Will Interoperability Change the Game for Digital Wallets?

September 26, 2024 |
By - Ruben Salazar
|
3 minutes read
3 minutes read
By - Ruben Salazar

Digital wallets are becoming increasingly more relevant. By 2026, over 5.3 billion people in the world will be using digital wallets. That’s more than half of the world’s population! By 2030, wallet transactions will make up more than 50% of the world’s digital payments. An exciting time for the global payments industry? We believe so!

The history of the digital wallet market is one of consistent growth. In the past two decades, we have seen digital wallets replacing a large share of payments traditionally made directly via cards or cash in some markets, in others, they serve as an alternative payment solution that offers greater accessibility than traditional banking. Today, these wallets have evolved into sophisticated payment instruments, expanding beyond payments, integral to modern finance. At the same time, they come with the promise of accelerating financial inclusion and driving the push towards a cashless society.

While the growth of wallets has been remarkable, they are evolving at a different pace across different regions. Take APAC for example. While Deloitte’s 2024 report confirms that APAC is a leader when it comes to global digital wallet spending contributing $9.8 trillion or 70% of the total, one can see variances even within the region with China and India leading the charge. Advanced payment markets like Singapore have witnessed a rise in wallet adoption but credit cards continue to be Singapore’s most used in-store payment option. Across the world, digital wallets are expected to show impressive double-digit growth in Europe (11%), the Middle East and Africa (MEA) (18%), and LATAM (23%) in the next 5 years*.

What’s driving this widespread wallet adoption?

The global transition towards wallets has been largely driven by the offer of convenience. From supermarket tills to coffee shops to websites to bill payments, digital wallets have seamlessly paved their way into the daily lives of consumers, and increasingly, even businesses. Today, a significant portion of people cannot imagine their lives without digital wallets. The convenience of making all forms of payments, particularly for younger consumers, and especially in developed economies*, has been the main draw towards digital wallets, and new research suggests that more growth is coming.

In developing countries, the rise of wallet adoption is linked not only to ease of use but also to the democratisation of financial services. Those who were once excluded from traditional banking services can now, with increased mobile penetration and access to e-wallets, make financial transactions with ease and security. TerraPay partners with some of the most popular digital wallets across Africa, including M-Pesa in Kenya and EcoCash in Zimbabwe, and we have witnessed how these digital wallets have transformed the financial landscape in the region, providing millions of people with access to financial services that were previously unavailable.

Digital wallets have been able to address the challenges related to the (typically) outdated banking infrastructure in these markets as well as the high risk associated with informal cash transactions; they become a lifeline for those engaging in commerce and migrant workers sending money across borders.

The interoperability challenge

Despite the widespread growth and popularity of digital wallets, interoperability continues to be one of the biggest hurdles for the global wallet ecosystem. Each app is often built using different technical standards and communications protocols, as a result, these systems don’t ‘speak the same language’, resulting in a lack of interconnectivity and compatibility in cross-border transactions. While wallets tend to perform better as domestic financial tools, the growing demand to go global calls for increased interoperability. The lack of interoperability takes away from one of the core benefits of wallets—convenience. Imagine a freelancer in Bangladesh juggling between multiple wallet apps to receive payments from their local and international clients. Or consumers expected to use different wallets at different merchant locations. This fragmentation leads to further complexities and can stunt the steady growth of wallets.

Interoperable digital wallets support multiple payment networks and protocols, enabling users to transact across various merchants and service providers. They seamlessly integrate with various payment methods, including cards, bank accounts, and mobile payment solutions. Keeping interoperability at the centre opens the doors to more network partnerships enabling widespread acceptance across merchants and businesses, and redefining wallet usage for cross-border transactions.

Given how critical interoperability is to mass adoption and the long-term success of digital wallets, it is vital that we work together as an industry to address it. At TerraPay, we are bridging this gap, building key collaborations with leading players in the industry to find relevant solutions. We have always been focused on developing technology that supports payment interoperability. Our recently launched Wallet Interoperability Council aims to leverage this technology to enhance interconnectivity and global money movement.

Wallet interoperability fundamentally shifts how the world of global payments operates. It is no longer an option but a necessity for the payments industry. By breaking down the barriers of fragmentation, interoperability changes the game, paving the way for a more inclusive and efficient financial ecosystem, where everyone can participate fully and benefit from the opportunities that digital finance offers.