The next stage of digital banking

The proliferation of smartphones and the growing reliance on mobile technology have created fertile ground for digital wallets and real-time payments, which are undergoing a rapid evolution. This is gradually transforming the banking sector worldwide, particularly in the UK, the US and European countries, driven by growing consumer demand and regulatory changes.

E-wallets, which allow consumers to store, manage and transfer financial assets, offer alternatives for those without access to traditional banking services. Consumers have become accustomed to managing their finances online, whether it’s checking balances, transferring funds or applying for loans. This reflects a fundamental shift in consumer behavior, with convenience and accessibility dominating. In addition, the enhanced security features they offer, such as tokenization—enabling a digital banking system to identify and process transactions without revealing user data—and biometric authentication—using a person’s unique physiological or behavioral characteristics for authentication and security purposes—have helped ease concerns about fraud and identity theft, leading to further adoption of the technology.

There has been a clear trend of younger generations moving to digital wallets for everyday use, particularly in the UK and the US. According to the UK Digital Banking Statistics 2024, the number of digital-only bank account holders is higher among younger generations, with more than half of Generation Z (55 per cent) – the 18 to 26-year-old age group – and half of millennials (50 per cent) having at least one digital-only bank account in 2024. Meanwhile, only one in five Silent Generation and Baby Boomers (21 per cent each) have a digital-only bank account, and a third of Generation X (34 per cent).

Fewer than five Millennials and Generation Z (18%) who do not currently have a digital bank account plan to open one in the future, as do 15% of Generation X.

Digital outshines traditional
According to Forbes Advisor’s 2023 Digital Wallet Study, about 53 percent of U.S. consumers used digital wallets more than traditional payment methods. Gen Z was the most likely to adopt digital wallets as their primary payment method for purchases (91 percent) and travel (86 percent).

The UK has seen significant progress in adopting digital wallets

In the U.S., tech giants like Apple, Google, and PayPal have created cloud-based digital wallets to offer seamless, real-time transaction capabilities. These companies, with their large user bases and access to the latest technology, have made platforms like Apple Pay, Google Pay, and PayPal household names, offering consumers secure and efficient payment solutions both online and in stores.

Similarly, the UK has seen significant progress in digital wallet adoption, supported by a thriving fintech ecosystem and a supportive regulatory environment. Companies like Revolut, Monzo and Wise have disrupted the market with features like instant notifications, budgeting tools and competitive rates for international transfers. This recent wave of innovation can be partly attributed to the UK’s Open Banking initiative, which promotes innovation and competition.
Overall, while there are some similarities in the development of digital wallets and payments between the US and the UK, there are also differences that depend on factors such as regulation, consumer behaviour and market dynamics.

Indeed, in regulatory terms, the UK has always been a more favourable environment for digital payments to thrive, with the Financial Conduct Authority (FCA) playing a significant role in promoting competition and innovation in the financial services sector. In contrast, the US regulatory landscape was more fragmented, with multiple regulators overseeing different aspects of the financial industry, which sometimes hindered innovation.

Accelerated innovation
While the UK is not required to comply with European banking regulations such as the Single Euro Payments Area (SEPA), the Payment Services Directive 2 (PSD2) and the Payment Services Directive 3 (PSD3), these mandates have accelerated innovation and the adoption of digital banking in the UK.

The United States has not experienced the same pace of adoption of new financial capabilities as the UK, in many cases because European banking and payments regulations have not had as much influence abroad. American consumers are increasingly adopting digital banking and payments, and given the expected domestic regulations, this trend is likely to accelerate in the coming years.

In this regard, CEO of global financial technology company Sopra Banking Software, Eric Bierry, said that there is a strong market demand for instant payments in the US in particular, with key players in this space including Zelle, The Clearing House’s RTP network, Visa Direct, Mastercard Send, Venmo, Paypal and Square processing over $900 billion in annual real-time transaction volume. In the UK, on ​​the other hand, while the Faster Payments Service has been driving fast payments in many UK banks for over 15 years, recent proposals aim to make instant payments even safer for consumers as fraud and scams are on the rise.

Alex Reddish, managing director of British fintech firm Tribe Payments, stressed that while the UK and Europe may be approaching digital banking saturation, the evolution of the sector is far from over. “Continued innovation, regulatory change and changing consumer preferences will shape the future of banking in Europe and the UK, ensuring the industry remains dynamic and responsive to future demands,” he argued. Reddish noted that in the US, the world’s largest financial services market, on the other hand, some progress is likely to be much slower, although the market has always shown an ability to adapt quickly and jump through phases, such as contactless payments, which the UK and Europe pioneered.

Partnerships between technology companies, financial institutions and merchants have also played a key role in driving digital wallet adoption. “These collaborations have expanded acceptance networks, raised awareness of the benefits of mobile payments and incentivized consumers with rewards and discounts,” Reddish added.

Safety remains a priority
Looking ahead, both the US and the UK are likely to see continued innovation and growth in the digital payments space. However, despite this progress, challenges remain, particularly in the cybersecurity and regulatory space. According to IBM’s 2023 Data Breach Report, cyberattacks have a disproportionate impact on the financial services sector, which is second only to healthcare in terms of cost per breach.

The US regulatory landscape is more fragmented

Chris McGee, Managing Director of Financial Services at global management and technology consultancy AArete, highlighted that security remains a major concern in both regions, and the need for cybersecurity remains a key trend in digital banking. “Banks are using AI to advance digital banking in several areas, including threat detection. AI can detect fraud and other potential threats faster than ever before, while helping banks comply with increasing regulations. AI will play an increasingly important role in protecting customers’ assets and personal data, and most importantly, in gaining customer trust, especially as customers continue to explore the use of digital wallets to pay for goods and services.”

Similarly, Bierry revealed that one of the biggest challenges banks in the US and UK will face is generative AI. “Banks see clear business value in AI, but they are still concerned about how generative AI tools will impact areas like security and the banking workforce as a whole. Banks will need to spend time not only implementing the AI ​​tools themselves, but also educating teams and consumers about their impact. While banks will certainly face challenges integrating GenAI into their businesses, it also presents them with an incredible opportunity,” he said.

“Regulations will pose another challenge for banks in the US and UK. As requirements evolve and new rules come into effect, banks need to stay on top of their game to ensure compliance. After a string of bank failures last year, regulators are set to introduce several new rules this year aimed at preventing something like this from happening again,” Bierry added.

According to Bierry, this year regulators are likely to focus on policies protecting consumers and their financial data, especially as innovative financial products and services emerge in the era of open banking and artificial intelligence.

Attractive goals
Similarly, Maureen Doyle-Spare, head of asset and wealth management and insurance at UST, a US-based digital transformation solutions company, stressed that security is crucial as digital wallets contain a lot of sensitive financial data, making them a very attractive target for cyberattacks.

“Robust encryption, multi-factor authentication, and vigilant monitoring are essential to protecting user information. Furthermore, interoperability also poses challenges, as seamless compatibility between different digital wallet platforms is key to improving user experience. Furthermore, scalability is a pressing issue, as advanced infrastructure is needed to handle increasing transaction volumes without compromising on speed or reliability,” she said.

Modernizing existing and outdated banking infrastructure is a significant hurdle for banks and fintech firms around the world. Both the US and UK markets are likely to face similar challenges to achieve the full potential of digital banking. In addition to the difficulty of differentiating the market due to the commoditization of digital banking services, neobanks will have to navigate a regulatory framework designed primarily for traditional banks, which can be resource-intensive and slow down innovation.

High customer acquisition costs and low revenue per customer also pose a challenge to profitability.