shopping lists, store receipts, refill your prescriptions, and even find an item’s location inside your preferred store.

Other players in the market include Cash App (released in 2014 by Square, and can only be accessed with your fingerprint for extra security), and also stores boarding passes, concert and movie tickets, loyalty cards and coupons. The app Due provides invoicing and time tracking but also offers a digital wallet and along with payment processing and banking capacities. They also happen to own the trademark on the word ‘eCash’ first promoted by Chaum.

Effects of and on eCommerce

With a boom in eCommerce this year, retailers need to keep up with their customers’ preferences for digital wallets and include all these options in their checkout. Here are some of the ways that digital wallets will impact the customer journey and the retailers’ balance sheets;

Customer behavior The companies offering these digital wallets – like the banks before them – have knowledge of their buying behavior in a granular sense.
Convenience: Not just for the customers who don’t have to open actual wallets, fill out forms or login online, retailers can also conveniently send and receive payments.
Reduces expenses Transfer fees and charges are much lower than on traditional banks. Some apps even allow retailers to eschew pricey POS systems.
Improved cash flow Credit card or check clearances can take a lot of time. Mobile eCash payments can speed up the process. Most transfers are completed within 72 hours with some even happening instantly.
Conversion rates The convenience and speed while using digital wallets is one strategy that can help increase conversion rates and reduce abandoned shopping carts. Coupons, discounts, promotions can be beamed to customers in-store and loyalty points awarded.
More sales opportunities Since wallets are contained on phones, and most people carry their phones everywhere, location isn’t really a problem anymore. This increases sales opportunities making sales truly omnichannel.
Security With extra levels of authentication, a digital wallet is much more secure than a credit card.

Digital wallets around the world

In Asia and Africa, where cash was formerly king, vast swathes of the population have sidestepped credit and debit cards to go straight to mobile payments. Alipay, offered by eCommerce giant Alibaba, and started out as an escrow service between eCommerce buyers and sellers is China’s leading third-party payment solution and digital wallet. In 2016, Alipay expanded to Europe to offer Chinese tourists traveling there a way to make in-store payments and receive offers and now has over a billion users worldwide. In India, its equivalent is PayTM. In Africa, and in particular Kenya, Vodafone M-Pesa allows users to deposit, withdraw and transfer funds, pay bills, and purchase mobile operator services.

As eCommerce becomes more commonplace, digital wallets are starting to gain favor with customers and in turn, gain ground from banks. Square, for example, has received conditional approval to open a bank. Recognizing this propensity to transact online and on the phone, banks around the world are working on central bank digital currencies (CBDC) capabilities.

Noting the banking-like features that digital wallets offer, Hong Kong and Singapore regulate digital wallets as stored value facilities. A new bill was tabled earlier this year in the US called the ‘Banking For All Act’ that mandates that all banks that are members of the Federal Reserve open and maintain ‘digital dollar wallets’ for all persons. The unbanked and the underbanked around the globe might fuel the next wave of digital wallets and we will be more digital money to fuel our digital lives.

The Benefits of Buy Now, Pay Later for Consumers and Retailers

Buy now, pay later integrations are set to stay.

As eCommerce booms with a growth rate poised to top 20% this year according to IBM’s U.S. Retail Index, vendors and marketplaces are trying to draw customers with a shopping experience with an extra payment feature that will help make it very easy to pay for their loaded shopping carts¹.

The BNPL field is dominated by a few major players – Afterpay, Affirm, Klarna, QuadPay, Sezzle, Splitit, and most recently, PayPal Credit (formerly BillMeLater). As a payment gateway service that most merchants already offer, PayPal clearly has, despite its late entrance into the game, a natural advantage. Part of PayPal’s suite of pay later products, Pay in 4, is available to consumers who are making purchases between US$30 and US$600. Major brands such as CVS, Revolve, Nike, Levi’s, Urban Outfitters, Expedia, are offering these services on their eCommerce channels.

While the buy now, pay later (BNPL) model has been around for some time, this year it has gotten a particular boost. Splitit saw record growth of 176% quarter-over-quarter and 260% year-on-year during Q2 of 2020 while Afterpay had boosted its active US customer base from 1.9million to 5.6million within a year, an increase of 219%^2,3.

The BNPL phenomenon has its roots in credit cards and financing schemes of yore such as layaway. However, unlike its predecessors, as a modern one-click payment option, it feels like a win-win for both the customer and retailer.

Popping up at checkout, the BNPL model allows customers to finance smaller ticket items with either no payment or just a small starting one and to pay the rest at a later date in a few installments, at either low or no interest rates. 1 in 3 US consumers have used a BNPL service while in the UK, 67% of UK millennials have used a BNPL service, according to research from management consultancy Kearney^4,5. Retailers, on the other hand, have no risk as the BNPL provider takes it on in case of default. For this privilege, sellers pay a few cents per transaction as well as 2-6% of transaction value, which is more expensive than fees that credit card companies charge.

Innovations in technology such as artificial intelligence and machine learning have made it possible for financial institutions to reduce the risk of fraud and defaults, and their clients benefit from this as they now have an understanding of the buyer’s credit profile without affecting their credit scores.

Customer demographic skews younger and has access to a range of financing

A report on PYMNTS.com on the BNPL industry showed that 87% of shoppers interested in the services were between the ages of 22 and 44⁶.

Consumers, especially the millennials and Gen Z among them, are also wary about the debt that comes with using credit cards. In the uncertain economic climate, customers are more inclined to take on more debt. However, issuers are lowering limits or closing cards altogether⁷. With uncertainty about the future on the minds of a lot of people, BPNL services stand to benefit from the sentiment.

Credit cards, in any case, are just one of a range of credit tools available to young people.

Respondents said they use BNPL to buy electronics (43.65 percent), clothing or fashion items (36.95 percent), furniture or appliances (32.81 percent), household essentials (30.96 percent) and groceries (22.54 percent).

Benefits to customers

Customers have the option of buying items and paying for them with flexible terms ranging from 3 months to multiple years, depending on the provider, improving the customer experience and making it frictionless. They can receive their item before completing a full payment. The payments are interest free and sign-up is much faster than for credit cards.

Nearly 42 percent of BPNL users cite clarity of terms as a key priority when making purchases online, and 39.1 percent the ability to monitor spending⁸.

Benefits to retailers

The BPNL model is being used by retailers for high value goods or by those offering low value goods but want to increase conversions, cart size, reach new customers and keep existing ones. Payment provider Stripe – a QuadPay partner – says it is not a good fit for businesses selling services or software or those sensitive to cost, since fees are higher⁹.

Increased sales value Providers such as Klarna claim that the addition of a BPNL feature led to an increase of 33% in the value of sales at its client GymShark. QuadPay says merchants that have implemented its BNPL product for e-commerce have seen a 20 percent increase in conversions and 60 percent increased average checkout value¹⁰. It is a way to ensure revenue without resorting to tactics such as discounting.

New customers A BPNL option might attract customers who were previously hesitant to buy products because the price was out of their budget. Lifestyle brand BlackCool says its sales rocketed 600 percent after it launched its BNPL plans. Its CEO claims that it brought in “different demographics, including price-conscious consumers who may think our premium products are priced beyond their reach”¹¹. The providers, with their own community, will expose a store’s products and brand to millions of potential customers.

Loyalty Customers who know this option is available on an eCommerce store, and like the seamless nature of the customer experience, are more likely to return for repeat purchases.

Retailers will however need to think about how they will be sharing the customer relationship with the BPNL provider.

Integrations

The greatest challenge to BNPL adoption used to be the fact that the direct integration into the retailer’s point-of-sale system is an onerous process. BPNL services are, however, increasing their integrations with existing eCommerce systems such as BigCommerce, Shopify Plus and Salesforce Commerce Cloud to make it as easy as a flick of a switch.

Drawbacks for customers

While the soft credit checks the BNPL providers run at purchase do not impact customers’ credit scores, late payments can. Customers who default may be banned from further purchases. The terms and conditions from the BPNL service providers are not necessarily clear at sign-up either, leading to unexpected fees.

The future of buy now, pay later

As the use of frictionless, contactless experiences, and mobile wallets at the checkout in retail settings increase, the uptake of BNPL should follow suit. BNPL payment methods went from 3% of all eCommerce payments in 2018 to 8% in 2019, according to the Global Payments Report 2020 by Worldpay from FIS¹². Customers are steadily being offered BNPL services outside eCommerce as well to pay for purchases, and they will possibly one day become as ubiquitous as credit card payments.

__________

Footnotes

^{1. COVID-19 pandemic accelerated shift to e-commerce by 5 years, new report says, TechCrunch, 24 August 2020. https://techcrunch.com/2020/08/24/covid-19-pandemic-accelerated-shift-to-e-commerce-by-5-years-new-report-says/}

^{2. As COVID-19 Continues to Fuel E-commerce, Buy Now, Pay Later Programs Evolve, WWD, 14 July 2020. https://wwd.com/business-news/business-features/as-covid-19-continues-to-fuel-e-commerce-buy-now-pay-later-programs-evolve-1203675418/}

^{3. Afterpay investor presentation, Afterpay, 07 July 2020, https://www.afterpaytouch.com/images/07072020-Investor-Presentation.pdf}

^{4. Buy Now, Pay Later Services Growing Quickly Among U.S. Consumers, 20 July 2020, https://www.fool.com/the-ascent/research/buy-now-pay-later-statistics/}

^{5. Credit uncrunched: why banks and retailers must develop more PoS credit services, Kearney, Jan 2020, https://www.kearney.com/financial-services/article/?/a/credit-uncrunched-why-banks-and-retailers-must-develop-more-pos-credit-services}

^{6. How BPNL Services bring value to small businesses, Pymnts.com, Apr-Mar 2020, https://www.pymnts.com/wp-content/uploads/2020/04/PYMNTS-Tracker-Buy-Now-Pay-Later-April-May-2020.pdf}

^{7. How Covid boosted popularity of buy now, pay later options, 4 Sep 2020, https://www.bizjournals.com/bizwomen/news/latest-news/2020/09/how-covid-boost-popularity-of-buy-now-pay-later-o.html}

^{8. Millennials, Buy Now Pay Later And The Shifting Dynamics Of Online Credit, Pymts.com, 10 Dec 2020, https://www.pymnts.com/buy-now-pay-later/2020/report-millennials-buy-now-pay-later-and-the-shifting-dynamics-of-online-credit/}

^{9. Stripe, Buy now pay later – Learn about buy now pay later methods with Stripe, https://stripe.com/docs/payments/buy-now-pay-later}

^{10. Changing the Game: The Rise of the Buy Now Pay Later Consumer,Finovate.com, 3 Nov 2020 https://finovate.com/changing-the-game-the-rise-of-the-buy-now-pay-later-consumer/}

^{11. How BNPL Helps Bring Consumers Into Stores, Pymnts, 23 July 2020, https://www.pymnts.com/buy-now-pay-later/2020/how-bnpl-is-helping-blackcool-boost-brand-awareness-and-availability/}

^{12. Global Payments Report 2020, Worldpay, https://worldpay.globalpaymentsreport.com/#/en}