The proliferation of smartphones and the increasing reliance on mobile technology have created a fertile environment for digital wallets and real-time payments, which are undergoing rapid evolution. This is progressively transforming the banking industry worldwide, especially in the UK, the US and European countries, driven by rising consumer demand and regulatory changes.
E-wallets, which allow consumers to store, manage and transfer their financial assets, offer alternatives for those without access to traditional banking services. Consumers are now accustomed to managing their finances online, whether that is checking balances, transferring funds, or applying for loans. This reflects a fundamental shift in consumer behaviour, where convenience and accessibility dominate. Further, the enhanced security features they offer, such as tokenisation – allowing the digital banking system to identify and process the transaction without exposing the user data – and biometric authentication – the use of unique physiological or behavioural characteristics of individuals for authentication and security purposes – have helped relieve concerns about fraud and identity theft, leading to further adoption of the tech.
A notable trend of younger generations moving towards digital wallets for everyday use has emerged, particularly in the UK and the US. According to the 2024 digital banking statistics in the UK, the number of digital-only bank account holders is higher among younger generations. More than half of Generation Z (55 percent) – the age group between 18 and 26 years old – and half of millennials (50 percent) hold at least one digital-only bank account in 2024. Meanwhile, just one in five members of the silent generation and baby boomers hold a digital-only bank account (21 percent each) and a third of Generation X (34 percent).
Just under one in five millennials and Generation Zers (18 percent) who do not currently have a digital bank account intend to open one at some point in the future, as well as 15 percent of those in Generation X.
Digital overtakes traditional
According to a Forbes Advisor survey on digital wallets which was revealed in 2023, around 53 percent of US consumers used digital wallets more often than traditional payment methods. Members of Generation Z were the most likely to adopt digital wallets as their primary payment method for shopping (91 percent) and travelling (86 percent).
The UK has seen significant strides in digital wallet adoption
In the US, technology giants like Apple, Google, and PayPal have set the stage with digital wallets that leverage the cloud to offer seamless, real-time transaction capabilities. These firms, with extensive user bases and access to the latest technological solutions, have made platforms such as Apple Pay, Google Pay, and PayPal household names, offering consumers secure and efficient payment solutions both online and in-store.
Similarly, the UK has seen significant strides in digital wallet adoption, buoyed by a flourishing fintech ecosystem and a friendly regulatory environment. Companies like Revolut, Monzo, and Wise have revolutionised the market with features such as instant notifications, budgeting tools, and competitive rates for international transfers. This recent spate of innovation can in part be attributed to the UK’s Open Banking initiative which fosters innovation and competition.
Overall, while there are similarities in the evolution of digital wallets and payments between the US and the UK, there are also differences shaped by factors such as regulation, consumer behaviour, and market dynamics.
Indeed, regulatory-wise, the UK has always been a more conducive environment for the growth of digital payments as the Financial Conduct Authority (FCA) has played a significant role in promoting competition and innovation in the financial services sector. In contrast, the regulatory landscape in the US has been more fragmented, with multiple regulatory bodies overseeing different aspects of the financial industry, which has sometimes hindered innovation.
Accelerated innovation
While the UK is not obligated to follow Europe’s banking regulations like Single Euro Payments Area (SEPA), Payment Services Directive 2 (PSD2) and Payment Services Directive 3 (PSD3), these mandates have still accelerated innovation and adoption of digital banking in the UK.
The US has not experienced the same rate of adoption of new financial capabilities as the UK, in many ways because European banking and payment regulations have not been as influential overseas. US consumers are increasingly flocking to digital banking and payments and with country-wide regulations expected this will likely accelerate in the coming years.
In this regard, global financial technology company Sopra Banking Software CEO Eric Bierry said that especially in the US, there is a large market demand for instant payments, with key players in this space including Zelle, The Clearing House’s RTP network, Visa Direct, Mastercard Send, Venmo, Paypal and Square processing more than $900bn in annual real-time transaction volume. On the other hand, in the UK, while the Faster Payments Service has been driving quick payments across many UK banks for more than 15 years, recent proposals seek to make instant payments even more secure for consumers as fraud and scams increase.
Alex Reddish, managing director of the UK fintech business Tribe Payments, highlighted that while the UK and Europe may be nearing saturation with digital banking, the evolution of the sector is far from over. “Continued innovation, regulatory developments, and shifting consumer preferences will shape the future of banking in Europe and the UK, ensuring that the industry remains dynamic and responsive to future demands,” he claimed. Reddish pointed out that on the other hand in the US, the largest financial services market in the world, some progress is likely to be much slower, although the market has always shown its ability to adapt quickly and leapfrog phases like contactless payments which the UK and Europe pioneered.
Partnerships between technology companies, financial institutions and merchants have also played a crucial role in promoting the adoption of digital wallets. “These collaborations have expanded acceptance networks, raised awareness about the benefits of mobile payments, and incentivised consumers with rewards and discounts,” Reddish added.
Security remains a top concern
Looking ahead, both the US and the UK are likely to see further innovation and growth in the digital payments space. Nevertheless, despite these advancements, challenges remain, particularly in the realms of cybersecurity and regulatory space. According to a data breach report released by IBM in 2023, cyber attacks disproportionately impact the financial services industry, which is second only to the healthcare industry in terms of cost per breach.
The regulatory landscape in the US has been more fragmented
Chris McGee, managing director of the financial services practice at global management and technology consulting firm AArete, stressed that security remains a top concern in both regions, and the need for cybersecurity remains a major trend in digital banking. “Banks are using AI to evolve digital banking in several areas, including security detection. AI can detect fraud and other potential risks faster than ever before while helping banks comply with a growing number of regulations. AI will increasingly play a key role in protecting customers’ assets and personal data and, crucially, in earning customers’ trust, especially as customers continue to explore the use of digital wallets to pay for goods and services.”
Likewise, Bierry revealed that one of the biggest challenges that both US and UK banks will face will be around generative AI. “Banks see clear business value with AI, but they nonetheless worry about how generative AI tools will affect areas like security and the banking workforce overall. Banks will need to devote time to not only onboarding AI tools themselves, but also educating teams and consumers about their impact. While banks will certainly face challenges integrating GenAI into their businesses, it also offers them an incredible opportunity,” he said.
“Regulations will pose another challenge to US and UK banks. As requirements continue to evolve and new policies come into play, banks must stay up-to-date to ensure compliance. After the failure of a series of banks last year, regulators are set to introduce several new policies this year that aim to prevent something like this from ever happening again,” Bierry added.
According to Bierry, regulators are likely to focus on policies protecting consumers and their financial data this year, especially as innovative financial products and services emerge in the era of open banking and AI.
Attractive targets
Likewise, Maureen Doyle-Spare, head of asset and wealth management and insurance at UST, a US digital transformation solutions company, highlighted that security is paramount because digital wallets contain so much sensitive financial data, which makes them very attractive targets for cyber attacks.
“Robust encryption, multi-factor authentication, and vigilant monitoring are essential for safeguarding user information. Additionally, interoperability also poses challenges, as seamless compatibility among various digital wallet platforms is crucial for enhancing the user experience. Furthermore, scalability is a pressing concern, as advanced infrastructure is needed to handle increasing transaction volumes without compromising speed or reliability,” she said.
Modernising existing and outdated banking infrastructure poses a significant hurdle for banks and fintech companies across the globe. Both markets in the US and the UK are likely to face similar challenges to reach their full digital banking potential. Aside from market differentiation difficulties due to the commoditised nature of digital banking services, neobanks will have to navigate regulatory frameworks primarily designed for traditional banks, which can be resource intensive and slow down innovation.
High customer acquisition costs and low per-customer revenue also present profitability challenges.
