Wallet Wars or Collaborative Wallet Ecosystems?

Making digital wallets an opportunity to strengthen your business relationships

Thanks to the sponsorship of MATTR, in the past months, we were able to dig into the heated digital wallet market, and do some deep thinking around how to proceed in what has been foreshadowed to be a battleground for many.

We started the project reviewing existing market information and analysis of digital wallets and published an Interviews Summary Report of aggregated input from six market players and industry experts covering the following four themes:

• Definition of Digital Wallets
• Digital Wallets in the Ideal World
• Current Market Activities and Potential Evolution
• Recommendations for Organizations Forming Digital Wallet Strategies

In this final report, we are going to share our own reflections on the materials reviewed and conversations had.

As we’ve worked with customers and their wallet users, we’ve seen first-hand how important it is for users to trust where their digital wallets and credentials are coming from, and shared some of our own experiences along the way. While building digital trust has its challenges, we’ve seen many customers successfully lean on their existing brand trust and expert technology partners to create wallet solutions that scale. We are excited to see that the independent study Kaliya and Lucy did reached similar conclusions as well as drew new insights from those working in a different capacity in the industry from us. We hope you will enjoy reading and learning from the work as much as we do.

Luke McIntyre, Chief Product Officer at MATTR

Are Wallet Wars Really Necessary?

For those who have been following the market movements of digital wallets and are pondering your own wallet strategy, the wallet wars shouldn’t be an unfamiliar topic. It has been a heated one since the emergence of payment wallets. As our lives have grown exponentially more digital since 2020, wallet wars seem inevitable due to the expanded responsibilities of digital wallets for things beyond payments and the increasing importance for businesses to establish and maintain digital presence and relevance.

However, what are we really battling for? As pointed out by John Phillips and Jo Spencer from Sezoo, who we interviewed for this project,

“People thought that wallets were important and then changed their mind to think they weren’t important. Now they think that wallets are back in vogue again. Some technology service providers who took their foot off the gas in terms of wallets now become more interested or even primarily focus on wallet capabilities (more than the whole ecosystem).”

It feels like many are fearing missing out on a great opportunity that is still yet to be articulated. So let’s try to articulate it.

Trust — The One Difference That Matters Most

Physical wallets are a common reference and comparison when discussing digital wallets. Through our interviews, we identified nine differences between the two. We believe that the fundamental difference that matters most when it comes to how service providers think about digital wallets (for individuals/persons) is trust.

Trust. “In the physical world, wallets are not part of the trust question.” Physical wallets are very tangible; you only have to trust that things won’t fall out of them. Other than potential counterfeits, there is not much hidden beyond what users’ eyes can see for them to have trust issues with. What goes into a physical wallet is considered separate from the wallet itself. However, digital wallets for users are primarily the application interfaces they directly engage with, web or mobile. Some of them are consumer applications, with embedded wallet functionalities (customers may not even know there is a wallet behind it) while others are purely wallet applications, such as Apple/Google wallets and Google/Microsoft Authenticators. Users of digital wallets, embedded or not, hardly know what is actually going on behind the scenes that enable them to show a driver’s license or pay for a service. This means users’ ability to choose good digital wallets for themselves are much lower in the digital world (especially when they don’t even know they are using a wallet), and very likely they are going to choose those offering the most convenience or by entities they already have trusted relationships with. This started to become a problem when cybersecurity vulnerabilities and data breaches became prevalent among trusted organizations handling important aspects of our lives, such as financial transactions and healthcare information. Customers, if they were not before, are now asking questions about their data and what is being done with that data.

Another type of trust question consumers ask is who they should hold accountable if something goes wrong. In the physical world, if someone loses a credit card from a wallet that has a loose cardholder, it is obvious that the issuing bank of the card is not to be blamed. However, if a bank issues a credit card to a customer’s digital wallet and the card information is found stolen later, can the issuing bank confidently say it is none of their business without an investigation? Even if card information and authentication processes are more often scammed at the point of sale (verification) at a merchant, the bank (issuer) will likely need to assume some responsibilities and suffer reputation damage as a result. This is only one of those examples where the banks become a part of a multi-part trust question when their customers start using digital wallets to interact with them.

Digital Wallets Are About Value Creation Through Trusted Relationships

The trust question implies that, as opposed to physical wallets, digital wallets are going to play an important role in an organization’s relationships and interactions with their customers. Many of these organizations are not new; they have established relationships with their customers, likely through various channels, so the consumer applications that leverage digital wallets will just be another channel. Then the questions for these organizations become:

1. Do you need a digital wallet for this channel? What kind of wallet?
2. What exactly do you need it for? What value will it create for your business/organization?
3. How to develop and maintain the wallet to achieve your goals? Or do you even need to develop or maintain one by yourself?

For new businesses that are about to start building relationships and interacting with customers digitally, the questions are similar. Digital wallets are most likely going to be a part of their customer channel strategy. They will need to focus on the actual value creation and relationship building that can lead them to success. This may involve competing with incumbents and convincing their customers to come to the new businesses and use their wallets, but all in all, the new businesses are not trying to outperform competitors with their capabilities of building digital wallets but their skills to create value by developing strong and trusted relationships across appropriate channels with their customers.

We are going to have organizations who primarily focus on developing wallet infrastructure and solutions. These organizations will need to answer a different set of questions but their offerings are driven by those needing digital wallets for their customer channels. Some organizations, such as government agencies, may need to play multiple roles — they develop and offer digital wallets as a new channel enabler for public services while providing them as a piece of critical digital infrastructure for broader use by private sector organizations. Regardless, the question will come down to if the wallets are effective in helping an organization build the right relationships and create real value.

Breaking Down the Roles in the Digital Wallet Market

We believe that by answering the above-mentioned questions many organizations may end up with the conclusion that they don’t need to develop a digital wallet from scratch or they may not need to build a wallet at all. But let’s take a closer look at the six main roles (not mutually exclusive) an organization may take on from a technical development perspective to help you answer the third question better:

1. Standards Contributor: Entities that initiate and/or contribute to the development of open and industry standards for digital wallets and related standards — they collaborate and fight at the same time. This could be any type of organization, but particularly a smaller group of entities wanting to actively shape the technology landscape of digital wallets and obtain early competitive advantage in the market or even market dominance. Being a standard contributor takes a lot of expertise and resources.
2. Infrastructure Builder: Entities that lead in laying the technical and policy groundwork for cross-border, cross-sector, cross-industry and/or cross-organization implementation of standards-based digital wallets. Existing organizations, such as government bodies (e.g. the European Union that put out the European Digital Identity Architecture and Reference Framework), industry coalitions, network organizations, large financial institutions, who are already playing an important role in providing digital infrastructure or having trusted relationships with people, are suited to lead infrastructure development. They will need to work with the rest of the players in the market to ensure an infrastructure serves broad needs.
3. Technology/Solution Provider: Entities that provide standards-based technical solutions and tools for implementing digital wallets, whether through open source, software as a service (SaaS), software development kits, or web/native applications. These entities may participate in the infrastructure building process. Some existing technology/solution providers are well positioned to branch out into the wallet space as their clients’ needs expand. We are also going to see many new players emerge to specialize in certain areas of wallet and/or supporting technology.
4. System Integrator: Entities that provide services to integrate standards-based digital wallet technology and solutions into organizations’ existing systems. Existing system integrators are most likely going to play this role by adding new service offerings and capabilities.
5. Wallet Developer: Entities that develop or implement standards-based digital wallets themselves as a service or part of their services (e.g. a banking app with embedded wallet function). Many of the wallet developers will implement existing solutions and tools developed by Technology/Solution Providers rather than build a wallet from scratch by themselves. The wallet development can range from simple things such as white-labeling someone’s wallet to become your own brand to developing a wallet completely from the ground up without leveraging any existing solutions or tools.
6. Wallet Adopter: Entities that use an existing standards-based wallet built and provided by others (not in their own brand) as a component of their channel solution to interact with their customers and improve customer experience. In the world of digital credentials, most issuers and verifiers will be Wallet Adopters, issuing credentials into third-party wallets customers are already using and/or accepting credentials from a particular wallet or set of wallets.

There has been and will still be a battleground for the standard contributors. This certainly matters to everyone wanting a piece of the market but not all of you have to join along — most of you will be standard followers and you will influence standards through making your choices and voicing your implementation experiences. As the small group of standard contributors fight and collaborate their way out, we expect to see a state where a relatively stable set of standards are available for a wide range of use cases. We have already had many of those standards in place and it is time that you figure out your goals and decide on your role(s) accordingly.

What about those not developing, implementing and/or adopting standards-based wallet technology? While they may have a place in the market for now, they won’t be able to survive in the long run if they don’t eventually move towards a standards-based approach. If they don’t even know what standards-based means, they’ve got a lot of homework to do.

Collaborative Wallet Ecosystems Benefit Us All

Some have compared digital wallets to browsers as both need a standardized technical core for interoperability. While these two are in some way comparable, we think the analogy could lead to a misunderstanding of the real challenges for digital wallet development, because the two require very different market dynamics to get to their respective standardized core. The key difference is ecosystem building — the development of a network of entities — some of whom may share some competitive nature in their respective businesses — that come together and interact with each other in a specific relational and transactional environment revolving around digital wallet(s) .

Ecosystem building is extremely important in the wallet world. As elaborated on in an earlier section, wallets will most likely be extensions of existing customer and partner relationships organizations already have. They fundamentally involve multi-party interactions and will be the intersection point between different parties with different sets of needs. Digital wallets enable organizations to serve their customers better by letting them share verified identities and data with other organizations within or across ecosystems through digital wallets. For example, one organization can leverage another organization’s know-your-customer outcome (stored in the customers’ wallet) without having to let the customers go through the same process again. Such business synergy and customer benefits don’t just naturally happen. This makes the role of ecosystem builders critical — they need to be masters of value creation and relationship building — not only do they need to understand and meet the needs of (potential) participants but also surface value from the participants by strategically synthesizing their needs and creating value for all of them. Ecosystem builders won’t be able to do their job well when the market is in a “war mode”.

In addition, the technical landscape of digital wallets is progressing quickly and there are too many variables for every Technology/Solution provider and Wallet Developer to do their own thing. By working in a collaborative ecosystem revolving around real value creation and relationship building, regardless of your specific roles, you can easily find and work with others who are facing similar challenges and have a built-in community to interoperate with — out of the gate.

Ecosystem builders are not a technically-oriented role based on our above-defined categories — if they are not Wallet Developers, they will need to be Wallet Adopters, authorizing use of different wallets within their ecosystems. Many ecosystems, e.g. industry coalitions, network platforms, that already existed before the coming of digital wallets lay a good collaborative foundation for wallet ecosystems, while new ecosystem opportunities emerge as we discover more about what value digital wallets can create. As these collaborations deepen, we are going to see positive outcomes that benefit us all:

Evolve From Closed to Open Ecosystems. Most ecosystems, particularly those in the private sector, are going to start off as closed ecosystems, meaning that their wallets (if they decide to develop their own wallets) are very likely going to work only within their self-managed native group of participants and stakeholders to begin with, and they won’t accept wallets from other ecosystems whether they are technically compatible or not. But as some of the ecosystems grow to a critical mass and validate their value creation model, they will start to open up their ecosystems to others, further expanding value creation through cross-ecosystem collaboration, wallet interoperability and customer choice and reach.

Shape Ongoing Development of Standards and Technology. As ecosystems grow or fail and many become more open, we are going to learn critical lessons about what works, what doesn’t, and what is missing. These real world value creation experiences will help shape standards and technology development that will eventually lead us to a standardized core, or in another way, ‘minimum viable product’ of interoperability.

Focus on Improving User Experiences. No standards-based wallets (other than payment wallets) are in the mass market yet, because the foundational technical components outside the payment space were just recently ready for production. To get standards-based wallets to reach that scale, we need to build ecosystems that offer good user experiences through digital wallets. There is no other way around it, as wallets enable people to live their lives — they are not an end in-and-of-themselves. User experience includes everything from how users install wallets, how they engage with service providers (e.g. credential issuers, merchants), how they are able to manage their data disclosure and audit their data sharing history, how they can exercise various capabilities offered by the wallet, and more. Also, as new technologies, such as selective disclosure and zero knowledge proofs, emerge to help better protect users’ privacy, we also need to figure out how to provide consistent and smooth experiences across wallets around these new functionalities so that users are not scared off or confused.

The battles between different standards continue. Market competition will never go away. But most of us are going to be better off through co-opetition (cooperate and compete at the same time). If you are still in a “war mentality’, we hope we have lifted some tension off you. It is very likely that you are in the position of making digital wallets an opportunity to strengthen your business relationships through collaborative ecosystem building.

Notes:

1. The nine differences between physical and digital wallets named by our interviewees collectively are security, durability, trust, restoration, ease of life and environmental effects, concreteness, use cases, standardization and compatibility, and holder binding. Read our Interview Summary Report to learn more.
2. If you are new to open standards and standard-based technology, our Founding Partner, Kaliya Young, was interviewed for a podcast on this topic, which may help with your understanding.

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About the Author — Identity Woman in Business

Identity Woman in Business is a boutique consulting firm with a global reach. We specialize in the business strategy, standards development, and technical implementation of Decentralized Identity as well as facilitating industry-wide collaborations in the space. We are committed to helping governments, industry organizations and companies of all sizes succeed in developing and investing in the new generation of identity infrastructure.

About the Sponsor — MATTR

MATTR is a global digital trust specialist, providing solutions that enhance information assurance and data privacy while increasing trust and confidence in digital interactions around the world. Its verifiable data platforms, MATTR VII and MATTR Pi, provide general-purpose building blocks and products with pre-built extensions that enable flexible solutions to scale trust across industries.