The Digital Wallet Revolution: Seizing the $4.6 Trillion Opportunity
This is part three of a series summarizing Ark Invest’s Big Ideas 2021 Report.
As a kid, I remember wanting a big bulky wallet. For some reason, it was a symbol of adulthood and success. Now, I can’t wait for life without a wallet, and neither can my chiropractor, who reminds me repeatedly how bad it is for my posture. We may need to wait a bit for a wallet-free society, but the digital wallet is quickly growing in capability, accessibility, and adoption.
What is a digital wallet?
Digital wallets are software and applications that enable electronic financial transactions. CashApp and Venmo are two well-known platforms that are disrupting banking, but digital wallets are quickly invading other areas, including:
Insurance
Lending
Brokerage
Real Estate
According to Ark-Invest, “digital wallets are valued between $250 and $1,900 per user today but could scale to $20,000 per user, representing a $4.6 trillion opportunity in the U.S. by 2025.”
China is leading the way
In five years, the number of mobile payments in China has grown over 15 times. Mobile payments now account for almost $36 trillion, almost three times China’s GDP. That’s impressive, especially considering China is the world’s second-largest economy trailing only the United States. Similar trends are emerging in countries around the world. As more people gain access to mobile phones and wireless internet, mobile payments and peer-to-peer transactions will continue to win market share.
Digital vs. Brick and Mortar
Banking used to be considered untouchable. Insulated by regulation, political favor, and ties to other mega-industries, banking was considered impenetrable. But, as we see in the automotive and energy sectors, no one is safe from disruptive innovation. As consumers shift to digital solutions, brick and mortar financial institutions become more exposed to hungry upstarts.
Digital wallets have a distinct business advantage over traditional banks — cost per customer acquisition. According to Ark’s research, traditional institutions pay around $1,000 per new customer, but digital wallets can acquire that same customer for approximately $20. How? New-age payment platforms benefit from viral growth due to the peer-to-peer nature of the transactions. For example, if I want to repay you for a coffee, you bought me, but you don’t have the app, you are motivated to get it, especially since it’s free. Now that you have the app, you could influence new customers to join.
On the other hand, if a bank wants my business, they have to convince me to switch. Unless they offer something incredibly appealing, I’ll stay put since I’m happy with my existing banking relationship. It’s easy to see how digital wallets allow for quicker growth at a lower cost.
And let’s not forget about the actual brick and mortar. Banks with physical branch locations incur additional costs like property leases, utilities, additional employees, etc. So, not only do banks have to pay more to gain customers, but they also have to pay more to conduct business. To maintain profitability, they must make up these expenses. Yup, you guessed it, higher prices and additional fees are accessed to keep the bottom line strong. And while this may work for a while, the higher cost is more incentive for customers to transfer to a cheaper, digital solution.
The Growing Threat
Like most massive changes, it started small. It may have begun with millennials transferring beer money back and forth, but fintech companies are expanding deeper into the territory of traditional finance. The rise of peer-to-peer transactions might have been an annoyance first, like a fly that keeps buzzing around your head no matter what you do. That fly has now morphed into a Godzilla-sized threat that’s still growing.
Ark-Invest believes there is a $4.6 trillion opportunity over the coming years, and they’re right. Traditional financial firms are well-aware of the threat, and many are moving (some more quickly than others) to combat these new competitors with slick apps of their own. Some will survive and even thrive in the digital wallet era, but not all will make it out alive. Some firms will succumb to complacency and a sheer unwillingness to change. I’m reminded of a quote by Army General Eric Shinseki:
“If you dislike change, you’re going to dislike irrelevance even more.”
Despite ample warning and plenty of time to mount a counter-attack, some red tape-ruled companies will fail or be shells of their former selves when the dust settles. For the investor, this transformation will provide ample opportunities to share in the profits of how we bank, insure, and conduct business. We’ll be watching enthusiastically and seeking to invest in companies that make banking and finance more simple, less time-consuming, and cheaper for all.
*This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from James Vermillion, and all rights are reserved.*
