The Surge of Digital Wallets: How can the Trend Hold?
Verso Finance
Verso tackles an industry-wide distribution challenge that has prevented innovative microfinance and decentralized financial products from reaching cross-border retail customers in the regulated world.
We are currently building a decentralized marketplace that will connect customized financial products to digital wallets. Our ecosystem essentially serves as a market layer connecting licensed financial products to consumers in a decentralized manner. We are applying DeFi to build a bridge between traditional financial services offered by conventional companies (TradFi) and eWallets (custodial & non-custodial).
Our product will work as a blueprint to standardize how financial products should be distributed and settled within the financial service industry to pave the way for mass adoption without skipping the rigid regulation lines.
To make it easy, we can think of Verso as a new product layer for eWallets. As we know, the typical use case for eWallets nowadays is to store money and make payments. What if we could expand the product offering in-app for end customers?
With Verso, we will be able to use our balances to buy microinsurance products, get instant unsecured loans, or even take advantage of the boom of crypto protocols and the new mechanisms of DeFi that allows us to earn passive income with yield generating products. The possibilities are unlimited, and it will depend on innovation in the financial market.
As we saw in a previous post, the growth of Embedded Finance is at an inflection point that requires addressing the underlying challenges for all the ecosystem participants. On this occasion, we will speak in-depth about one of Verso’s most important stakeholders: eWallets.
What are eWallets?
A digital wallet, also known as eWallet, is an electronic device, online service, or software program that allows one party to make electronic transactions with another party (like B2C or P2P), exchanging digital currency units for goods and services. Money can be deposited in the digital wallet before any transactions, or, in other cases, an individual’s bank account can be linked to the digital wallet. Beyond the convenience of the user experience, it represents a safe method as it facilitates the payment operations without sharing the data of the payment instrument used (security).
As we already know, digitalization has experienced an unprecedented boom in the wake of the pandemic. One of the sectors most impacted by this upturn has been digital payments. According to a study by CPA Practice Advisor, there are now over a billion mobile money accounts globally, contributing $2.5 trillion or 37% to the total digital payments value in 2021. With this, consumer ownership of digital wallets is surging.
With the developments in contactless payment processes and new technologies emerging daily, mobile wallets are revolutionizing transactions on a global scale. Less than 30 years ago, the ubiquity of mobile phones was unimaginable, let alone the idea of transferring money using a smartphone. Today, the use of a mobile phone for money transfer is accepted and is becoming the standard. The market is getting crowded, but with notable leaders in respective markets, such as AliPay and WeChat Pay in China, PayTM in India, OVO, ShopeePay, LinkAja, and GoPay in Indonesia, LINE Pay in Japan and Taiwan, or Kakao Pay in South Korea.
We want to emphasize these Asian companies for a reason. In this region of the world, the functionality of this technology goes beyond payments and mere transactions. It is deeply integrated with people’s everyday lives, which translates into the highest adoption rates worldwide.
Kakao is one company from South Korea that started as a chat service before pivoting to peer-to-peer payments, taxi booking services, a rewards platform, and eventually even acquiring a banking license.
Kakao’s user base? A modest half of the Korean population. We are sure that it’s only a matter of time until we see this adoption in the west.
The latest FIS PACE research finds that 32% of US mobile wallet users now have three or more mobile wallets — like Apple Pay, Google Pay, and others — downloaded on their smartphones, up from just 21% a year ago.
Probably nothing.
Custodial vs Non-Custodial Wallets
Verso’s vision is to embed DeFi and other microfinance products into the existing user experience of regulated digital wallets. Having said this, we are aware that the new cryptocurrency networks represent a new P2P paradigm and will shift the way we function as a society largely. Our product development roadmap already addresses developing functionalities around the new non-custodial wallets.
Let’s address the difference between custodial and non-custodial wallets to get a sense of this.
Once you’ve purchased a crypto asset, you must decide whether to use a custodial vs. non-custodial wallet to store your funds.
By its very definition, custodial wallets mean that a third-party is holding onto your crypto private keys for you, and in most cases, it’s the exchange or platform you bought the crypto from. In this case, exchanges like Coinbase or Binance are your custodians. Most if not all eWallets in the traditional world work under this mechanism.
A non-custodial wallet is a type of decentralized wallet, where the user owns their private keys. These keys are held in encrypted storage and users get a mnemonic phrase with which they can access or restore their accounts.
Having private keys means that you have full control over the funds. Sounds good right? You should keep in mind, however, that full control of your assets also means that you are solely responsible for your funds as there is no need to trust a third party and their customer support services.
While a custodial wallet may be considered less secure than a non-custodial wallet, many prefer them because they don’t require as much responsibility and are usually more convenient. However, there’s a counterparty risk involved. If a custodial wallet turned malicious, there is really no way for you to retrieve your funds. While established custodial wallet providers are unlikely to steal your funds directly, they may lock you out of your wallet without notice as well.
The challenge ahead for eWallets
As Finextra states, the shift of the physical world to a more digitized community, boosted by the pandemic, has brought new challenges for the whole fintech industry. As more businesses are becoming digital, the need for speed, convenience, and personalization demanded by consumers grows exponentially. People require a fully digital experience regarding Know-Your-Customer (KYC) processes and onboarding with eWallets.
Financial institutions and mainly wallet providers need to rethink how to increase their range of services to stay relevant to their customers and enhance stickiness. This is easier said than done as custodial wallet providers need to meet strict regulatory requirements and are often restricted in terms of sharing data with third parties and face limitations when opening up their technology for third-party integrations.
Main pain points detected by Verso:
- Integration complexity, given the security standards and regulatory nature.
- Inability to provide adjacent financial products from other financial service providers.
Verso will enable providers to unlock new revenue streams through a suite of constantly evolving add-on products that can dynamically be displayed to their customers, thus enriching their core product.
In the following blogs, we will address the other participants of our ecosystem, microfinance and TradFi, and how they share their challenges when it comes to regulation and profitability. Stay tuned!
Read more
- Regional insurtech Igloo and Verso Finance to enter into a strategic partnership
- Deconstructing Stablecoins: A Bridge to a Decentralized Future
- Bringing Embedded Finance On-Chain with Verso
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