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Payment market evolution backs digital wallets

August 30, 2021

Woman checking payments on her mobile
Jonathan Bennett, Chief Commercial Officer

Jonathan Bennett

Chief Commercial Officer

Only two types of eCommerce payment methods will grow their share of online shopping transactions between 2020 and 2024, according to a new report: mobile wallet and buy now pay later services. But whereas alternative payment mechanisms (APMs) may increase their share of transaction volume and value over the next few years, the migration will have significant repercussions for banks and fintech companies due to the different revenue models involved.

While digital and mobile wallets accounted for 44.5% of eCommerce payment transactions in 2020, BNPL took just a 2.1% share, according to FT Partners Fintech Industry Research published in August 2021. The report predicts that that figure will double to 4.2% by 2024, whereas the share of transactions funded by digital and mobile wallets will grow to 51.7% during the same period.

Source: Worldpay (FIS) Global Payments Report January 2021

In contrast, the report predicts that the volume of eCommerce purchases transacted using credit cards, debit cards, bank transfers, cash on delivery, direct debits, and pre-paid cards will decline over the next three years. The total combined value of eCommerce purchases enabled by all forms of payment combined is forecast to increase from US$4.4tn in 2021 to US$5.7tn in 2023. At this point, online will represent over 20% of all retail transactions.

Source: eMarketer May 2020

PPRO estimates that 79% of all eCommerce payments today use alternative payment methods (APMs), defined as eWallets, bank transfers, cash payment services, local card or deferred credit schemes. Traditional card payments from Mastercard, Visa, American Express and Diners Club International account for the other 21%.

 

Total payments still rely on cash and credit transfers

Separate research published by GlobalData also predicts that the proportion of global transactions funded by mobile wallets has increased rapidly over the last couple of years. That trend will continue to 2023, driven by solid usage in the Asia Pacific and growing adoption in the developed world.

Published in July 2021, GlobalData’s Payment Revenue Models in 2021 and Beyond report discusses existing approaches to the entire payments market (not just eCommerce) and evaluates the challenges providers face from emerging technologies and business models. It concluded that new solutions could let merchants and customers bypass crucial elements of the payments loop – interchange fees, system fees, and service charges, for example – with a significant impact on associated revenues.

GlobalData estimates that mobile wallets will account for 37% of payment volumes in 2021 and will expand their share by 49% between 2020 and 2023. Debit/credit cards are also forecast for growth, funding 23% of payment volumes in 2021 and set to expand their market share by 23% during the same period.

Whereas transaction volumes for wallets are expected to be over twice as those for payment cards, they will accelerate their market share at the expense of cash (down 5%), and cheques (down 9%) in with the consumer aversion to cash entails contact in the post-pandemic world. However, the most used payment methods – mobile wallets, payment cards and cash – still account for just 8% of total payments value (US$1.3tn), 80% of which (over US$1tn) are served by credit transfers.

 

Significant variance in payment method costs

GlobalData’s research also notes that some payment methods make more revenue for banks and payment providers than others. The cost of processing cash payments is low, but unavoidable peripheral costs tend to be much higher than digital solutions. McKinsey estimates that cash accounts for around 5% of bank operating costs in Europe and North America. For example, a figure rises to 7-10% in the more cash-intensive geographies of Latin America and Africa.

Card payment revenues come from several different sources. Most commonly, fees paid by the banks and merchants that use them vary by location and the type of technology in use (i.e. chip and pin, contactless, phone or recurring). Visa’s fees range from 0.04% to 1.02%, for example, and Mastercard’s from 0.12% to 0.67%. The acquiring bank pays interchange fees to the issuing bank as part of the money transfer between the customer and merchant. According to GlobalData’s research, these account for a quarter of global payment revenue. Issuing banks also derive payments revenue from customer account fees, charges and interest on credit card balances.

On the other side of the equation, acquiring banks collect a range of merchant service charges (MSCs) higher than the interchange fee and account for around a quarter of global payment revenues, according to GlobalData. Many larger financial services companies that operate as issuer and acquirer (examples include Barclays, Citi and Bank of America) derive revenue from multiple parts of the transaction process.

 

Mobile wallet fees offer lower-cost alternative

Interchange fees also apply to mobile wallet transactions. They tend to vary depending on the exact model – whether delivered by a bank, mobile network operator, smartphone manufacturer of fintech – and whether cards are involved. A staged model like PayPal’s that links the wallet to a bank account balance to fund a payment, whereas the pass-through model operated by Google Pay and Apple Pay sees a smartphone app replace the card and directly pay the merchant (processing costs are generally the same as for a card). In both cases, consumers have no visibility of the issuing bank, and the costs are typically passed on to the merchant.

Another model bypasses the card-based value chains entirely and uses local or regional real-time payment (RTP) systems to facilitate transfers directly between consumer and merchant bank accounts. Examples include Vyne, Plaid, TrueLater, TIPS, MobilePay and Vipps, and they generate less revenue because crucial stages of the traditional payment chain are taken away.

In most cases, the mobile wallet provider earns a commission per purchase similar to an interchange fee but generally lower, typically between 1.25% and 2%, according to whether the transaction takes place online or in-store. Providers can also earn interest on money stored in preloaded mobile wallets.

MNO operated mobile wallets funded by carrier billing too do not rely on cards directly, instead of charging purchases to the consumer’s mobile phone account (though this, in turn, can be backed by their bank account or credit/debit card). A purchase commission fee is passed on to the merchant in recognition that they are often gaining access to millions of potential customers and a more seamless payment experience that reduces the number of abandoned transactions.

Other solutions which cut out card providers are emerging, including the European Union’s (European Payments Initiative (EPI) and digital currencies like Facebook’s Diem, which enables payments between its 2.7bn social network users.

 

Innovation and expansion continues

However, payment models are constantly changing, as can be seen by the recent surge in BNPL acquisition activity as established financial services providers look to expand their product portfolios and customer base. The most recent example is Square, which is purchasing Afterpay for around US$29bn (see Afterpay acquisition preps Square SuperApp ambitions). Other deals include Affirm buying Canadian BNPL provider PayBright, Germany payment service provider Unzer snapping up Paysafe Pay Later and Klarna acquiring Italian BNPL specialist Moneymour.

Established providers who offer mobile payment apps linked to user bank accounts are also getting in on the act, notably PayPal, which launched BNPL solutions in France, the US and the UK in 2020. In Australia, Zip Co also offers interest-free payment solutions that can be set up via its Zip Pay and Zip Money digital wallets.

From the merchant perspective, offering consumers as many different ways to pay at the lowest cost is a predictable route to expanding revenue and increasing profitability, so more innovation and flexibility in the payments market can only be a good thing.

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