World Reimagined: Digital Wallets Are Revolutionizing How and Where We Pay

This time of year, many of us are pulling out our wallets more frequently, but increasingly that wallet is digital. Here, we are going to look at the rapid pace of innovation in payments as new technologies are making payments faster, cheaper, less intrusive, and safer.

While both Web 1.0 and Web 2.0 changed civilization in mind-boggling ways, allowing people from all over the world to connect and collaborate, regardless of geography, they were materially flawed. They were both content-first and were missing two layers: an identity layer and a financial layer. The absence of both creates enormous cybersecurity challenges.

As we move towards a more decentralized, interactive Web 3.0, new technologies are allowing for a digital-first identity and financial service layer that will offer speed, agility, and a level of convenience that will frequently allow them to operate in the background. Unlike prior technological leaps, developing nations are innovating and adopting at a much faster pace than we are seeing in developed nations, where existing solutions work well enough most of the time. But in developing nations, millions of the unbanked are getting access to the global economy for the first time through digital wallets and mobile device-based eCommerce, and they are unencumbered by legacy solutions.

The skeptic in you might be asking just how many people have a smartphone that can access these solutions? In 2021 the number of smartphone users rose to 6.4 billion, which is roughly 80.6% of the world’s population. By 2026 that number is expected to rise to 7.5 billion. In 2020, the smartphone penetration rate in the US was 81.6%, in Germany 77.9%, in China 63.4%, Mexico 54.4%, Brazil 51.4%, and India 31.8%.

While smartphone penetration may be higher in developed economies, the digital revolution in emerging economies is already as advanced as in developed ones and likely to surpass it. In fact, among the top 30 countries by revenue from digital services as a percent of GDP, 16 are developing nations. Since 2017, digital revenue in emerging nations has been growing at an average annual pace of 26% versus 11% in developed nations. The reason for that is because the developed world has an abundance of brick-and-mortar stores, services, and payment options that are familiar and deeply embedded. Why switch when what you have works? In countries where people have a tough time accessing any sort of traditional financial service or even a doctor, they are more than happy to try a new digital option that is frequently much more reliable and certainly more accessible.

But then 2020 came along. Payment tech was yet another area in which changes that would have taken many years occurred within months, driven by the pandemic-related restrictions. These restrictions ignited a cross-generational shift toward both contactless payments and digital currencies. The fact is that Covid-19 created the single greatest, previously unimaginable challenge for cash transactions. Never before and most likely never again will such a drastic and rapid change in payment dynamics occur as pandemic restrictions and fear drove rapid adoption of online shopping along with mobile and contactless payments.

So, where are we now as we head in 2022? A recent study from Mastercard (MA) found that over 90% of North Americans use technology to manage money. A full 82% of North Americans use financial tech to pay bills, but only 46% use express payment options for online shopping, so there is plenty of room to grow, even in the U.S., and respondents cited convenience as the primary driver for adopting new financial tech options. In case you were wondering, this isn’t just about the younger generations, with over 65% of the Silent Generation and Boomers both choosing financial tech to save time and reduce their workload.

In developed nations, the shift to online spending and the growth in alternative payment methods that use technologies such as biometrics and wearables for faster and less disruptive payment are pressuring traditional banks and payment processing institutions. These companies have monopolized the world of payments for decades, protecting their relatively high fees by creating barriers to innovation, often aided by well-intended regulations. Today they are facing enormous pressure from both the consumer and merchants as cheaper and more convenient options emerge.

Payment solutions such as those from PayPal (PYPL), Block (SQ), and Stripe reduce not only the cost to process payments but also the barriers to entry both for online commerce and off. Last week we discussed Investing in the Creator Economy and how the Great Resignation is seeing more people pursue entrepreneurial options that connect their passion with their profession. These technologies are effectively lowering the risks of kicking off a new venture by making it easier and less expensive to process payments.

For example, the pandemic pushed retailers to go a lot more digital, but now they (and service providers as well) need to broaden their payments options. Consumers want options that are convenient but also protect them against fraud. The QR code payment option is increasingly able to leverage popular digital wallets already on smartphones. Block (formerly known as Square) now allows businesses to create food and drink menus with a QR code that can be given to customers rather than a physical menu in the U.S., UK, Ireland, and Australia. Payment is also possible via these QR codes. Block also offers an eCommerce platform, Square Online, that allows payments via Visa (V), Mastercard, Maestro, American Express (AXP), gift cards, Apple Pay (AAPL), Google Pay (GOOG), and Paypal.

The pandemic decimated tourism around the world, harming not only those businesses directly in the industry but also those that benefit tangentially, such as restaurants and retailers who previously had generated a meaningful portion of their revenue from visitors. People had to get creative and fast. That’s where companies such as Nuvei Corp (NVEI) came in to help them sell across borders, accepting not only foreign currencies but also alternative payment methods, handling much of the burden of complex taxes and regulations. Again, here we see the barriers to global entrepreneurship being lowered as the ability to sell to anyone, anywhere, paying with any method becomes a service rather than an in-house capability.

Old-school unattended retail payments have been getting on board as well. Unattended payments are things like purchasing a soda from a vending machine, paying for an automated car wash, or Tuesday night at the laundromat. Companies like Cantaloupe Inc (CTLP) are helping businesses sell more by accepting cashless and touchless payments and managing the backend to reduce processing costs.

The OG players in the field are also adapting. Take Moneygram (MGI), for example, which was founded in 1980 and was recently upgraded to a Zacks Strong Buy based on an upward trend in earnings estimates. The company has been through a major restructuring over the past ten-plus years and, in 2019, announced that it was partnering with Ripple to utilize the digital asset XRP for cross-border remittance. Through a partnership with Coinme, its customers can purchase or exchange bitcoin for U.S. dollars at some of its locations.

Mastercard, one of the payment behemoths founded in 1966, teamed up with Wirex and Bitpay in 2020 to create crypto cards that allow people to transact using their cryptocurrencies. This year the company joined forces with the cryptocurrency exchange LVL to offer a debit card linked to bitcoin and fiat accounts as part of its Start Path Crypto startup engagement program, which is “dedicated to exploring and solving real-world problems for people and businesses around the world using blockchain technology.” Some of the other startups joining the program are Ava Labs, Envel, Kash, and NiftyKey.

The mass adoption of smart mobile devices has accelerated both online shopping and social media. That has led to an evolution in social commerce as social media transitions from lead generation to commerce centers. Social commerce is online selling that takes place on social media platforms or on platforms that have a social aspect. Instead of being sent off-platform to the retailer’s online store to complete the purchase, social media platforms are evolving to enable the transaction to be completed without ever leaving it. The entire experience, from browsing to checking out, occurs on social media. While not an evolution in payment technology, it is a change in the payments process and in how retailers can interact with their customers.

Twitter (TWTR) launched a pilot program last July to showcase products on business profiles. Meta’s Facebook Shops allow businesses to connect with potential customers through Messenger, WhatsApp, or Instagram Direct. Its Shops allow store owners to import a product catalog or create one on the platform. In February 2021, TikTok launched its Seller University as an additional way users can monetize the platform by selling directly on TikTok.

The bottom line is how we pay, where we pay, and with what we pay is evolving at an increasing pace. The downside is that change takes effort, but the upside is a world in which the payment process itself is becoming increasingly frictionless. There have never been so many tools to aid the aspiring entrepreneur, and for consumers, we are getting closer to the day when all you will need to carry around with you is your smartphone.

Disclosure: Block, Cantaloupe, Mastercard, Moneygram, Nuvei Corp, Paypal, and Visa are constituents of the Tematica BITA Digital Payments & Fintech Sustainability Screened Index

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

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