Digital wallets represent a “significant opportunity” for consumers, the Financial Conduct Authority (FCA) and Payment Systems Regulator (PSR) revealed as they shared their findings regarding the payment software.
Digital wallets are rapidly increasing in popularity across the globe, not least in the UK. In fact, digital wallet adoption more than tripled between 2019 and 2023, with the proportion of card transactions using a digital wallet increasing from eight per cent to 29 per cent, the regulators revealed.
The proportion of consumers relying on pass-through digital wallets for most of their card transactions is also growing. In 2023, approximately 20 per cent of card users used a digital wallet for over 50 per cent of their card transactions.
In July 2024, the FCA and PSR published a “call for information” in July 2024, to understand the opportunities and risks that the digital wallets’ increasing popularity creates, by engaging with stakeholders across the payments and wider financial services landscape. Having looked into the responses, the regulatory entities published a joint statement and Feedback Statement, detailing what it heard from stakeholders, as well as its plans for the next steps.
January 2025 saw the Competition and Markets Authority (CMA) invite firms and organisations to comment on two investigations into Apple and Google‘s mobile ecosystem. The UK’s competition regulator aims to ensure effective competition in mobile ecosystems to ensure that businesses have the opportunity to innovate and deliver services and technology developments to consumers, including (but not limited to) digital wallets.
Following the joint research by the FCA and PSR, the financial regulators revealed that they agree with the scope of the proposed investigation into the tech giants, in the open letter to the CMA. The regulators hope that the CMA can take the findings into account under the Digital Markets, Competition and Consumers Act (DMCCA).
The digital wallet findings
In the summary, the FCA and PSR reveal the following findings:
Digital wallets represent a significant opportunity for innovation and growth.
The majority of stakeholders highlighted that consumers benefit from a more seamless and efficient payment journey, including enhanced authentication security measures and greater financial accessibility for underserved groups. Firms highlighted considerable scope for further innovation in digital wallets extending beyond payments into other financial services and digital identity.
Digital wallets could present a significant opportunity for non-card forms of payment as they become available, particularly for retail transactions.
Increased choice of payment methods between and within wallets has the potential to benefit consumers and merchants by increasing competition between payment systems.
Responses raised potential competition, consumer protection and operational resilience issues.
Concerns have also been raised about innovation in the supply of digital wallets and the effectiveness of the current regulatory framework.
What are the next steps?
After identifying a range of challenges and collaborating with stakeholders and other regulators, the FCA and PSA proposed a number of next steps that it hopes will support the development of a competitive digital wallets landscape in the UK.
One challenge related to the question of whether pass-through wallet providers should fall within the FCA and/or PSR’s regulatory parameters. Recognising this, the FCA plans to consider these issues as part
of its review of the Payment Services Regulations and the Electronic Money Regulations. The PSR has also noted its intention to further engage with digital wallet providers on this issue as it continues to monitor developments in this area.
Concerns also remain that competition between digital wallets is not working well. To address this, the FCA and PSR will work with the CMA as it investigates digital wallets as part of its mobile ecosystems SMS investigation using DMCCA powers.
The financial regulators said they consider that the DMCCA means that the CMA is best placed to act in this area. However, given the importance of digital wallets for competition and innovation, they plan to continually review their role in case circumstances change.
