World Reimagined

The Rise of the Digital Wallet and Stocks to Watch

Contactless payment technology
Credit: Shutterstock

Against the backdrop of rising mobile payment activity comes the rise of the digital wallet. First off, what exactly is a digital, or mobile, wallet? It is pretty much just what it sounds like, a wallet in digital format that sits on your mobile device rather than in the physical form in your purse or pocket. That’s an especially attractive feature in this pandemic world which increasingly favors contactless payments, rather than manhandling grubby card readers.

Digital wallets are an attractive alternative because, frankly, most of us would feel just fine walking around without a wallet as long as we could still buy things. To be without one’s phone or wearable, however, is emotionally equivalent to nightmares about forgetting to put on pants before going out in public. Or if you prefer a more topical analogy, as scary as showing up at a store only to realize you left your mask at home. Urgh!

There are two main types of digital wallets, closed and open, and we aren’t talking about Scrooge McDuck versus Richie Rich. Closed wallets typically connect directly to a specific merchant – think Starbucks’ (SBUX) or Walmart’s (WMT) app. They are limited in scope for the consumer, but due to the exclusive relationship between consumer and company, they are useful for offering special discounts or loyalty perks. Open wallets are based on a central platform that allows the users to pay any retailer that is compatible with the platform, using any compatible payment method – think Apple Pay (AAPL) or Google Pay (GOOG). While clearly more functional for the consumer, they provide retailers with less information on their customers than is possible with closed wallets.

Digital wallets can manage all your credit and debit cards, membership cards, boarding passes, and more without adding any bulk to your life. And let’s face it, after these lockdowns, additional bulk is the last thing most of us need. A digital wallet also has the potential to reduce fraud as they are more difficult to steal and use than a physical card or cash. In 2018, the global mobile wallets market was estimated to be around $755.6 billion, according to Statista.

Over the past year, billions of people were forced to change the way they live, work, and shop. As a result, mobile wallet adoption, according to a recent report from ACI Worldwide (ACIW), rose to a historic high of 46% in 2020, up from 40.6% in 2019 and just 18.9% in 2018. Countries such as Brazil, Mexico, and Malaysia, where many historically relied heavily on cash, have become some of the fastest adopters of mobile wallets. Total mobile wallet transactions amounted to 102.7 billion in 2020 and are expected to reach 2.58 trillion by 2025, according to ACI Worldwide.

According to the Global Payments Report 2021, released by Worldpay from FIS, digital wallet payments are exceeding card use at the point-of-sale (POS), and contactless in-store payments via mobile wallet worldwide exceeded in-store cash payments for the first time in 2020. The use of cash for payments fell 10%, accounting for just 20% of all in-person payments worldwide, and is down 42% since 2019. In Australia, France, Norway, Sweden, and the UK, in-store cash payments fell by at least 50% in 2020.

The number of contactless digital wallet payments at the POS is growing faster than the number of payments made with a physical card. By 2024, the Global Payments Report predicts that cash will be used for less than 10% of in-store transactions in the U.S. and less than 13% worldwide. Digital wallets are expected to account globally for a third of in-store payments. And there is much more wallet share to take by digital wallets given that exiting 2020, roughly $18 trillion was still being spent in cash and checks globally. A poll of 129 financial services professionals by EY at the SIBOS conference unanimously (96%) agreed that cash will be replaced by digital payment methods by the end of the next decade, with 59% believing mobile payments will be the most common.

This technology isn’t only useful at point-of-sale as it turns out those digital wallets aren’t only handy for grabbing an emergency pint of gelato when you’ve forgotten your wallet, but God forbid, never your phone! Digital wallet-based e-commerce transactions grew 7% in 2020 and are, according to the report, expected to account for more than 50% of all global e-commerce payments by 2024.

While countries in Asia, particularly China, have the highest adoption levels for digital wallets currently, the U.S. mobile payments market is the second-largest at $465.1 billion worth of transactions and, according to a new report from Finaria, is expected to grow by 49% to $698 billion in 2023. China is expected to see mobile wallet transactions reach $1.3 trillion this year and will generate half of all mobile payments by 2023, according to research by Statista.

The ways in which a digital wallet can be used are vast, going well beyond a more secure way to hold forms of payment. For example, Disney has developed a MagicMobile service to replace its MagicBand. This new service adds a digital pass to Apple Wallet that can be scanned or used via Near Field Communication chips (NFC) on the iPhone or Apple Watch. New features are to include linking PhotoPass to the app or being able to unlock hotel rooms via the app. The same goes for airline or train tickets that can be housed inside one’s digital wallet, which also allow users to receive push notifications of gate changes or departure delays.

Companies like Hertz (HTZGQ) allow you to download a reservation confirmation to your mobile wallet. Health Insurance companies such as Blue Shield of California give their clients the option of carrying a digital version of their membership card in their mobile wallets, and many airlines around the world allow their passengers to download mobile boarding passes into the wallets. And as we recently discussed, the digital wallet would be the likely hub for one’s digital vaccine passport. The one item that many of us are waiting for is a secure, digital driver's license or ID card stored on your smartphone. With the smartphone increasingly replacing our wallets and keys thanks to applications like Apple’s new Car Key feature, the driver’s license, and for those international travelers, the passport are some of the last digital hold-outs.

So what does all this mean for investors? Wallets work either through NFC chips or by scanning a QWERTY code, and as usage increases, that means more retailers will need chips produced by companies such as Broadcom (AVGO), NXP Semiconductors (NXPI), and Qualcomm (QCOM). Companies that have digital payments as a core part of their business include PayPal (PYPL) and Square (SQ), but we’re also inclined to include companies like Mastercard (MA) and Visa (V) as well as other companies whose networks process those payments.

Now, if they could just stop us from losing our phones in the couch...

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Chris Versace

Christopher (Chris) Versace is the Chief Investment Officer and thematic strategist at Tematica Research. The proprietary thematic investing framework that he’s developed over the last decade leverages changing economic, demographic, psychographic and technology landscapes to identify pronounced, multi-year structural changes. This framework sits at the heart of Tematica’s investment themes and indices and builds on his more than 25 years analyzing industries, companies and their business models as well as financial statements. Versace is the co-author of “Cocktail Investing: Distilling Everyday Noise into Clear Investing Signals” and hosts the Thematic Signals podcast. He is also an Assistant Professor at NJCU School of Business, where he developed the NJCU New Jersey 50 Index.

Read Chris' Bio

Lenore Elle Hawkins

Lenore Elle Hawkins has, for over a decade, served as a founding partner of Calit Advisors, a boutique advisory firm specializing in mergers and acquisitions, private capital raise, and corporate finance with offices in Italy, Ireland, and California. She has previously served as the Chief Macro Strategist for Tematica Research, which primarily develops indices for Exchange Traded Products, co-authored the book Cocktail Investing, and is a regular guest on a variety of national and international investing-oriented television programs. She holds a degree in Mathematics and Economics from Claremont McKenna College, an MBA in Finance from the Anderson School at UCLA and is a member of the Mont Pelerin Society.

Read Lenore's Bio

Mark Abssy

Mark Abssy is Head of Indexing at Tematica Research focused on index and Exchange Traded Product development. He has product development and management experience with Indexes, ETFs, ETNs, Mutual Funds and listed derivatives. In his 25 year career he has held product development and management positions at NYSE|ICE, ISE ETF Ventures, Morgan Stanley, Fidelity Investments and Loomis Sayles. He received a BSBA from Northeastern University with a focus in Finance and International Business.

Read Mark's Bio