Power of Payments Ep. 16: Digital wallets, credit cards vs competitors, and Visa’s interest in the creator economy

Welcome back to the Power of Payments podcast. I’m your host Ismail Umar, and in today’s episode, we will discuss how digital wallets have performed in the US over the past year, why credit cards are struggling to fight off competitors like BNPL and debit cards, and Visa’s growing interest in the global creator economy.

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The following excerpts were edited for clarity.

How digital wallets fared over the last year

Let’s kick off today’s discussion by looking at how digital wallets have performed among US consumers over the past year.

Consumers in the US – as well as many countries around the world – have experienced half a year of historic inflation. This has affected their financial well-being, slowed progress toward their financial goals, and impacted 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.

An interesting question to ask here is, how is this affecting consumers’ use of different payment methods? 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.

With less discretionary income due to sustained inflation, consumers have fewer incentives to visit bank branches and ATMs, or to use a digital wallet. Over the past year, consumers’ use of bank branches, ATMs and digital wallets has gone down. 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.

Brands like Venmo and Cash App had been growing consistently for years before the pandemic, but the Covid-induced growth in digital adoption further bolstered their usage. The research found that consumer awareness of Venmo and Cash App has grown from less than 40% in Q3 2018 to over 80% in Q3 of this year.

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, which underlines the potential threat that major tech companies could pose to payments providers.

When it comes to global digital wallet adoption, the US still lags behind other major economies.China, India, and Brazil report the world’s highest digital wallet usage. Almost half of the 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’ 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 new technologies to reach more consumers than ever before, but still struggling to hold back the growing competition in consumer payments.

Recent research by J.D. Power finds that even though consumer satisfaction with credit cards increased in the last year, their overall share of spend fell from 47% in 2021 to 42% in 2022. 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’s not immediately clear why.

John Cabell, managing director of payments intelligence at J.D. Power, believes 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.

Over the past five years, credit cards seem to have lost some of their share of spend not because of stagnancy or a 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.

A recent Marqeta report also found that consumers are struggling more with meeting the minimum payments on their credit cards than last year, up globally from 27% in 2021 to 37% in 2022. The situation was much worse for US respondents, 55% of whom had trouble meeting minimum payments.

With high inflation and rising interest rates, credit card use is weighing on people. This has forced more than half (53%) of global consumers – including 65% of millennials – to delay a major purchase on credit cards.

Many of these consumers are increasingly turning to BNPL payments because of their many perceived benefits, which include ease of use, interest-free payments, helping new borrowers build a credit score, and insight into spending to help consumers navigate rising prices.

Two-thirds of people globally used a BNPL service to make a purchase this year, up from 51% in 2021. And in the US, the number jumped from 47% last year to 67% this year. More than one in three people say they used BNPL more than credit cards in 2022.

All of this doesn’t mean that traditional players in the industry like Bank of America or Discover are not pushing to meet consumers where they are. For example, Bank of America has made a concerted effort to introduce customizable rewards and flexibility in their credit card products. J.D. Power’s Cabell says 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 Amex.

As issuers grow more cognizant of consumer struggles post-pandemic, many are changing their approach 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. Cabell adds that in today’s financial space, there is more of an element to be responsible with consumers and not just push products that are ripe with high fees and interest rates.

Marqeta’s research shows that the most attractive benefits of credit cards include convenience (39%), rewards (38%), fraud protection (35%), and the ability to pay off over time (31%).

Although there are many types of credit cards available, cash-back credit cards are a favorite among 59% of US consumers, making them by far the most popular card option.

If credit card providers want to maintain their market dominance, they would need to focus on maximizing these strengths, while at the same time modernizing their customer satisfaction strategies.

If consumers’ pain points are not identified and resolved quickly enough, 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 rapidly changing landscape of payments.

Visa’s growing interest in the creator economy

Last week, Visa rolled out a new program targeting the creator economy. The Visa Ready Creator Commerce Program, as it’s called, is a global initiative for Visa’s platform partners to help them embed financial tools that creators can use to grow their business.

The global initiative will help creator-centric platforms – such as social commerce and video gaming companies – to offer solutions to boost their offerings to creators, such as faster payouts, tipping, donations, and subscriptions.

The creator economy is one of the fastest-growing categories of small business, with more than 50 million artists, musicians and creators publishing content as a full- or part-time source of income. Social commerce, which includes creator-driven work, is expected to become a $1.2 trillion industry by 2025.

Visa says it wants to utilize the scale and reach of its network to provide a boost to the creator economy. The firm says that with this program, it’s building a connective layer that brings together platforms and tech enablers to deliver financial tools for the creator community.

Cash flow is a persistent challenge for owners of small businesses. Creators need to move capital quickly to build momentum and gain a following. 69% of creators surveyed by Visa say that waiting for payouts slows their momentum, and 88% say they would engage more with a platform that offers instant payouts.

Immediate access to earnings can help creators capitalize on opportunities for advertising and partnerships, which can facilitate the growth of their business. Visa’s new program would allow creators to connect to Visa Direct, which enables them to access their funds in near-real time.

Qualifying platforms can also enable tipping and subscriptions through the program, and unlock new income streams for creators globally.

In order to implement these solutions and partnerships, Visa is building creator commerce solutions with companies like Marqeta, Linktree, Rutter, and SamCart.

Visa’s new program expands on its prior engagement with the creator ecosystem. Earlier this year, the firm launched the Visa Creator Program, a one-year program that brings together a global cohort of creators and entrepreneurs involved in digital art, music, fashion, and film, who are interested in engaging with NFTs and blockchain technology.

Visa says the Creator Program is part of its ongoing efforts to digitally enable small and micro businesses to gain greater access to funding, resources, and expertise.

It’s also a way for the firm to build out its crypto strategy. Cuy Sheffield, head of crypto at Visa, said that the firm can use the program to learn how it can develop NFT commerce products, and position itself to support creators using NFTs to reach new audiences, products, and services.