Member Exclusive, Payments

Payments Briefing: How digital wallets fared over the last year

  • This week, we take a look at how digital wallets have performed among US consumers over the past year.
  • We also discuss why credit cards are earning higher satisfaction scores, but still struggling to keep competitors like BNPL, debit cards, and cash at bay.

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Payments Briefing: How digital wallets fared over the last year

Consumers in the US – as well as many countries around the world – have experienced half a year of historic inflation. This is affecting their financial well-being, slowing progress toward their financial goals, and impacting how they interact with payments providers.

According to a recent report by Morning Consult, American consumers with annual household income ranging from less than $50,000 to $100,000 are all in a worse financial position compared to a year ago due to record inflation levels.

How is this affecting consumers’ use of different payment options? The research finds that digital wallet apps such as PayPal’s Venmo and Square’s Cash App are faring well despite an overall decline in spending. Consumers continue to rely on and trust digital wallets and the brands that offer them, challenging traditional providers.

Bank branch, ATM and digital wallet use is down – but digital wallets are in the lead

Source: Morning Consult

With less discretionary income due to sustained inflation, consumers have fewer incentives to visit bank branches and ATMs, or to use a digital wallet. However, out of these three activities, digital wallets have been a consistent leader among US adults because of their growing acceptance by retailers and the convenience they offer to consumers.

Venmo and Cash App continue to grow

Brands like Venmo and Cash App had been growing consistently for years before the pandemic, but the Covid-induced acceleration in digital adoption further bolstered their usage. The above chart shows how consumer awareness of Venmo and Cash App has grown from less than 40% in Q3 2018 to over 80% in Q3 2022.

Despite the upward trend, these brands are of course not impenetrable. Big Tech offerings like Apple Pay and Google Pay have stronger awareness and usage than their fintech counterparts, underlining the threat that major tech companies could pose to payments providers.

The US is still behind other economies in digital wallet adoption

China, India and Brazil report the world’s highest digital wallet usage. Almost half (45%) of respondents in China said they use digital wallets every day.

In the US, digital wallet use has not changed drastically since July 2021. It ranks near the bottom of the surveyed countries, with just 6% of respondents saying they use a digital wallet every day.

But the overall adoption rate of digital payments in the US is high, and if other countries’ digital wallet usage trends are any indication, digital wallet adoption will grow significantly in the US in the coming years.

The Morning Consult report concludes that digital wallets are increasingly becoming a central part of consumers’ financial lives. Ease of use and high brand trust are two differentiating factors that have given digital wallets an advantage in the US market over traditional financial providers. However, there’s still much room to attract new customers and increase usage among existing ones, given the dominance of digital wallets in other major economies.

Credit cards are earning higher satisfaction scores – but still losing share of spend to competitors

2022 has been a mixed bag for credit cards, with issuers making use of the latest and greatest in technology to reach more consumers than ever before, but still struggling to keep adversaries like BNPL, debit cards, and cash at bay.

Source: J.D. Power

Recent research by J.D. Power has much to unveil about this predicament. As the image above shows, despite high satisfaction, credit cards have experienced a marked decrease in spend over the past year. This trend remains the same when you scope out and look at the big picture. In the last five years, credit cards have lost a large chunk of spend to debit cards and cash, and it isn’t immediately clear why.

John Cabell, managing director of payments intelligence at J.D. Power, hypothesizes that while a disruption in consumer spending due to the pandemic may be at play, another reason for this decrease is the rise of alternative payment methods like BNPL.

Our recent coverage unpacks the CFPB report on BNPL, but it leaves out the role this product plays in the lifecycle and value of credit cards. Over the past five years, credit cards have lost their lion’s share of spend not because of stagnancy or lack of innovation, but because of an active search for an alternative on the part of customers. Among the issuers that have lost the biggest chunk of spend, national issuers and co-branded cards top the list, losing five and six points respectively over the last year.

All of this doesn’t mean that traditional players like Bank of America or Discover aren’t pushing to meet consumers where they are. For instance, Bank of America has made a concerted effort to introduce customizable rewards and flexibility in their credit card products. “Discover and American Express have long-standing customer affinity, and they also have very strong product and interaction features. Benefits was a big area of improvement this year for brands like American Express,” said Cabell.

As issuers grow more cognizant of consumer struggles post-pandemic, many are changing their modus operandi in favor of consumers and finally shifting away from charging late fees. “Issuers are now figuring out ways to help consumers budget and manage their funds. In the financial space today, there is more of an element to be responsible with consumers and not just push products that are ripe with fees and interest rates,” said Cabell.

If known pain points within the customer experience (such as long hold times in call centers) aren’t resolved quickly, credit card issuers run the risk of pushing more customers towards alternatives. The coming months will be critical indicators of how issuers, regulators and customers alike are responding to this evolving landscape of payments.

Highlights from our recent coverage

Power of Payments Ep. 15: ‘Regulators don’t hate BNPL — they just want more consumer protection’: Citizens Pay’s Gaurav Sethi

Gaurav Sethi, chief strategy officer at Citizens Pay, joins host Ismail Umar on this week’s podcast. He talks about how being a bank-owned BNPL provider differentiates Citizens Pay from competitors, how the current macroeconomic climate is impacting BNPL firms, and what increased regulation would look like for the sector.

Tearsheet’s TPOP Guide 2022

Tearsheet hosted its first TPOP Conference to deeply discuss and network around the top payments trends, companies, and products. The TPOP Guide 2022 highlights the challenges and opportunities ahead as we move into the next generation of payments.

Unpacking the CFPB report on BNPL, in 4 charts

The number of people paying in four is growing. More customers are getting approved for BNPL loans, with a 4% increase between 2020 and 2021. However, due to practices like autopay, the risks associated with BNPL are rising too, and so is its potential to harm consumer financial health.

What we're reading

  • Marqeta, Branch and Mastercard power new Uber Pro Card (Finextra)
  • Few customers get refunds for ‘rampant’ Zelle fraud, senator’s report says (New York Times)
  • WEX launches digital wallet for B2B payments (PYMNTS)
  • Klarna cuts jobs a second time after CEO said layoffs were done (AltFi)
  • Square officially launches support for Tap to Pay on iPhone (MacRumors)
  • Amazon and Affirm bring BNPL payments to Canada (Finextra)
  • Apple Pay Later may not arrive until next year due to 'technical and engineering' setbacks (Engadget)
  • JPMorgan’s plan to kill credit cards split the bank (FT)
  • Visa Tap-to-Pay hits 1 billion transit transactions (PYMNTS)
  • Goldman Sachs partners with Modern Treasury to push embedded payments (Finextra)

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