Call for Standardizing Digital Payments
Digital wallets have become increasingly popular over the years, with Venmo, Stripe, and Apple’s digital-first card leading the charge. The trend has accelerated over the last year as people want more touchless experiences. According to Square, the number of cashless businesses went from 8% to over 30% in the first 54 days of COVID in 2020. But the current breed of apps falls short on interoperability, and there are opportunities for real disruption in this market.
Digital Wallets: Digital Wallets serve two primary purposes. First, to make payments by holding your phone (or watch) close to the point of sales device during checkout in stores. Second, to transfer money between people efficiently and cheaply. For example, “just Venmo me” has become a catchphrase with millennials and Gen Z.
But “just Venmo me” also reflects the lack of interoperability between the many digital wallets and money transfer apps. Venmo, Stripe, and Cash (by Square) are all popular apps, but they work only for users who use the same service or within their walled gardens. For example, if you use Venmo, it is difficult to exchange money with your friends on Stripe or Cash, and vice versa. As an analogy, imagine if a T-Mobile user could only call or text others on T-Mobile and no one else. Mobile phones wouldn’t be as useful for communication anymore. Similarly, the current breed of digital wallets is not very useful, and it is ripe for disruption.
Why Digital Wallets matter?
Mobile wallets are essential to get right, not because it makes buying the soy-latte more convenient at Starbucks or sharing the lunch tab with your friends, but because digital wallets can have a positive social impact. Several non-profits like CGAP have published reports about how digital wallets can empower women in lower-income segments and lift economically ignored people out of poverty. Women in developing nations can manage their money independently and are more likely to succeed in business if they have access to digital payment systems.
“digital wallets can empower women in lower-income segments and lift economically ignored people out of poverty”
What is the problem?
Here is an example of how convoluted it is to transfer money between Venmo and Cash App, and most apps are equally disconnected. These payment solutions don’t have a standardized interface or security model for users to log in, making it hard to integrate them. If users cannot exchange money freely, then the user experience suffers. The usefulness of digital wallets decreases, and the promise of giving millions the economic freedom remains a dream. The solution providers (Venmo, Stripe, etc.) perceive a competitive advantage by locking in users on their platform, but this is short-sighted. Eventually, someone will disrupt them.
What is the solution?
Standardizing the interfaces and the security model is the key
Standardizing the interfaces and the security model is the key to addressing this challenge. A good framework is Universal Payment Interface (UPI) developed in India. UPI is a standard interface and a standardized security model implemented for digital wallets in India, and there is regulatory involvement, ensuring the long-term viability of a mobile-based digital wallet system. Imagine if there was no standard like ACH and routing numbers. We wouldn’t be able to transact between banks. Similarly, in the absence of a standard, the new age money transfer apps will live only in their silo or walled gardens till they are disrupted.
If app-based wallets and money transfer services were to succeed, then the apps have to be interoperable. If the digital wallet solutions stay stuck in their walled garden approach, either a new service will emerge that integrates them, relegating the apps as a backend, or a new player with an open standard will disrupt the current infant digital wallet market.
In conclusion, digital wallets have the potential to change how we all transact, send and receive money. Not only making it convenient for the consumers but also economically liberating millions. But the digital wallet solutions have created their walled gardens instead of being interoperable. There are no standards in place, and the consumers suffer as a result — solutions like UPI that can serve as a model and roadmap for this industry.
