Cash to Cashless: the rise and challenges of the Mobile Wallet

This is a follow on post to “What does Wallet mean to you?”, where I wrote about how the term “Wallet” holds different meanings to different audiences. I’ll cover four points:

1. Recap three common “Wallet Types”
2. Overview of fund flows and capabilities of “Type 2 — Electronic/Mobile Wallet”
3. What Type 2 — Electronic/Mobile Wallets have achieved
4. Reflections — monetization and web 3 intersections

1/ Recap: Three common “Wallet Types”

1. Digital Wallet: Applications that enable consumers to make contactless payments with their smartphones and other mobile devices, using digital representation of their cards. For example, Apple Pay, Google Pay.
2. Electronic Wallet/Mobile Wallet: Applications that function as a store of value for fiat funds, and enables consumers to make cashless payments (peer to peer, consumer to business, business to business). Sometimes, the app is a platform for financial services (lending, trading etc). Examples are Alipay, WeChat Pay, Gcash, Maya, Gopay.
3. Self Custodial Wallet: “Wallet” to a Web3 audience brings to mind CB Wallet, Metamask, Trust Wallet. For self custodial wallets — the wallet user owns the keys (“custodies”) and their own crypto assets.

Today, I’ll focus solely on Type 2: Electronic Wallet/Mobile Wallet, which is generally more common in markets with underbanked populations/low card penetration.

2/ Fund flows and capabilities of “Type 2”

Imagine a context where cash dominates and most of the population doesn’t have a bank account or card. Businesses are accustomed to cash, as card acceptance requires having a physical terminal and is more expensive.

Then arrives the “electronic wallet/mobile wallet”, a mobile application on a phone. Through the wallet, users can:

• Cash in: Top up the wallet with cash at convenience stores, department stores, ATMs, pawnshops etc. For example, this extensive list from Gcash.
• Use the wallet balance for a multiple payment use cases (see diagram below)
• Cash out: Withdraw cash from their wallet.

Image is my own, please do not use without written permission

To make it visual, here’s a screenshot from Gcash (66M users in the Philippines — an amazing feat).

This image belongs to Gcash

Likewise, sharing a visual of a competitor wallet — Maya — where crypto trading is also one of the many services offered.

This image belongs to Maya

3/ What the Wallets have achieved

Mobile wallets like Alipay, WechatPay, Gcash, Maya (yes, many similarities across them, as apps have learned from one another) have been impactful in moving cash payments to cashless payments and promoting financial inclusion for the unbanked. While success stories have emerged, there were substantial challenges they have had to overcome, and continue to chip away at.

To Gcash and Maya’s full credit, they are great examples of those who made considerable progress on the challenges listed below.

A) Monetization

• Customer acquisition costs: Consumer adoption is crucial and requires high marketing spend (eg. ads, $$ rewards). If consumer usage is heavily dependent on rewards vs bringing true consumer value, then the app is less sticky and viable in the longer run.
• Cash ins/Cash outs: Depending on the cost of “cash ins” (key for the consumer to start using their wallet), that can significantly affect profitability. For sustainability, ideally costs are as low as possible and shared with consumers.
• Longer term monetization: Do all roads lead to lending? Well, banks make money from financial services and perhaps mobile/electronic wallets have to figure out how to apply parts of the banking playbook.

B) Network Effects — merchant acceptance

The power of networks like Visa/Mastercard is merchant acceptance. The mobile wallet has to be accepted by merchants (online and offline), so that consumers have more reasons to use their wallet for a wide set of use cases. For example — is paying a bill easier via bank transfer or via a mobile wallet? To the extent that it’s easier and more accessible via the mobile wallet, then the consumer has a reason to use it in their everyday life (costs being roughly equal).

C) Regulation and compliance

Traction brings regulatory scrutiny and calls for consumer protection. Mobile wallets must meet compliance requirements (KYC/AML) and local regulations, like those around being a “Stored Value Facility” (SVF) and more, depending on the financial services offered [1].

4/ Some Reflections

Path to profitability — gotta make money

I fondly remember payment sales around 5+ years ago where a solid amount of inbound leads were around wallet top ups, often using cards (usually the most expensive top up mode).

Today, mobile wallets have risen and fallen. Wallets without a path to profitability struggle especially if the market has low cost instant payments networks as the viable option for C2B, P2P, B2B payments (thinking here about India based wallets vs UPI).

Web3 intersections

1. On/off ramps: Enabling mobile wallets for fiat on/off ramps (to the extent that they allow crypto purchases). Consideration: Is this a low cost, attractive payment method to truly reach more users?
2. Crypto trading: Some electronic/mobile wallet apps are “super apps” that are a full stack platform for (already) KYCed consumers, and could extend their services into crypto trading/custody. A parallel to this is a bank offering crypto trading to its customers.

Would love to hear from folks on what other intersections there might be!

[1] An example only. Regulatory lawyers would be the experts here on SVFs/applicable banking regulations across wallets.