The Evolution of Digital Wallets and Open Banking

Innovations in Frictionless Payments and Financial Data Access

Introduction

The use of cash continues to decrease across the financial landscape of modern society; with notes and cash being a thing of the past, digital wallets and open banking continue to become the new norm. These advancements are actively changing the way customers engage with money, by making transactions seamless, accessible and allowing data driven customization. This article describes the development of digital wallets and open banking, reflects on key innovations such as frictionless payments and access to data, discusses their implications in terms of financial inclusion and competitiveness in the market, and looks ahead to the future trends shaping the financial ecosystem.

Core Innovations

Frictionless Payments

At the center of this digital revolution is the idea of frictionless payments (payments which are extremely easy to perform, without any ‘friction’).

Frictionless payments have enabled consumers to pay with minimal effort or disruption. Likewise, various other technologies, including near-field communication (NFC), radio frequency identification (RFID), and biometric identification, are allowing customers to transact with a tap, glance or a click, resulting in fast, effortless and intuitive transactions.

For instance, digital wallets by big players, like Apple Pay and Google Pay, enable payments using NFC cryptocurrencies that support contactless payments and speed up in-store transactions.

The shift to frictionless payments skyrocketed during the COVID-19 pandemic, with consumers seeking a contactless and hygienic way to make payments, and it has been successfully adopted widely by consumers and merchants across the world since then.

Open Banking Platforms

Open banking is another disruptive innovation which allows third parties to have safe and regulated access to consumers' financial data via APIs (application programming interfaces) with proper consent of the customer. This opens up the financial ecosystem to innovation and competition, by allowing FinTechs( https://www.rootsanalysis.com/fintech-market )and banks to collaborate on financial solutions that go beyond traditional banking.

For instance, HSBC’s ‘Get Connected’ app presents users with a view of all their bank accounts, whether in the same bank or in different ones, in one place. This not only makes it easier for the users to keep track of their assets and have a better understanding of their money but also creates a scope for HSBC to attract more customers from other providers.

Integration and Implications

Data Access

Open banking’s secure data sharing approach is creating a new data-driven product potential. With secure sharing of customer data to banks and fintech companies, open banking creates streamlined customer onboarding, automated KYC checks, and faster credit checks (which also consider payments like utilities and rents).

This data is very intricately collected and assessed, enabling informed lending, highly customized investment guidance, proper fraud detection powered by AI and machine learning. This is allowing customers to have more accurate and personalized financial services, while also maintaining full control over their data privacy.

Financial Inclusion and Market Competition

One of the greatest implications of open banking is the push for financial inclusion. The alternative data and elimination of manual processes in open banking allow for the ability to eliminate barriers for previously underserved people, such as those who do not have a credit profile to qualify for loans, and a banking relationship.

Over the decade, there has been a rapid growth in the ‘breadth’ of financial services, i.e. the increase in number of people with active bank accounts. This growth is largely fueled by the wide adoption of mobile wallets and the digitization of G2P systems globally, providing banking access to around 76% of people worldwide.

This also aligns with the sustainable development goals seen worldwide to reduce poverty and inequality through broader financial participation. Plus, open banking competition creates a competitive environment for fintech companies who challenge traditional banks, by providing improved service quality and reducing consumer costs. In the same vein, digital wallets, increasingly interwoven with open banking capabilities, are making payments more accessible for a broader demographic including everything from a peer-to-peer transaction to merchant payments.

Future Trends

Going forward, the future of digital wallets and open banking can be expected to further blur the lines between transactions, identity verifications, and financial management. Following are a few emerging trends:

Conclusion

Digital wallets and open banking have progressed from an emerging technology to be the building blocks of a new financial system. They are not only changing the way the global economy makes payments, but they are also expanding access and enabling competition in the financial space. As technology continues to develop in relevant ways, these trends will change the future of financial capital management and make transferring money easier, smarter, and more personalized.

Author(s): Ronit Sharma, Anmol Bali

Ronit Sharma is an accomplished business research and competitive intelligence professional with over eight years of experience in the market research industry. As a team leader at Roots Analysis, he has authored numerous multidisciplinary market research reports, and led the efforts on several bespoken consulting assignments, providing valuable insights into the latest innovations across different industries. Ronit's exceptional analytical skills and strategic thinking in the field is driving force behind firm's intellectual capital, empowering clients to make informed decisions in the dynamic landscape. With a passion for staying at the forefront of industry advancements, Ronit specializes in identifying emerging opportunities for various stakeholders, leveraging his deep understanding of market trends and technological developments.

Anmol Bali is a content writer at Roots Analysis, specializing in creating comprehensive market report descriptions and articles across sectors. With extensive experience in content writing, she transforms complex data into clear and easy-to-interpret information. Passionate about research writing and communication, she contributes significantly to the firm’s content and marketing departments.