The variety of digital wallet options has proliferated over the past decade in step with consumers' growing use of connected devices for commerce. Wallets are pitched to shoppers as a more convenient way to pay online and for merchants the promise of improved conversion rates is a salient selling point. We'll look at how the digital wallet value proposition is resonating with the market and offer guidance on what is needed to drive uptake levels further.

The 451 Take

Digital wallets offer a panacea for widespread friction in the online checkout flow. They have demonstrated an ability to streamline the payment experience, ultimately helping to support key business outcomes such as conversion and customer loyalty. Given these benefits, the onus is on merchants and payments industry stakeholders alike to work collaboratively to drive consumer adoption further. While the current state of adoption is promising, half of consumers are not regularly using digital wallets, meaning more work is required to sweeten the case for uptake. Dispelling lingering security misconceptions and tightly integrating value-added services like rewards and offers will be essential to increasing adoption and usage levels.

Digital Wallets Show Traction Online

While the US has yet to see digital wallets displace physical cards or cash as they have in markets like China, usage is apparent across a significant swath of the population. As shown in Figure 1 below, over half of respondents to our Q3 2019 Voice of the Connected User Landscape (VoCUL) Connected Customer survey have used digital wallets more than once (either online or in-store) over the past 90 days. What's more, a healthy segment of power users has emerged, with nearly a third of respondents using digital wallets at least weekly. Among Gen Z and Millennials, the size of the power-user cohort is even more impressive, with 52% and 54%, respectively, using digital wallets at least weekly.

Admittedly, much of this activity is occurring online. We find that 'online retailers' rank as the top merchant category where consumers are using digital wallets, besting the next-closest category by more than 20 percentage points. Online checkout is where the most obvious friction exists in payments today and many consumers are gravitating toward wallets to eliminate data entry and streamline their path to purchase.

Figure 1: Digital wallets are used by a large percentage of the US population
Source: VoCUL: Connected Customer, Consumer Representative, Q3 2019

Further evidencing the prominence of digital wallets online over in-store, PayPal is far out in front as the most widely used digital wallet among those that have used one more than once over the past 90 days (see Figure 2 below). Amazon Pay and Visa Checkout – two online-only digital wallets – also rank in the top five. It's worth noting that Visa Checkout is being transitioned to a new online checkout service known as Secure Remote Commerce (SRC) beginning in Q1.

Wallet utilization rates vary by generation. While PayPal is firmly in the top position across Millennials, Gen X and Baby Boomers with at least a 30 percentage point lead, there is only a four percentage point difference between Apple Pay and PayPal use among Gen Z consumers. Retailers will want to focus integration efforts on wallets exhibiting the strongest adoption levels among their key demographics to avoid littering their checkout flow with unnecessary logos.

Figure 2: PayPal leads in digital wallet use
Source: VoCUL: Connected Customer, Consumer Representative, Q3 2019

As Figure 3 below indicates, debit cards are the most popular funding source for digital wallets, although they top credit cards by fewer than three percentage points. Linking directly to a bank account, which produces robust margins for wallets like PayPal, is the preference of little more than 1 in 10 wallet users. This funding option is not currently offered by the likes of Apple Pay and Google Pay.

Notably, the choice to use debit over credit isn't universal across demographics. Sixty-one percent of Baby Boomers using digital wallets, for instance, have a credit card set as the default payment method, compared with 23% opting for debit. Similarly, 58% of digital wallet users from $125,000+ income households opt for credit, while just 26% choose debit. Financial institutions can encourage cardholders' decision to use one card over another in a digital wallet through incentives and promotions (e.g., additional cash back, statement credit), as Chase and Citi have done.

Figure 3: Debit cards are the most popular funding source for digital wallets by a small margin
Source: VoCUL: Connected Customer, Consumer Representative, Q3 2019

Digital Wallets Drive Business Outcomes

Consumers are gravitating toward merchants – and payment options – that can best eliminate checkout friction online. In fact, more than a quarter of respondents in our Q2 VoCUL survey said they would tolerate slightly or moderately higher prices for a simple check-out procedure characterized by a 'one-click' purchase experience. Similarly, 40% said that the availability of 'fast and convenient checkout and payment options' would improve their loyalty to a specific retailer.

Most online merchants have noted the business impact of wallets, with 94% stating they believe they have had, or will have, a favorable impact on their business. This positive perception has helped to make digital wallets a more widespread option at checkout in recent years. As shown in Figure 4 below, 66% of e-commerce merchants and 65% of merchants with a native app have at least one digital wallet option integrated. Our survey revealed digital-centric merchants (50% or more of sales occurring online) exhibited the highest rates of adoption, with 70% having a wallet integrated on their e-commerce site and 71% on their mobile app. For brick-and-mortar-centric merchants (less than 25% of sales online), wallet integration drops to 54% for e-commerce sites and 50% for mobile apps.

Figure 4: Merchant digital wallet adoption is widespread
Source: US Merchant Survey (Commissioned by Discover Global Network), Q2 2019

Offering digital wallet options at checkout can translate to business results that directly lift the bottom line. When we surveyed digital commerce enablers (vendors responsible for helping merchants integrate payments into their websites and apps), more than three in five said digital wallet acceptance was helping their merchants improve checkout speed and over half said wallets were driving up customer visit frequency (see Figure 5 below). Many also pointed to the role digital wallets have played in reducing fraud/chargebacks and lifting conversions and average order values. Merchants themselves are also providing evidence of these results. HotelTonight, for instance, says Google Pay users are 65% more likely to complete the booking flow and Fancy noted that Google Pay users exhibit a 2x higher conversion rate compared with shoppers using cards.

Figure 5: Digital wallets drive business outcomes

Source: Digital Commerce Enabler Survey (Commissioned by Discover Global Network), Q1 2019

Bridging the Adoption Chasm Requires an Ecosystem-wide Approach

As displayed in Figure 6 below, a variety of tactics show promise in increasing digital wallet adoption, but none more so than security. This is somewhat perplexing, given that wallets like Apple Pay bring to the table technologies including biometrics and payment tokenization that significantly enhance their security compared with plastic cards. This signals that security misconceptions continue to run rampant and enhanced consumer education is an absolute requirement to further move the needle on adoption.

Two additional drivers rounding out the top three pertain to coupons and loyalty. To change behavior at checkout, many consumers require a value proposition that extends beyond payment. Wallets are well-suited as a vehicle that can deliver a more comprehensive commerce value proposition, yet it remains early in terms of execution. PayPal's recent $4bn acquisition of Honey, which should help to move PayPal up the funnel, looks particularly interesting in that regard. Merchants should explore opportunities with various other wallet providers to integrate targeted offers and loyalty schemes.

Figure 6: Security-centric messaging is needed to drive wallet adoption further

Source: VoCUL: Connected Customer, Consumer Representative, Q3 2019
Cam O'Shaughnessy
Associate Analyst

An Associate Analyst in 451 Research’s Customer Experience & Commerce Channel, Cam O'Shaughnessy covers the digital commerce ecosystem, including e-commerce, mobile payments and omni-channel commerce. Additionally, he contributes to the design and writing of the consumer insight-driven VoCUL (Voice of the Connected User Landscape) Digital Wallets survey product.

Jordan McKee
Research Director

Jordan McKee is a Research Director for Customer Experience & Commerce, and also leads 451 Research’s coverage of the payments ecosystem. He focuses on digital transformation across the commerce value chain, with an emphasis on the major trends impacting payment networks, issuing and acquiring banks, payment processors and point-of-sale providers.

 Csilla Zsigri
Senior Analyst - Blockchain & Distributed Databases

Csilla is a senior analyst for 451 Research’s Data, AI & Analytics channel. She currently focuses on decoding the blockchain market to help replace confusion and complexity with an examination of the technology, the competitive landscape and available solutions that are driving the market, as well as real-world use cases and deployments.

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