19 Aug A brief history of the Digital Wallet and the Digital Ecosystem
Some of you may have heard the term digital wallet. But what exactly is a digital wallet and where did it come from. And how did this lead to the creation of digital Ecosystems?
A digital wallet is precisely what it sounds like. A wallet containing digital money. This money can be used to exchange goods and services with people, so long as they are within the same ecosystem. A digital ecosystem, like any ecosystem, is made up of unique self-sustaining elements that interact with one another. Advanced ecosystems tend to have suppliers and retailers all able to trade with one another without having to interact with the main financial system.
The History of the Digital Wallet
One of the best and earliest examples of a digital wallet provider was PayPal. The company saw a clear requirement to handle some of the front-end processing of transactions. By this, we mean the customer-facing end. Ultimately PayTech, Digital wallet and Ecosystems tap into the existing payment systems but then aim to try and keep funds within that ecosystems. They also take on a major role in areas such as onboarding and KYC or Know Your Customer. Effectively they believe that as a technology provider, they can create a more focused and customer-friendly experience.
Once a customer has transferred funds to their wallet, they are then able to transfer to other wallets using simple identity methods such as an email address or phone number rather than a having to have complex account numbers, swift codes and International Identifiers. The system does, however, require both users to have wallets within the same ecosystem and still requires funds to be onboarded in and out via the traditional ACH banking system. The idea is to build on the existing system better efficiencies rather than trying to change the system entirely. Which let’s be honest, is a mammoth task.
As I stated before, PayPal was the first to push the envelope on this task well, but it has started to be replicated in technologies such as PAYM or ‘pay my contacts’ which we see in the UK. Here you can transfer between bank wallets using a telephone number from your contacts in your mobile phone.
PayPal’s: Digital Wallet
We can see that once both the user and the receiver have a PayPal account; they can easily transfer funds to one another.
*Source: Michigan University
The problem with PayPal’s business model is that it didn’t really encourage people to keep their funds within the ecosystem. They simply transacted and then immediately transferred funds out. You could not buy real-world goods either through the system and ultimately people still relied on cash and cards in the real world and had to ‘offload’ funds out of the ecosystem.
Alipay’s Digital Ecosystem
It was the Chinese company Alipay that decided to build on this payments ecosystem concept by adding an Interest-bearing Money market account. A simple partnership with a banking provider made all the difference.
Additionally, they teamed up with Ant Financial to extend the range of services and offerings for customers which included Investment products, Lending and Insurance. This all meant that there were fewer reasons to leave the ecosystem and more reasons to stay. The diagram below, from Michigan State University, details the AliPay Ecosystem.
*Source: Michigan University
AliPay also has been forward-thinking in the problem of handling ‘Offline’ transactions. This meant that retailer and customer could now effectively trade when they did not have access to the internet by using the simple Q-code system. This system also no longer required expensive hardware and card terminals and instead required to have codes physically available.
In the emerging marks such as Africa, this system will allow even more people to be integrated into the banking and payments system than ever before. Yes, the smartphone is required, but the process certainly opens up more doors than it closes.
*Source: Michigan university
The Banko digital ecosystem
Building on the concept of ecosystems but now advancing them into the new ‘digital era’, is the core philosophy of Banko. More than Banking, Banko intends to become the first banking one-stop-shop platform in Africa to help financial institutions underpin their main drivers of growth.
Banko enables financial institutions to access funding to manage liquidity and capital issues as well as government and risk management frameworks in line with international standards. In addition, it has a BaaS platform that connects then directly to FinTech’s, thus accelerating their digital transformation at less cost.
BANKO takes the idea of an ecosystem and plans to allow this model to transcend the whole of Africa. Imagine an ecosystem built on the very best of modern technology that could allow remittance on a global scale with other ecosystem partners and where the products and services were from global market leaders. Insurance, investments, blockchain, payments, lending, credit ratings all under one ecosystem. That is the ambition of Banko.
Integrating existing Banks/Payment providers under one ecosystem
Rather than creating an entirely ‘new ecosystem’, Banko intends instead to unite Africans and African businesses by bringing existing entities and client banks into a ‘super hub’ and in essence magnifying the benefits that smaller ecosystems create.
Investing in Africa is a long-term commitment that requires resilience, specialized knowledge and expertise to navigate the risk complexity that usually surrounds fast-emerging economies. Access to capital and liquidity, dysfunctional governance and risk management as well as lack of trusted and credible advisers and partners, have become the major innovation and growth constraints for financial institutions in Africa. The industry keeps falling short on the promise of financial inclusion of individuals and business as 66% of the continent’s population is still listed as unbanked, according to the World Bank.
Today there is not a single solution that allows these financial institutions, in the foreseeable future, to remain profitable with capital requirements, driving down costs and yet having the ability to develop new products to meet the next frontier of customer needs.
With the continent set to double its population in the next 20 to 30 years and become the largest and youngest workforce on the planet, it is critical to build and create tools that allow the new generations of Africans to become the author of their own narrative. This is the goal of Banko, to provide those tools.
No narrative about the history of ecosystems would be complete without touching upon the importance and potential of social ecosystems. WeChat is possibly one of the best examples. The easiest way to think of WeChat’s origins is as a combination of WhatsApp and Facebook.
What they ingeniously did was to create ‘lucky money’ as a form of reward and gift that was often given via ‘red packets’ or digital envelopes at important times like the Lunar New Year. These packets were then passed onto other people and became the basis of a new payment’s ecosystem (*Source: Michigan University)
In many ways, the social networks of today are perfect conduits for starting and expanding on digital ecosystems. In reverse, digital financial ecosystems can also become social networks…. Just think Bloomberg.
*Source: Michigan University
The Future of the Digital Wallet and Ecosystem.
Ultimately the future of the payments rail will be depending on the future of the needs of customers. Sometimes you build solutions to a specific need and other times you build a solution that customers are not even aware they need and then make sure they can’t live without it. Just like Steve Jobs did with the iPod or Satoshi Nakamoto undertook with Blockchain. Blockchain and DLT will be the cornerstone of the new internet, of that I am certain.
The idea of the social ecosystem also needs to take a new focus. The best business are those that attract the customer at a young age and harness their loyalty. This is how the old banking model used to work and worked effectively. I still think there is room for this concept, but target audiences are different. For example, I believe that the Gaming industry, the largest sector in the world, will be at the forefront of the next banking revolution. Anyone serious about attracting good quality customers, should also make this sector a core focus.
I firmly believe that the future of the digital ecosystem in Africa will be a blockchain-based ecosystem, where social and payments rails interloop and where you can make a payment or even an investment as easily as you can send a message or post a photo. Integration with the existing ACH money/banking systems will also be seamless. And the best way to capture your audience is to harness the power of existing organizations and develop instead their technology to build a super ecosystem. And I know that this model will flourish in the Continent of Africa.
A Final Word regarding the Pandemic and the Effect on Digitalisation
In todays world, no discussion will be relevant without touching on current events unfolding. The fact is we have two elements at play here. A Recessionary period and a Pandemic. The former usually has some positive impact on technological advancements, and the latter in this case, should in theory expedite that factor.
What we will see again this time around, as in 2008, is a strangle on funding for some smaller starts ups and FinTech businesses as there is always a tightening of credit. What we will see, due to Covid, is larger incumbent organisations such as Banks and Telcos that are in the space, actually accelerate their digital initiatives. So in summary stage one of this next business cycle, will be good for banks and telcos and not so great for FinTechs trying to capture a market share.
This is where Banko will flourish as it provides solutions for both the larger incumbents and also finance for the smaller growth stage businesses. But ultimately no matter what business you are in, you either Digitalise or Die.