Digital wallets are emerging as a disruptive force, with the potential to change the way businesses engage with their customers.

According to analysts, these digital payment platforms not only streamline transactions but also open up an array of opportunities to organisations trying to out-innovate their competitors.

They warn that banks and businesses must be mindful of interoperability issues and the potential of vendor lock-in if they want to benefit from the impending market consolidation.

Digital wallets are experiencing significant growth. Worldpay Global Payments Report 2024, predicts that by 2027, digital wallets would account for 61% of ecommerce payments and 46% of point-of-sale payments worldwide.

“Digital wallets offer a seamless, convenient way to manage consumers’ finances, store their identification, and make payments with a simple tap or click. This level of integration and accessibility is particularly appealing in emerging markets, where traditional banking services have often fallen short in reaching underserved populations and are viewed as expensive," says Pieter De Wet, business development lead at FutureBank.

He adds: “For businesses, the integration of digital wallets presents a unique opportunity to enhance customer engagement, drive loyalty, and unlock new revenue streams. By linking their services to these digital wallets, banks and retailers can tap into a wealth of customer data, enabling them to develop personalised offerings and targeted marketing campaigns.”

Sergio Barbosa, CIO of enterprise software development house, Global Kinetic, and CEO of its open banking platform, FutureBank, sees opportunities when wallets open up.

He describes one of the most important shifts in the mobile wallet environment as the proliferation of closed-loop wallets, which are tightly connected with specific use cases like transportation or reward programmes.

Barbosa comments: “Closed-loop wallets, like public transport cards, have wide adoption, but money in the wallet is trapped. The true potential lies in the ability to ‘open up’ these closed-loop wallets, allowing users to leverage their stored value beyond the initial use case.

“By integrating closed-loop wallets with open-loop payment networks like Visa and Mastercard, organisations can unlock a new revenue stream through interchange fees, while also providing customers with greater flexibility and convenience.”

De Wet goes on to warn banks, "If you can't beat them."

He argues that banks have traditionally viewed digital wallets with suspicion.

He points out that traditional banking models rely significantly on interchange fees earned by card-based transactions, but digital wallets, particularly closed-loop solutions, may bypass these fees, posing a direct threat to a significant revenue stream for banks.

“Rather than fighting it, banks should be finding ways to participate in the very big upside wallets offer. What’s more, the entry of non-traditional players, such as tech companies and retailers, into the mobile wallet space can introduce new competitive dynamics that banks must be ready for.

“However, ensuring compliance and protecting customer information can be a complex and costly endeavour. The integration of sensitive personal and financial data within mobile wallets also raises significant regulatory and security challenges that banks must navigate,” De Wet cautions.

According to the two industry experts, the number of wallets in the market is increasing tremendously, but FutureBank's leadership believes this is unsustainable and that consolidation will happen as a result.

However, they warn that the approach "will undoubtedly be hindered by the interoperability challenge."

“The wallets have to either consolidate commercially, or there needs to be a technology solution. The schemes aren’t going to do point-to-point integration with every wallet offering. There will need to be consolidation around the payment rails and tech infrastructure for market consolidation to really work. Unfortunately, interoperability is a major challenge at the moment,” Barbosa shares.