THOMAS SO – OCTOBER 14TH, 2019 EDITOR: ODYSSEUS PYRINIS
Electronic payments are not a new concept in the United States. From as early as the 1970s, debit and credit cards have been gradually replacing checks as the most popular non-cash payment instrument. However, up until 2000, credit and debit cards were viewed as insufficient to meet the needs of American businesses and consumers. Nevertheless, with the improvement of technology, credit or debit cards became more widely accepted ever since 2000. According to the 2018 Federal Reserve Payments Study, debit card transactions reached a stunning 82.6 billion payments by the year 2017 in the United States and credit card transactions also rose to 40.8 billion, increasing from 37.3 billion the previous year. The widespread popularity and recent adoption of debit and credit cards as viable payment methods could partially be attributed to the various discounts and rewards offered by banks and credit card companies to further incentivize businesses and consumers to utilize electronic forms of payment over the more traditional cash and check. Yet, debit and credit cards are not the only electronic, non-cash payment instruments available as an alternative to cash and checks. Another form of payment has demonstrated potential applications that could render credit and debit cards obsolete.
No, this is not about Bitcoin nor any of the other cryptocurrencies. Instead, we are referring to another emerging payment method in the U.S. market: digital wallets. Digital wallets, also known as e-wallets or mobile wallets, currently account for less than 3% of Point of Sale (POS) transactions where consumers pay at a cash register in the retail store. However, the market potential of digital wallets is not to be underestimated. One of the more successful examples in the U.S. demonstrating the viability of a digital wallet is Venmo. This mobile application offers a platform where users can transfer funds just by using their phones. This way, there is no need for card chip readers to neither split gas nor pay for food; but the benefits do not just stop there. Samsung Pay and Apple Pay expand upon the traditional functionality of digital wallets by allowing users to store debit and credit card information on their phones and pay upfront simply by tapping their phones onto an NFC terminal; this technology further simplifies how payments over the counter are made.
What should be known about digital wallets? Firstly, in addition to their convenience, digital wallets offer additional layers of security and prevent theft or loss, which are key disadvantages of paying with either cash, check, credit card, or a debit card. Digital wallet applications require a means of authentication, either through passcodes or biometrics (such as fingerprints or facial recognition), to be accessed by the user. Furthermore, reputable digital wallets utilize anonymized digital tokens to complete a transaction rather than transmitting to the retailer any financial information, preventing the consumer’s payment details from ever being stolen. Digital wallets also circumvent transactional fees by avoiding additional bank charges. However, one of the major problems for e-wallets is its acceptability as a method of payment. Some countries such as Malaysia have up to 40 different mobile wallets. Consumers would be discouraged to switch away from cash if they have to find out which e-wallet could be used when they make purchases from different merchants. Another negative associated with digital wallets is that they rely on a functioning mobile device and may require an active internet connection, which is problematic in situations where there is poor network reception or when the user’s device is out of power.
As the e-wallet technology continues to mature, the market for this payment instrument has been, and continues to be, under strong competition, preventing any single company from being able to claim a substantial share of the global market. In terms of online e-commerce, PayPal and Visa Checkout are the dominant payment options worldwide; however, for POS transactions, payment options vary among different countries. In Scandinavian countries, bank-led wallets, such as Vipps in Norway, Swish in Sweden, or MobilePay in Denmark, are the mainstream. These wallets offer basic transaction functions for users and are backed by the local banks. Meanwhile in China, e-wallet companies have taken liberty to significantly expand upon the functionality of digital wallets. Alipay, one of the major e-wallets, offers interests for deposits and loaning services to users. In other words, users of Alipay can earn money by depositing into their e-wallet and earn credit to borrow money from other users. Moreover, established companies such as Apple and Google have launched their payment system using NFC technology, which allows users with stored card information on their mobile devices to make payments simply by placing the phone near a terminal.
However, like any other payment method, e-wallets must be widely accepted as a means of payment in order to become successful. In the U.S., a study conducted by JPMorgan shows that up to 41% of consumers are willing to try out digital wallets, while 37% of merchants accept digital wallets as a payment method. The study also shows that the younger generation, consumers between the ages of 18 and 34 years old, and specifically the more affluent and tech enthusiastic users, are more likely to take the lead in trying out e-wallets. Yet, consumers are still worried about the security of e-wallets, and businesses do not see a need to spend additional upfront costs to upgrade their systems, such as implementing NFC technologies at checkout. Thus, time is still required for e-wallets to mature and gain traction worldwide, but this trend could offer a glimpse into the future world of transactions.
Featured Image Source: Bank Info Security
Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty, or the University of California, Berkeley in general.
