The Payment Systems Regulator (PSR) and the Financial Conduct Authority (FCA) have highlighted concerns about a lack of competition among digital wallet providers.
The regulators noted these concerns after receiving feedback from its Call for Information (CfI), which was requested last July. This CfI invited industry stakeholders to raise worries or points on big tech and digital wallets.
Particular areas of interest were the benefits digital wallets bring to service users, whether any features don’t work as well as they could, their role in unlocking the potential of account-to-account (A2A) payments, and whether digital wallets raise issues of competition, consumer protection, or market integrity.
A joint statement read: “The FCA and PSR are committed to fostering growth and ensuring the UK remains a competitive global economy. Our work on digital wallets plays an important role in maintaining the UK’s position at the forefront of financial innovation, ensuring the UK remains an attractive destination for investment and a leader in the future of payments.”
The benefits
The use of digital wallets has sharply increased in recent years with the proportion of card transactions using a digital wallet rising from 8% in 2019 to 29% in 2023. This popularity is mainly due to the convenience they provide consumers, removing the need to carry a physical card.
Additionally, ease of use is another major advantage. NFC technology means that users simply need to tap their digital wallet against a point-of-sale (POS) terminal, resulting in a smoother and frictionless purchase. Some websites and online stores have also reduced friction by catering for digital wallets.
However, it isn’t only shoppers benefiting from digital wallets but also merchants and card issuers. Faster checkout times mean fewer abandoned online shopping carts and fewer queues in physical stores, while payments initiated using these wallets are usually underpinned by a card transaction therefore increasing the adoption of cards.
A lack of competition
At the moment, Apple and Google dominate the digital wallet space. Until October 2024, Apple restricted access to the NFC chip in UK iPhones and other iOS devices, placing a significant barrier in the way of other digital wallet providers.
While this technology is now available to third-party developers, the PSR and FCA have struggled to find any information on the number of developers, if any, that have entered into commercial contracts with Apple.
This follows a similar trend on Android, with Google Pay not facing significant competition despite NFC technology never being restricted. The regulators believe this is due to Google’s market position as a mobile ecosystem provider.
There is also a lack of competition between payment methods. As mentioned earlier, most retail transactions in the UK are underpinned by card transactions, which are mainly driven by digital wallets only allowing consumers to make card-based payments.
Alternative payment methods have risen in popularity in recent years, particularly in South America, Africa and Asia. The UK has also attempted to encourage competition between payment methods, with the PSR and FCA publishing plans to launch a new independent operator for variable recurring payments.
However, as long as digital wallets are unable to process Open Banking payments both online and at POS, alternative payment adoption will suffer.
Due to these competition concerns and to avoid regulatory duplication, the PSR and the FCA have shared the findings with the Competition and Markets Authority (CMA), which is currently investigating Apple and Google’s respective mobile ecosystems.
“We will continue to embrace digital improvements that benefit consumers. This includes progressing work on Open Banking and contactless payments to boost competition and enhance the UK’s growth and competitiveness. These efforts align with the National Payments Vision of a modern, resilient, and innovative payments landscape that supports the evolving needs of consumers and businesses,” concluded the joint statement.
