Death by a thousand digital wallets 06 October 2021

Digital wallets are everywhere and companies are building out impressive ecosystems. But in America and Europe, they are running up against some limits. 
Since joining Efma two years ago, I have had the good fortune to interview bankers and executives from all around the globe. These interviews add insight and color to our many reports. Look closely, and you'll see that none of those reports focus on external competition in the financial services industry. Instead, they are reports on topics such as digital banking in Canada or the next wave of SME banking. 
But a peculiar thing happens quite often when I conduct these interviews: unprompted mentions of external competitors. In particular, competition from big tech companies. Bankers clearly view the biggest tech companies of our era as a threat, largely due to the digital ecosystems they have constructed and the data they collect. As people have shifted their entire lives online, they have brought their money with them, and the competition for that money is fierce. 

Modern-day banks are complex entities with myriad sources of revenue. But traditionally, and somewhat fundamentally, they take and hold deposits of customers in order to then lend money out to other customers. For this business model to function, the bank must have a healthy amount of deposits in order to lend. Prior to the internet and smartphone era, the range of options for storing money was quite limited. People stored their money at their bank. Or in a safe. Or under their mattress.

In today’s landscape, people are flush with places to tuck away their money. Of course, people still keep money with banks. But digital wallets have flourished in recent years. All you have to do is download an app, link a bank account, and pop some money into your new "wallet". You can then send that money flying around the digital world, paying other people, merchants, or purchasing that hot new altcoin. Digital wallet proliferation reflects, in one way, China envy. Everyone in China uses a digital wallet and annual mobile payments in the country topped $34 trillion in 2019. Potential founders, investors, and financial executives see those figures and wonder why it can’t be replicated in America or Europe.

It is one of the reasons people are so bullish on Square. ARK Investments estimates there will be 220 million digital wallet users by 2024, creating an $800 billion market in America. With this immense growth, ARK believes that Square will become the “Alipay of the West” and has allocated capital accordingly. Digital wallet companies like Square, Venmo, or Lydia, first attract customers through the simplicity and ease of P2P payments. Then, they expand their ecosystem to include traditional financial services: a debit card, a savings account, individual lending, and so on. As these companies collect more and more data on their users, they can craft tailored solutions for people and become the go-to spot for all things finance. It is a process that builds on itself. 

Which brings us back to the concerns of bankers. When ubiquity and customer data are major advantages, the companies that dominate those areas will be the winners of this era. What companies are the most ubiquitous and possess the most customer data? Big tech. The biggest tech companies have indeed encroached on the financial services space, by incorporating payments, partnering with banks, or trying to launch their own currencies. The network effect means that tech giants have a massive built-in advantage. There is no need to construct an ecosystem from scratch, it is already in place. And yet, no one has managed to make the digital wallet super app in the west. Not Square. Not Venmo. Not Facebook. Not Google. 

For the tech giants, they have made essays toward obtaining bank licenses, but the regulatory hurdles have proved too steep. So they have resigned themselves to – for the moment – partnering with financial institutions and incorporating payments into their apps. And probably some data center maintenance in light of recent events.   

For other digital wallet competitors, their ambitions are often curbed by stubborn geography. Where I went to university in the states (Arizona), everyone used Venmo. But other regions of the U.S. are using Zelle or the Cash App. I never even downloaded those apps, even though I was in the same country. In France, Lydia is popular but Lyf Pay and Paylib are also used. MobilePay is used in Denmark and Finland. Countries have their own payment networks and digital wallet apps but the networks remain largely confined to their borders. If you don’t have the right app, sending money to others is frustrating and the network effect is nullified. That handy digital wallet where you can send money with a couple of clicks suddenly isn’t very handy. Perhaps there is such a thing as too much choice.

Digital wallets are certainly eating into the traditional revenue sources of banks. Banks are responding by creating their own digital ecosystems and marketplaces. But geographic and competitive factors mean the dreaded tech super app hasn’t taken over the financial services industry. The uniformity and centralization extant in China is not in America or Europe. Given the scattered and competitive payments landscape in its current form, banks will stave off death for a little while longer.

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