Digital wallets set to dominate the payments industry

Digital wallets have taken the payments industry and the wider financial services sector by storm, but what of the future, where do we go from here?

Firstly, we have to bear in mind that sustained demand is going to continue to drive the use of the digital wallet for some years to come. The continuing Covid-19 pandemic might have given digital wallets a slingshot start, but they were always going to grow in popularity, mainly because they deliver the consumer the undeniable benefits of flexibility, convenience, speed and security. Numerous estimates exist, but even looking at the more conservative figures, it’s said that spending via digital wallets will reach an incredible ten trillion by 2025. Yet, less than 40% of merchants currently provide digital wallets. That's way less than half who have yet to catch up with the opportunities they represent, which is why growth is likely to be spectacular over the coming years, as more merchants see the light.

What Is a Digital Wallet and How Does It Work?

What's more, the digital wallet is simple in concept to understand. Most people have physical wallets and purses. Here they keep cash and plastic to pay for their services and goods. The digital wallet is the same - it's just run by software and kept in the cloud, using virtual cash and cards, rather than paper and plastic. It's not difficult to understand.

What’s more, the technology behind the digital wallet might be a lot more complicated than the consumer will ever need to appreciate (and merchants now have recourse to ready-made platforms that will allow them to join the party at a fraction of the cost of building their own), but it is here where the future of this concept lies - how it will evolve over the coming years to allow even greater flexibility when organising a person’s finances.

The ultimate quest of course is convenience. The current march towards embedded finance is not about a financial industry keen to show off its developing skills, it's all about empowering the financial consumer, to liberate them from a legacy system that made the rules to suit themselves.

Advantages of Using Digital Wallets

The digital wallet is the central cornerstone of liberation, because it provides a portal for a system much more advanced and flexible than we have today. In short, the digital wallet will become the mothership of all payments, a central hub through which our financial footprint will be controlled. And remember that many of the future innovations we discuss today are technically possible now - the engine has been invented, the only question is, how fast do you want to go?

One of the best qualities for the next-generation of digital wallets is the ability to hold multi-currencies, both fiat and crypto. A person only a few years from now might load their wallet with their 'native' currency, say US dollars, but also have a stash of Bitcoin and Ethereum as well, allowing them to cover every payment opportunity, anything from paying for tickets for the big game, to paying a taxi app.

Central Bank Digital Currencies(CBDCs)

And lets not forget that digital wallets are easily able to cope with the future introduction of central bank digital currencies (CBDCs), who might have been slow to join the party, but now want to ensure that the decentralised token players like Bitcoin don't have it all their way. Indeed, rather than us moving to a small number of powerful non-geo specific currencies, individual countries will want to retain control of their currencies, so the environment will be as complicated as today, if not more. Imagine your physical wallet stuffed full of various denominations and embedded finance cards - it would soon burst. The digital equivalent will take as many as you want and still be able to offer the user core digital information about their money.

Indeed, with the choice of fungible assets on the rise, the digital filing cabinet that is your wallet is the best way to cope with an ever more complex ecosystem of centralized and decentralised currencies and assets. Also, the digital wallet will increasingly play a bigger part in helping the consumer understand the varying assets that can be exploited when buying products and services within their own country, and across borders. Financial literacy is going to be more important than ever, especially in economies which are underbanked and playing catch up.

Digital Wallet Security

Turning to the question of security, and digital wallets can already claim to improve matters here, comes the notion of hot and cold digital wallets. Hot wallets are connected to the internet, which means that the information can be rapidly accessed via the holder's bank account for example. A cold wallet is offline and not actively connected to the internet, which means it is safe from prying digital eyes and fingers. Expect more cold wallet solutions, working alongside hot wallets, to be introduced in the future.

We live in an ever more visual society, so as the wallet evolves, there will be a greater use of highly engaging and illustrative user interfaces. Here the user experience will be as important as other formats, explaining what's going on in ever greater detail and without a reliance on language.

Niche digital wallets will also evolve. Granted that the idea of having one wallet to handle as much as you want is key, there will also be a requirement for more specialist wallets that stand to one side and are used on distinct occasions, and for particular reasons. It may well be that one digital wallet is used for spending and currency exchange, whilst another is used for special purchases in say a micro-economy (such as a fan who follows a certain sport).

Digital Wallet Biometrics

As for other developments, there are a number of innovations just around the corner that will be coming to the payments space very soon. This will include biometric, voice-activated, facial recognition and social media initiated payments.

Digital wallets will increase the uptake of Near Field Communication (NFC) and Quick Response (QR) codes which are seen by many across the globe, especially in Asia, as a fast and safe way to make a payment. Then there is the role digital wallets will play in encouraging the move to mobile banking, as apps become vital to how a person manages their money. Loyalty rewards is also a major area in which digital wallets will be exploited.

Retailers are increasingly using loyalty rewards to keep their customers engaged and faithful, and the best way this can be organized is via the digital wallet. The same applies to the rise of artificial intelligence within the banking space. Chatbots are being used by more platforms, and what better way to manage their use and relevance than via the digital wallet?

In short, as the financial consumer's needs and demands increase, the digital wallet will be there to serve. We are at the start of a new age of financial control and management, one which will benefit the financial consumer, and the digital wallet is the hub from which all future innovation will start.

Is now the right moment?