The Future of Payments: Unlocking Interoperability in Closed-Loop Wallets
According to the e-wallet Market Overview by MarketResearchFuture, the global e-wallet market in 2023 is estimated at $105.5 billion. By 2032, this figure is expected to grow almost fivefold to $567.2 billion.
Many companies whose sphere of activity is connected with finances strive to occupy this promising niche. Among the popular providers of this method of electronic payments are Samsung, Google, PayPal, Amazon, Apple, and many others.
With such a variety of digital wallets on the market, their users face a significant problem: a lack of interoperability between different services. In practice, this leads to the fact that owners of different digital solutions cannot send payments to each other.
In this article, we will discuss the significance of the interoperability of e-wallets for users and how modern FinTech giants are trying to go beyond closed-loop payments.
Growing Use of Digital Wallets and the Lack of Interoperability
According to Juniper Research, a consulting firm, there were 3.4 billion digital wallet users worldwide in 2022.
According to the same source, this figure will increase to 5.2 billion users by 2026. In other words, it is assumed that more than 60% of the world’s population will use electronic means of payment.
Another indicator that shows the popularity of digital wallets is the number of transactions carried out with the help of such tools. According to Statista, 49% of all online payments in e-commerce are made through digital wallets. Analysts predict that their share will increase another 4% in 2025.
It is worth noting that the maximum demand for this payment method is in the Asia-Pacific region, while such online transactions are much less common in the Middle East and Africa. However, the growth of this indicator is predicted in all regions without exception.
With this industry trend of steady growth, the problem of interoperability in closed-loop wallets takes on serious proportions.
RNDpoint specializes in FinTech software development and, in particular, in digital wallet development. Therefore, we want to look into this problem from an expert point of view.
The Problem of Interoperability in Digital Wallets: Consequences for Users
Before describing this problem, we should give a definition of interoperability in eWallets. This term refers to the ability of different digital wallet platforms to work seamlessly with each other.
From an end-user perspective, interoperability in digital wallets is the ability for two users of different digital wallets to send or receive money without difficulty.
In today’s software market, closed-loop payment solutions – wallets that allow transactions exclusively within their own platform – are widely available.
For example, PayPal users cannot easily transfer money to Wise account, while Apple Pay wallet holders can only interact with users of the same platform.
This lack of interoperability in digital wallets leads to a fragmented ecosystem with limited flexibility and convenience.
Closed-loop mobile payments involve different apps for each electronic payment service provider. This entails installing additional software on the user’s device, creating separate accounts, and going through the verification process.
As the number of digital wallet users grows and more and more of these digital solutions emerge, the problem will only worsen. That is why major financial market players are already thinking about the future of payments and solving the problem of interoperability in closed-loop wallets.
Examples of Digital Wallet Platforms That Do Not Communicate With Each Other
To demonstrate the problem of interoperability in digital wallets, we bring to your attention several popular platforms with similar purposes and functionality, which are incompatible with each other. This incompatibility means that their users cannot transfer money to each other, which is highly inconvenient.
Example 1. Cash App and Venmo
Cash App is a platform that allows individuals and business owners to transfer money to each other using a cell phone app. It is available to users in the U.S. and the UK.
Venmo is a local P2P payment service that operates in the United States. Like CashApp, it gives users access to a mobile app that can transfer money between account holders of this platform in a few clicks.
Because of the lack of interoperability between these solutions, people who live in the same country and use the same type of apps can send money to each other only via a linked bank account. In this case, no additional software is required.
Example 2. Alipay and WeChat Pay
Alipay is a platform for digital payments that originated in China but is now gaining popularity in many countries worldwide. It allows paying bills, purchasing online, and sending funds to other system users.
WeChat Pay is another popular digital wallet service in China, used for mobile payments and online transactions.
As of 2022, these payment solutions have 1.3 billion and 900 million users, respectively. Due to the lack of interoperability, this multi-million audience cannot transfer money between Alipay and WeChat Pay accounts.
| Digital wallet | Users |
|---|---|
| Alipay | 1.3 Billion |
| WeChat Pay | 900 Million |
| Venmo | 52 Million |
| Cash App | 36 Million |
Fig. 3. The number of users of the most popular digital wallets as of 2022. Source: Fintechnews
In addition to significant inconvenience for end users, such a characteristic of financial services of this type can also negatively affect businesses.
For example, a certain percentage of customers may choose to refrain from using a platform if, due to the nature of their business, they must send regular payments to users of a competing service.
Considering all of the above, we can conclude that the race for interoperability is becoming increasingly important in the digital wallet industry.
Visa’s Partnership With PayPal and Venmo to Enable Interoperability
Visa was one of the first players in the financial market to take up the challenge and offer a solution to the lack of interoperability in closed-loop wallets. Let’s talk in detail about how they did it.
Visa+: the point of the service and how it works
Visa+ is a solution that helps make electronic transactions easier and more convenient by allowing you to transfer money between different digital platforms.
The company is launching a pilot project involving Visa’s partnership with PayPal and Venmo. In the future, the company plans to expand the list of its partners, providing opportunities for interaction with other providers. Some of them include DailyPay, TabaPay, i2c, and Western Union.
Visa’s goal is to become a link between various P2P platforms and digital wallets. It is very easy to do this with the new service. All users need to do is follow three steps:
- Set up a Visa+ payment name in your primary payment app.
- Tell your payment name to a person who needs to transfer money from a third-party wallet.
- Start receiving and sending funds from an app participating in the Visa+ infrastructure.
With the new service, users can access a seamless and interconnected system that provides simple and convenient transactions between electronic payment platforms.
Factors that will measure the success of Visa+
Let’s dwell on the benefits of interoperability in eWallets, which are available thanks to the new service from Visa.
- Convenience. Users don’t need to install additional software on their devices, go through lengthy verification processes, or remember multiple passwords for their accounts. Now, they only need the Visa+ payment name to send money to customers of other systems.
- Interoperability. The lack of interoperability in digital wallets is a global issue, demonstrated by the fact that Venmo has been under the ownership of PayPal since 2013. Despite this, before the introduction of Visa+, payments between these platforms were impossible.
- Ecosystem potential. With the new service, the participating payment instruments create a unified ecosystem where users of one wallet automatically become customers of another. In other words, there is a mutually beneficial collaboration among all Visa+ participants.
Visa’s service has tremendous potential in the online transaction sphere. Currently, analysts are assessing the likelihood of market leaders like Apple Pay or Cash App joining the infrastructure, but there is no discussion of it yet.
OpenWallet Foundation (OWF): Another Initiative for Interoperability
In addition to Visa+, there are other solutions for building interoperability between digital wallets. Let’s talk about the practice of developing software that facilitates the creation of infrastructure in digital wallets.
The OpenWallet Foundation is a consortium of companies and non-profit organizations aiming to implement software that facilitates interaction between digital wallets from different providers.
OWF enables the optimization of working with electronic wallets. They serve as a convenient way to store and manage digital currencies, but at the same time, due to the lack of interoperability, they have some functional limitations.
The foundation emphasizes the development of open-source software to make digital wallet compatibility technology accessible to a wide range of users and adaptable to most existing market solutions.
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