In the broadest terms, digital wallets house items that carry monetary value. It can be tickets to a football game, rewards from a local grocer, or funds sent from a friend after a dinner out.
Propelled by ease of use and more plentiful payment options, digital wallets are expected to account for $12 trillion in spending by 2026. Digital non-network payment options appeal to Generations X, Y & Z, with 80 percent of Gen Z consumers using digital wallets. As the use of digital wallets increases, so do the applications and functionality of these wallets.
We now see wallet use extending far beyond simply holding tickets or short-term storage of funds. Savvy consumers take advantage of merchant offers with wallets to manage cashback, discounts, and other loyalty rewards. Consumers benefit from ease of use, safety & security, and rewards to drive more wallet use, but what’s in it for the business?
Businesses offering a stored wallet benefit from three primary drivers:
1. Decrease in payment fees
Reduced transaction costs
Consumers can add funds to the wallet for future purchases. This is a simple model, where incremental funds are added periodically for regular or expected purchases. While most are familiar with the Starbucks example, there are broad — and appealing — applications for grocers and quick service restaurants (QSRs), where consumers tend to be loyal with regular visits, and will also reap rewards for frequent purchases.
Businesses offering these stored-value wallets reduce network fees as there are fewer transactions, each with larger amounts. For example, spending $15 using a network credit card in four visits accumulates four transaction fees. In contrast, one pre-funded deposit for the same total, $60, will accrue only one transaction cost.
Bypass interchange
Allowing customers to load funds via alternative payment methods reduces network fees to near zero. Funding via ACH (bank transfer) or direct deposit removes network dependency, while guaranteeing future revenue. The stored value wallet can be funded via a portion of direct deposit, or a simple bank transfer. This is especially relevant for grocers with known weekly and monthly spending. Consumers have the same seamless load funds capability via an existing app. The savings from network interchange can be used to provide an additional incentive for non-network funding and fund enticing rewards.
2. Increased app engagement
Consumers using an app to pre-pay for purchases, place orders online, or simply to check rewards balances will use the app more frequently. Top-tier loyal customers will take advantage of promotions and offers, and can be especially motivated by gamifying the experience. For example: Earn 100 points by the end of the month to unlock an additional 5 percent off your next purchase. Or, at a new reward tier, access new items before they’re released.
3. Increase in revenue
Citing a PYMNTS and AWS survey, digital wallets promote more revenue per ticket. The boost was strongest for restaurant sales: Digital wallet transactions were 33 percent higher than non-wallet sales. Retail had a 17 percent increase in revenue from wallet users, and digital wallet grocery sales were 4 percent higher. Coupled with the payments fee savings, digital wallets drive both top-line revenue and payments cost savings.
Bonus: Guaranteed revenue (and yield)
When customers pre-fund closed-loop wallets (spending only at the issuing merchant), businesses lock-in guaranteed revenue for future purchases. Additionally, as purchases are made via the wallet, spending and buying patterns are immediately accessible, providing ample first-party data for individual level offer personalization.
Unspent funds in consumer wallets can earn yield as a new revenue source, contributing to the overall program value — at no cost to the consumer.
Offer more and stay focused on core business
The most successful programs are those that create value on both sides of the equation: For the customer and for the business. Finding these opportunities means leaning into consumer adoption of alternative payments and delivering a payments experience that rewards customers while bringing new revenue and cost savings to the business.
If you’re interested in taking the next step in embedded finance, read this article: 5 Essentials for offering financial products. Or, reach out to our team, we’re always happy to talk shop(ping).
