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E-Money Wallets

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In recent years, digital wallets have become more popular, and the
industry landscape continues to evolve quickly. Digital wallets are usually
smartphone apps that allow customers to open accounts. Customers fund
their wallets using a credit or debit card, a bank payment, or by paying
physical cash to an agent, usually in a convenience store. Once money has
physical cash to an agent, usually in a convenience store. Once money has
been transferred from the customer to the wallet operator, the customer
sees a balance in their wallet, which can then be used. Depending on the
services provided by the wallet, it can be used to temporarily store value
or to send money to other customers, pay bills, buy tickets, shop at
various merchants, pay for taxis, pay for groceries at the checkout, and
even pay speeding tickets. Many providers offer a ‘virtual’ credit or debit
card number that is connected to the customer’s digital wallet. This
allows customers who may not have otherwise be able to get a credit or
debit card to make payments anywhere that those cards are accepted, and
sometimes even make ATM cash withdrawals.
PayPal, Venmo (owned by PayPal), and Starbucks are popular digital
wallets in the USA. In India, Paytm and Oxigen are the leading providers.
GoPay, owned by Indonesian ridesharing app GoJek, is popular in
Indonesia and is gaining traction in the rest of Southeast Asia, where the
dominant ridesharing app Grab also has a wallet. In China, Alipay and
WeChat Pay are used extensively to store value and make payments. The
rate of customer growth of these wallets is astonishing: Alipay alone has
over 500 million registered users and 100 million daily active users.
Early wallets were provided by telecommunications companies (telcos),
who were already dealing in pre-paid airtime, a different type of digital
currency. It was a small step to allow customers to move money into a
wallet denominated in fiat currency rather than in ‘minutes,’ especially as
the wallet would exist on a device that the customer had likely bought
from the telco (do you remember when handsets were branded with the
telco’s logo?). However, telcos were unable to maintain their early lead
due to their ‘walled-garden’ approach, so this first wave of digital wallets
was not, on the whole, successful.
Today’s wallets have either developed from private companies who could
Today’s wallets have either developed from private companies who could
navigate the airtime-to-wallet path well (PayTM), or ridesharing
companies who, due to their popularity, have gigantic scale (Grab,
GoJek), or companies that started as social messaging apps and added
payments (WeChat).
These businesses operate under different licences in different
jurisdictions. The names of the regulatory licences used by these wallet
businesses differ by jurisdiction. Examples include: e-Money; Money
Transmitter; Stored Value Card; Remittance; Wallet; Money Transfer,
and so on. These licences tend to be easier to obtain than banking
licences, but the permitted activities are more limited. In most
jurisdictions, licensees are usually forbidden to write loans or create
money, a privilege granted to lenders and banks. Every dollar or unit of
currency that a customer sees in their app must be backed by an
equivalent dollar in the company’s bank account.
E-Money wallets are easy to understand from a payments perspective.
Each operator has a bank account that is ring-fenced to contain only
customer money. This account must not be used for company operations
such as receiving income or paying salaries. When customers fund their
wallets, transfers are made into this bank account. When customers of
one operator move money between each other, there is no change to the
money in the bank account, but the wallet operator records a debit to one
customer and a credit to another—a -$10/+$10 in its books. If a customer
withdraws money from their account, then the wallet operator makes a
corresponding bank transfer to the customer’s bank account. Customers
are not limited to individuals. Merchants, minicab drivers, utilities
companies, and public-sector entities are often customers of wallets, and
wallets are becoming a convenient and common way to pay bills in some
The rise of wallets, due in part to their focus on delivering a superior user
The rise of wallets, due in part to their focus on delivering a superior user
experience, has caused some concern from banks. In some jurisdictions
banks are losing relevance with their customers and losing data and
revenue from payments. Wallets are increasingly sitting between the
customers and their respective banks.
In Europe, one of the most successful ‘challenger banks,’ Revolut, uses an
e-money wallet licence, so is not technically a bank. Despite this, it offers
a full suite of payments, savings, insurance, pensions, loans and
investments. Revolut is the customer-facing front-end through which
licensed providers offer their services. This dynamic raises interesting
questions as to the future of licensed banks.
Banks need to make a tough decision: They should either try to re-engage
with their customers and become more relevant by providing better user
experiences, or they should focus on becoming extremely efficient
financial pipes in the background. Both models are viable if executed

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