Digital Wallets: accessories or innovation

Wallets, purses, and handbags, have been female accessories and there is no sign of change on the horizon. Physical procession of IDs, credit cards, and cash, has been centralized in these accessories for ages. Men have been resisting the wrappers and filling front, back pockets of trousers or inside pockets of jackets. There is no adult that hasn’t been tormented by a misplaced, forgotten, or stolen “pack of personal” stuff (IDs, plastic, cash). Being able to take care of these possessions is a sign of maturity that any parent trains their teenager and delegates when it seems kind of safe.

The 24/7 mobile world seems to have moved part of the “pack of personal” stuff (IDs, plastic, cash) onto our smartphones. Digital wallets from Google, Apple, M-Pesa, and the likes are gaining traction and offering consumer banking kind of conveniences instead of cash and/or plastic. This is no shortage of mobile digital wallets even though end-users don’t seem to be spreading the word. I have yet to meet someone that looks at me in the eye and says “You cannot not have a mobile digital wallet! How can you live without that kind of accessory?”.

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Some are counting on the fact that they are centralizing the multiple credit cards or store cards for us. Others are marketing loyalty programs either from our banking service providers or credit card providers or e-commerce stores. More recently, mobile digital wallets that aggregate and exchange value across various loyalty programs market themselves as creating more value with such interoperability.

All these kinds of Digital wallets are simply a digital interface to access centrally managed accounts through a mobile phone. There is no genuine innovation in these kinds of services since security issues inherent to centrally managed accounts remain and the cyber vulnerability of such third-party trust mechanism is not mitigated. The costs that these third-parties incur in order to handle the promises of maintaining deposits and accounts, keep increasing.

True wallets are those that enable each of us to hold bearer assets (like cash or cryptoassets) without needing a central third party to hold and possess these assets, and at the same time be able to transact with these. The true innovation here is removing institutional risk.

The finance future that is being built right now is offering the ability to hold any digital bearer instrument directly.

A user’s wallet will be able to hold a variety of financial instruments; cash, equity in a company, commodities, or even non-monetary instruments such as identification documents, school records, and driver’s licenses.

This world is the one that Monetas, Lykke, Jaxx, Shapeshift are shaping up. Their wallets aren’t just an interface to a bank. Their wallets are not just another account with an institutional provider. They aim to offer control directly to us and we can choose to trust our smartphone, our hardware wallets (Trezor, Ledger etc), or our hard copies etc.

Once they manage to scale, they will become the darlings of the regulators because who doesn’t dream of a world with reduced cyber institutional risk. The world of this next decade, will get rid of the need for reconciliation between financial service providers, a complex, and expensive process.

Fintech innovation started as a war between start-ups and financial institutions. This culture is clearly not the flavor of the day anymore.

Today we are seeing the emergence of another type of race. Will it be some branch of AI that solves the complex problems around legacy financial processes (like reconciliation between financial providers or vulnerabilities of accounts etc)? Or will it be cryptography that replaces centrally managed processes all the way from central banks to financial service providers?

We will be watching the number of genuine Digital wallets (not the interfaces to centralized accounts) as it rises. The size and the activity in these wallets are the basic indicators to monitor at this stage of innovation.

Efi Pylarinou is a Fintech thought-leader, consultant, and investor. 

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2 comments

  1. Great post Efi. I think you are right that there is a world of difference between a wallet that is a front end to the incumbent credit card networks and something that removes institutional risk and thus reduces cyber risk and systemic risk. It will be interesting to see how the world of open cyber wallets (like Monetas, Lykke, Jaxx, Shapeshift) merges with simple but closed cash only wallets with massive adoption such as Mpesa and Paytm. This is where I think we have to see on-chain (high value) merge with off-chain (low value) via technologies such as Sidechains and payment channels (Lightning Network, Raiden).

    Like

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