Why Small Businesses Need Mobile Wallets

Why Small Businesses Need Mobile Wallets

By Andrew Steele


Because small businesses have a chance to get a leg up in the mobile wallet game.

By Andrew Steele

The pandemic continues to force us to rethink many of our standard practices — the things we once considered “normal.” That’s especially true for how small- and medium-size businesses interact with customers, and many of these firms are struggling in the face of mixed demand and downward pressure on their margins.

The salt in their wounds? The additional 2.5 percent “tax” they pay for processing transactions with traditional credit cards. In the past, small businesses — especially those in the retail and restaurant sectors — could avoid that extra tax by having customers pay in cash. But COVID-19 has made cash a less-than-likable option. 

The good news is that the pandemic has also shed a brighter light on emerging electronic payment options such as Venmo, PayPal and Square Cash, which collectively comprise what is known as a “mobile wallet.” It’s a trend that promises to not only reshape the future of commerce, but also help small businesses avoid billions of dollars in wasted fees. 

The Payment Evolution

The rise of credit card payments was spearheaded by Diners Club back in the 1950s. While consumers were initially limited to using cards tied to particular merchants and the banks willing to process those payments, it was the introduction of third-party processors that enabled credit card payments to truly scale. 

That innovation not only increased conversion rates for brick-and-mortar merchants, but it also enabled credit cards to power the emergence of e-commerce over the past two decades. Today, some $6.7 trillion worth of transactions are conducted via credit cards in the U.S. alone.

The catch for these businesses, especially smaller merchants, is that the cost of accepting credit card payments has continued to creep up over the years, where most now pay a 2.5 percent or higher fee on every transaction they process — which adds up nearly $60 billion of lost revenue every year.

Better, Faster and Cheaper

Mobile payment options have actually been around since 1999, when PayPal was developed to work seamlessly with the PalmPilot without the need for middlemen in the form of credit cards or banks. But it was technology that was ahead of its time.

It has been the more recent proliferation of low-cost smartphones around the world that has led to the more widespread adoption of mobile wallet alternatives to traditional credit cards.

True mobile wallet applications including Venmo and Square Cash operate outside the traditional credit card infrastructure, which enables them to provide increased speed of processing and lower costs. That distinguishes them from, say, the confusingly named Apple Wallet, which is actually a platform built on top of the traditional credit card system. 

Over the past decade, mobile wallets have become a massive digitizing force for economies around the world — especially in countries where Visa and Mastercard hadn’t yet built out the extensive networks of merchants and consumers like they have in the U.S. 

Consider the example of China, where more than 1 billion people use mobile wallet solutions like WePay or AliPay, or India, which, thanks to a government-backed decision to move away from cash, has seen 100 percent year-over-year growth in digital payments. In Kenya, some 50 percent of the nation’s gross domestic product now moves through M-Pesa — a mobile money platform.  

What’s interesting is that the U.S. lags behind other countries in adopting mobile wallets. That’s because the credit card companies have built strong network effects while incentivizing consumers with rewards points, so we don’t think about who bears the cost.

A Tipping Point

The pandemic has created the kinds of conditions that may push small-business consumers over the tipping point in terms of adopting mobile wallets. If you go to eat at a New York City restaurant, for instance, you won’t find a menu anywhere — everything has gone digital. Consumers now use QR codes to pull up the menu on their phones. It’s not a great leap to take the next step by paying for your meal through your phone as well.

This trend is gaining momentum. In a study of some 2,163 consumers conducted by PYMNTS and commissioned by PayPal, between 34 and 40 percent of survey participants reported that they wouldn’t make a purchase without access to a contactless payment option like a QR code or digital wallet. The results become even more polarizing when viewed generationally. More than 70 percent of Gen Z and millennial respondents said they wouldn’t even shop in a store that didn’t provide contactless payment options.

Thanks to these shifts created by the pandemic, PayPal, the owner of Venmo, may finally be positioned to achieve Peter Thiel’s and Elon Musk’s original vision. The company just reported the strongest quarter in its history: It signed up more than 21 million new accounts in the second quarter of 2020, while daily active accounts have increased 37 percent year-over-year. 

Square has also experienced massive success with its consumer-facing Cash App. Square now has the unique opportunity to “close the loop” by connecting the 30 million consumers using their Cash App with the more than 2 million small businesses using its point-of-sale application.

We also expect that Shopify, which already powers the e-commerce capabilities for more than 1 million small businesses, will soon replicate Square’s model with the launch of their its mobile wallet, Shop App, which already has millions of downloads.

Add in the fact that apps like Uber and Doordash will be rolling out their own embedded payment capabilities among other future developments, and it paints the clear picture that the future of payments will increasingly be fueled by mobile wallets.

Act Now

The lesson here for small-business owners? The mobile wallet trend is one you can’t afford to miss. Not only will your customers soon demand to pay this way if they haven’t already, but you can give your bottom line a boost as well. Now is the time to act — it won’t just reduce your costs, but also improve the customer experience.

Andrew Steele is a member of the investment team at Activant Capital.