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Tuesday, May 25, 2021

Mobile Wallets Create Fragmented Liquidity: The Opportunity for Payments Evolution

Co-authored by Eddie Chin and Phillip Jackson

An acquaintance of mine who has spent a lot of time in China told me how he uses the barcode on his WeChat Pay app to pay for everything there, including when he buys a cup of coffee from the street vendor outside of his office. He can’t remember the last time he touched a physical Yuan.

Thought: Mobile Wallets Create Fragmented Liquidity: The Opportunity for Payments Evolution
Mobile Wallets Create Fragmented Liquidity: The Opportunity for Payments EvolutionSenior Director, Business Development — Eddie Chin
Thought: Mobile Wallets Create Fragmented Liquidity: The Opportunity for Payments Evolution

Digital and mobile wallets aren’t just big in China and India; they’re attracting consumers all over the globe. According to Payments Dive, some 2.6 billion people had some type of digital or mobile wallet in 2020, up significantly from the year before, and that number will grow to 4.5 billion by 2025.

Much of the uptick in usage was driven by the pandemic. Jodie Kelley, CEO of Electronic Transactions Association, told CNBC that safety concerns prompted consumers to adopt contactless payment options. She predicts digital and mobile wallets will continue to be a preferred source of payment.

How is this trend affecting our everyday lives, both as e-Commerce brands and consumers? Like all emerging trends that are upending major aspects of the economy, there are exciting opportunities to offer more services, and challenges that are a direct result of exponential levels of choice.

Opportunities for e-Commerce Brands

Every business in the e-Commerce space needs to think about a strategy for the payments market. Since 2016 we’ve seen a proliferation of digital and mobile wallets, and their success has led to an even greater proliferation of options. If you support one type of wallet, say PayPal, why not support 10 or 100? 

The case for supporting a plethora of payment options is straightforward: the leading providers of digital and mobile wallets boast massive customer bases, ranging from 50 to 500 million active users (Venmo and Apple Pay respectively). Many consumers, myself included, are more apt to make a purchase if a site supports a digital wallet I use. Who wants the bother of typing in credit card information and shipping address? Digital wallets make impulse purchases easy.

There are other benefits than just conversions. As a vendor, you may pay a lower interchange rate than you would with a credit card network, and some services, such as Square and Zelle, charge the consumer, not the vendor, a nominal fee for making a digital payment. And the icing on the cake: You get your money within a few days of the payment, rather than waiting for a check that’s cut at the end of the month. 

Over time, the cost of paying by digital will go down, driven largely by increased competition in the space and consumer adoption. There are over 100 digital and mobile wallet providers, so consumers have plenty of options if a vendor tries to raise its rates too much. And once consumers stop using paper checks and ACH to pay bills like their mortgage payment and life insurance payments, handling costs are likely to decline. 

The Challenge: Consumers Have Increasingly Fragmented Liquidity

One of the challenges that stems from lots of choice is fragmentation. Consumers, particularly millennials, have multiple wallets, which means they have little insight into their total spending and financial wellbeing. For these millennials, there is no 360 view of your net worth, or their liquid assets. The promise of the digital revolution was greater access. What we got instead was digital diffusion: there is no central store of value anymore. Your net worth is spread out amongst dozens of accounts.

To a certain extent, all adults have multiple financial accounts: checking, savings, 401k, Roth IRA, brokerage accounts, credit cards. Prior to wide scale adoption of digital wallets, day-to-day transactions were limited to our checking account and credit cards, and it’s easier to understand what we spend throughout the year to maintain our lifestyles. 

Once spending is spread out among credit cards, PayPal, Zelle, Venmo, Apple Pay and so on, which is the case with the younger generations, it’s much harder to get a clear picture of what one spends to live, and to manage liquidity. 

Let’s say I put $500 in my Venmo account and assume it will be enough to pay my electric bill for the year. If it’s not, I’ll be in for a rude awakening, and will need to find the money in some other account in order to pay up. It also leads to a less than ideal situation where, until I have that rude awakening, I have no clear idea of what I pay for electricity each month. If I want to start putting money aside to buy a bigger house or a new car, I’ll really need to have a concise picture of what my current expenses are.

Another challenge: it’s not always easy to move money from one digital account to another. It takes two days to move money from my brokerage account to my checking account. I can get money instantly from PayPal, as long as I’m willing to pay a 1% surcharge. In some instances, once money enters a platform it can never be withdrawn again, as is the case with Roblox, a platform that allows users to build their own games. My kids have a lot of money on that platform, none of which they’ll be able to retrieve once they get bored with it and move on. Take into account digital currencies like Ethereum - and there is a cost to transact on the blockchain, meaning that it is prohibitive to consolidate these assets to a single wallet, as you incur a charge to do so.

The same challenge applies to savings and wealth accumulation. I know many people who were genuinely surprised at how much money they had accumulated without realizing it. They spent years putting small amounts of money -- a $1,000 a brokerage account here, a $100 in a credit union savings account there -- and never bothered to add it all up because it was kind of a pain. 

I understand why. It’s actually pretty difficult to add up all of one’s accounts to get a clear understanding of how much liquidity one has. Venmo pays some interest to consumers who keep money in their account and to attract new customers. Suddenly, Venmo is more than just a way to pay your brother the $100 you owe him, it’s also a savings vehicle that needs to be tracked and added to the equation.

The upper echelons have plenty of wealth management tools to help them track their net worth and manage liquidity, but not the everyday consumer. I think that will change quickly, however, as FinTech companies come to realize that there is both a need and an opportunity to provide financial aggregation tools for the everyday consumer. At some point, consumers will have the ability to see their total assets from a single screen, move money around with the touch of a finger, and post to social media how much the app has streamlined their lives or paid them in interest, similar to the way that Venmo lets users post how they used the app to pay for a slice of pizza.

The upshot: the more fragmented our financial lives become, the more we’ll need to acquire aggregation tools that allow us to manage our finances, both short-term and long-term.