Written by: Dylan Sekuterski
Digital wallets are becoming increasingly popular, with 4% of the global population or 3.2 billion users already using them. With an estimated 8% annual increase, 65% of the global population is predicted to use digital wallets by 2030. Moreover, digital wallets have gained a significant market share in e-commerce transactions, growing from 18% in 2016 to 49% in 2021, while credit cards, bank transfers, and cash have declined. They’ve also gained ground in offline transactions, nearly doubling from 16% in 2018 to 29% in 2021 and overtook cash as the primary means of offline transactions during the COVID pandemic in 2020.
How Digital Wallets Work
Digital wallets create closed-loop ecosystems for consumers and merchants, enabling direct transactions that bypass traditional financial institutions. By eliminating intermediaries in the payment chain, digital wallets capture more value per transaction and can share the savings with merchants and consumers. As digital wallet providers onboard millions of merchants, they can create more in-network transactions and reduce traditional payment intermediaries.
Furthermore, digital wallets are designed with security in mind and implement various measures to protect users’ payment information. Using a process called tokenization, digital wallets replace sensitive card data (primary account number, CVV, and expiration date) with a token, which is used as a reference for payments. This allows for secure transactions without exposing the original card details. Additionally, some digital wallets use two-factor authentication, biometric authentication, and fraud monitoring to enhance security.
Conclusion
The increase in digital wallet users could save nearly $50 billion in costs due to the economics associated with traditional payment transactions. As more consumers and merchants adopt digital wallets, traditional payment methods like checking accounts, credit and debit cards, and direct merchant accounts will decline. This could potentially add $450 billion to the current $1 trillion digital wallet enterprise value by 2030 as they facilitate closed-loop transactions, cutting out traditional payment intermediaries.
This insight is one piece of the Wolf series covering ARK Invest’s “Big Ideas” for 2023 — head to our table of contents to read more about the latest industry trends and updates!
