Digital wallet strategies are pitting payments against identity

Digital identity wallets are here – and so, some say, are the wallet wars, as leading tech firms jockey to win the hearts and credentials of users globally.

Others disparage the term “wallet wars,” saying it misses the point. Regardless, experts from all sides are weighing in on what digital wallets mean for the future of the internet, payments, and identity. The EUDI wallet program is bringing seismic changes to Europe. Mobile driver’s licenses (mDL) are picking up steam in the U.S.

To quote noted author, advisor and commentator on digital financial services David G.W. Birch, “digital wallets are a big deal.”

‘Wallets are about organising identity, not money’: Birch

On his Substack, Birch frames wallets as a big picture shift that goes way beyond money. “If you think that competition around digital wallets is only about selecting cards to make payments, you are seriously missing the big picture,” he writes. Ultimately, “wallets are about organising identity, not money.”

That said, payments remain the largest use case for wallets. Birch cites Worldpay’s Global Payments Report 2024, which says “digital wallets accounted for $14 trillion in the global transaction value in 2023, representing half of all online consumer spending and almost a third of consumer spending in physical locations.” Slowly, they are replacing physical wallets as the preferred method of payment for many.

As Birch sees it, the main conflict in the wallet wars is between big tech and big banks. The latter are traditionally the keepers of savings accounts, credit and other financial products. But tech players, who are by definition central to the wallet revolution, are “encroaching on financial institutions’ territory with digital wallets in the vanguard.”

In a separate piece for Forbes about digital wallets, Birch notes that Apple is driving wallet innovation with the opening up of the near-field communication (NFC) contactless interface for iPhone. The move is expected to boost competition in digital wallets, per Juniper Research, which predicts “a race for innovation within the digital wallets market.” Existing wallets will expand their capabilities, big tech wallets will become dissociated from devices (so that, for instance, Google Pay runs on iOS) and new players will enter the market.

Merchants, too, could leverage the opening of iPhone’s NFC ecosystem, which will eliminate the need to invest in new acceptance infrastructure such as QR codes at point of sale. As such, you might walk into a retail shop and have your wallet open coupons or special offers, then walk out and have your wallet deduct the appropriate amount for your purchases. AI customer assistants could make certain decisions, like whether to use cash or points for a purchase.

Birch says “creating a digital wallet, as a retailer, “opens an opportunity to build loyalty, add value to the customer, and collect valuable data directly from consumers.”

Smart wallets controlled by people give way to smarter wallets controlled by bots

Wallets, he says, are only going to get smarter, imagining “wallets with interfaces to associated intelligent agents to take care of transactions that are too boring (e.g., paying for car parking) or too baffling (e.g., deciding whether to put spare money into a tax-efficient cash savings account or one based on equities) for most of us to deal with.”

These transactions will be controlled not by people, but by bots – something that anyone planning a digital wallet strategy needs to take into account. And Birch is clear: “if you are anywhere in the payments value chain, you need a wallet strategy.”

Part of that strategy should probably also factor in communication. Birch also notes research showing that, while many people are aware of digital wallets, they also still confuse many: in a sample, “only one in 10 consumers were able to distinguish digital wallets from other types of platforms, such as digital banking apps.”

While Birch chalks this up to a need for education to improve consumers’ understanding, he neglects to distinguish between more education and better ways to communicate knowledge. His piece’s subtitle – “It used to about top of wallet, now it’s about wallet” – is a good example of phrasing that, to the vast majority of normal people, reads like a zen koan.

Key to wallets is in robust, widely established networks: Wilson

Stephen Wilson, a seasoned global policy advisor on digital identity and principal of Lockstep, says that while there is certainly shuffling going on as wallet providers and users hash out UX preferences, “the suggestion of a wallet war misses the most critical success factor for utility and interoperability, and it’s not at the wallet level!”

Writing on LinkedIn, Wilson says that to attain true interoperability of verifiable credentials, “wallets need underpinning networks to make credentials legible.”

Digital ID networks on the scale of credit card networks will be necessary for digital wallets and VCs to work how they’re intended to.

“The superpower of the payment card networks is they allow you to use a credit card anywhere on the planet, without the merchant knowing you,” Wilson writes. “More significantly, neither does the merchant need to know your bank (the issuer).”

“It’s going to be the same reality with verifiable credentials. No Relying Party will know what to do with a VC presented by a user unless prior arrangements are in place. But no one can afford to have bilateral arrangements between every RP and every issuer. Instead, VCs and digital wallets need to be supported by acceptance networks which scale globally just like the credit card networks scale.”

Payments still primary use case for most in US, Europe: PYMNTS

Regardless of your position, there is no denying that wallets have begun to enter the mainstream. Pymnts reports that, across the U.S., France and Germany, wallet use is on the rise, accounting for a growing percentage of transactions.

An intelligence report by Pymnts and Google Wallet says “digital wallets in the U.S. are commonly used for transactions,” with 48 percent of consumers using digital wallets for online shopping and 39 using them in-store.

However, “U.S. consumers are mostly using digital wallets for payments, but the range of non-financial functions, such as storing keys, event tickets or even verifying identity, has not gained traction.”

That contrasts with Europe, where Gen Z is driving non-transactional uses. In the UK, 23 percent of consumers use their digital wallets to store travel or identity-related credentials, a similar number among Gen Z users in Germany. Identity verification is a popular use case in France, but less so in Germany.

Across the board, however, shopping remains the main use case. Nearly 50 percent of German consumers used digital wallets for eCommerce transactions in the past year, and 38 percent of French consumers made online purchases with digital wallets.

Meaning that, likewise across the board, there remain untapped opportunities for wallets as a tool for ticketing, fan experience, travel, ID verification, and age assurance.

Article Topics

digital identity  |  digital payments  |  digital wallets  |  identity verification  |  verifiable credentials