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Digital payment transactions have grown rapidly in emerging markets during the past two years, as the pandemic accelerated shifts to contactless payments and e-commerce.1“Digital payments” include e-wallet transactions, instant bank transfers, digital bill payments, online card payments, and other forms of noncash payments made by and to businesses, individuals, and governments. “Emerging markets” refers to markets in emerging Asian countries, Africa, and Latin America. E-wallets proliferated, real-time account-to-account transfers took off, and industry players formed new partnerships to access capabilities and broaden their customer base. Some of the fastest growth in digital payments occurred in Africa and Southeast Asia, where low banking penetration gives payments providers opportunities to capture untapped potential and reach underserved populations.
Along with new opportunities, banks, telecom companies, and fintechs have experienced intensified competition. Banks maintain a leading position in payments in most countries, but nonbanks own the dominant front-end payment application in some emerging markets, including India, Kenya, the Philippines, and Vietnam.
This article addresses the remarkable opportunities and competitive pressures of the fast-growing emerging markets. We explore which digital payments models are best placed to gain momentum in these markets, which monetization paths payments providers are likely to pursue, and what innovations may lie on the horizon.
Digital payments continue to increase
Globally, between 2018 and 2021, the number of noncash retail payment transactions have increased at a compound annual growth rate of 13 percent; while in emerging markets, that figure is 25 percent. Some of the fastest growth occurred in emerging markets in Africa (Morocco, Nigeria, and South Africa) and Asia. Strong growth is expected to continue in some emerging markets over the next few years, with projected CAGRs of 15 percent between 2021 and 2026.
Four major trends have driven the growth in digital payments. First, the pandemic accelerated the shift from cash to contactless digital payments that was already under way among consumers. Second, e-commerce continued to grow and evolve, with global volumes increasing by 25 percent between 2019 and 2020 and expected to grow by 12 to 15 percent a year to 2025.2McKinsey analysis based on data from Euromonitor and company filings; 25 percent growth rate derived by comparing the six months ending October 31, 2019, with the six months ending October 31, 2020. Third, government pushes for cashless payments to facilitate interoperability, plug tax leakages, and ensure the effective distribution of aid accelerated the take-up of new digital payment systems such as Wave in Côte d’Ivoire, UPI in India, and Pix in Brazil. Finally, investors’ appetite for digital payments grew, leading to a proliferation of payments-focused fintechs. In Africa, for instance, these firms accounted for about 40 percent of the $5.2 billion in tech start-up capital in 2021.3Startup Deals Database, Africa: The Big Deal, August 24, 2022.
Despite this explosion in digital retail payments, cash remains king in some markets. In Africa, it was used in 95 percent of transactions in 2021, according to McKinsey’s Global Payments Map. Cash is distributed via extensive networks of retail agents: for instance. M-Pesa has more than 600,000 agents across seven African countries,4Kevin Namunwa, “51 million customers, 600K agents and more; M-Pesa celebrates 15 years,” CIO Africa, March 7, 2022. and MTN has more than 970,000 across the continent.5MTN Group annual report, December 31, 2021. These agents help less digitally savvy customers make bill payments, buy airtime, access cash from their wallets, and conduct other transactions. Cash is still the top in-person point-of-sale (POS) payment method in Southeast Asian markets, including Thailand (where it accounts for 63 percent of POS transaction value), Vietnam (54 percent), Indonesia (51 percent), and the Philippines (48 percent).6The global payments report, Worldpay, 2022. In Latin America, where credit and debit cards are more established, cash accounts for 36 percent of POS transaction value.7The global payments report, Worldpay, 2022.
Banks and third-party wallets compete for share
In most emerging markets, the main contest for providing digital payments is between banks, with their mobile banking apps and wallets, and third-party mobile wallets owned by telecom companies, e-commerce platforms, and other ecosystem participants. Which side comes out ahead is likely to vary by country and depends to a large extent on market structure (Exhibit 1).
Markets where banks lead
The emerging markets where banks are the strongest, such as Brazil and Nigeria, tend to have a solid payments infrastructure and a captive customer base stemming from historical first-mover advantage or regulatory restrictions on alternative rails. Banks also retain a leading position in markets where financial inclusion and card penetration are low and regulatory regimes have not permitted nonbanks to offer wallets to underserved populations.
In some markets with well-established banking infrastructure, governments have intervened to set up unified payment systems that offer instant bank transfers free or for a small charge. In the two years since its launch, Brazil’s Pix has reached 122 million customers (equivalent to more than half of the population), more than 775 registered participants (including banks, government agencies, and other institutions), and some two billion transactions a month.8Data as of August 2022 from Banco Central do Brasil. In India, UPI has attracted more than 300 registered banks, close to 260 million users, and almost six billion transactions a month.9Anand Parthasarathy, “Made in India payment system is a runaway success that 10 nations are trying out,” Swarajya, July 15, 2022.
Banks in emerging markets may also want to take note of the strategies followed by their counterparts in developed markets such as Singapore and Hong Kong. Some banks are launching their own wallets, such as DBS PayLah! by DBS in Singapore. Others offer a wallet-like user experience on their mobile banking app and enable customers to complete transactions by scanning a quick response (QR) code or using a near-field communication (NFC) device. Yet others are partnering with Apple Pay, Samsung Pay, and Google Pay to ensure they keep the balances of customers’ checking and savings accounts even if they miss out on the last mile of payments.
Some of these developed-market banks are now extending their digital wallets into emerging markets. For example, DBS recently announced a partnership with Nets and UnionPay International to make PayLah! available in 45 markets, including Malaysia and Thailand.10Bryan Ng, “Shoppers can use PayLah! in Malaysia, Thailand, 43 other places abroad after DBS tie-up with Nets and China’s UnionPay,” TODAY (Singapore), June 21, 2022.
Markets where nonbank wallets are ahead
Nonbank wallets tend to do best in markets with less developed payments infrastructure and where telecom companies and other providers face no regulatory barriers in creating strong value propositions to reach underserved customers. In Kenya and Ghana, for instance, telecom companies’ first-mover advantage and innovative efforts to extend financial services to mass markets via mobile wallets have resulted in very high penetration levels.
Wallets are the leading e-commerce payment method in the Philippines (accounting for 31 percent of transaction value), Vietnam (25 percent), and Indonesia (39 percent), and they take second place in Thailand after bank transfers.11The global payments report, 2022. Some wallets have achieved very high penetration levels in these markets. In the Philippines, for example, the registered users of the top two wallets, GCash and Maya, account for 83 and 65 percent of adults, respectively.12Lisbet Esmael, “GCash tops 60M users despite rival’s digital bank license,” CNN Philippines, May 24, 2022. Such successes can partly be ascribed to the digital know-your-customer (KYC) processes that enable wallets to offer customers a quick and easy onboarding experience. However, as regulatory regimes are simplified and banks are allowed to offer a fully digital KYC process instead of requiring new customers to visit a branch, this advantage will be eroded. Moreover, banks will benefit from the introduction of new QR standards—such as QRIS in Indonesia and QRPh in the Philippines—that are forcing wallets to open up their proprietary QR networks to bank apps.
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An evolving landscape
Meanwhile, banks are using easy instant payments (for instance, those offered by Pix in Brazil) and more user-friendly apps to encroach on territory previously carved out by wallets. Wallets have high adoption; more than 70 percent of the respondents to a recent survey13McKinsey Brazil Payments Survey, December 2021, n = 4,023. said they use digital wallets, with an average of three different wallets each. However, frequency of use and volumes transacted remain stubbornly low. In Brazil, half of the respondents to a McKinsey payments survey said they spent no more than 300 reais ($56) a month through their digital wallets.14McKinsey Brazil Payments Survey, December 2021, n = 4,023. Despite heavy investment in rewards to acquire customers, wallet providers apparently have yet to create a value proposition strong enough to significantly change usage levels.
Meanwhile, banks and wallets are shaping a variety of partnerships to access capabilities, enhance their value proposition, and extend their geographic reach. In Africa, for instance, M-Pesa has partnered with KCB and NCBA to offer overdraft and microloan products, while the Tanzanian mobile remittance provider NALA has partnered with Equity Bank to gain access to the Kenyan market.15“Tanzanian App, NALA, Partners with Equity Bank Kenya for Remittance Transfers,” BitKe, July 25, 2022, bitcoinke.io.
Successful wallets will be part of ecosystems
Wallets are more embedded in customers’ daily lives when they are part of ecosystems. This enables them to grow by extending into e-commerce, ride hailing, food delivery, messaging, travel, and other adjacent categories. For instance, prominent ride-hailing players in Southeast Asia, such as Grab and Gojek, are looking to capitalize on their high-frequency use and rich customer data by extending into groceries and other categories with larger ticket sizes. Players with higher ticket sizes but lower frequency of use, including e-commerce platforms Jumia in Africa and Shopee in Southeast Asia, are pushing in the opposite direction, seeking to boost user engagement through gamification and other approaches.
In Africa, M-Pesa morphed from a mobile money service into an ecosystem by forming partnerships to create a super app with seamlessly integrated mini apps in e-commerce, travel, health, agriculture, and other categories. User engagement and monthly revenue per user have risen, with more than a million monthly active users since the launch of the super app in 2021.16See “Driven by purpose: 15 years of M-Pesa’s evolution,” McKinsey & Company, June 29, 2022. In Latin America, Rappi—a Colombia-based, on-demand delivery service with more than 30 million users and a presence in more than 100 cities in nine countries—has expanded its super app into offerings such as e-commerce, insurance, and loyalty points.
Wallets that are not part of an ecosystem involving e-commerce, social media, or ride hailing will find it tougher to succeed, since capturing customer mindshare is difficult when use cases are limited (Exhibit 2). Exceptions can be found, however, in markets where wallets have a significant first-mover advantage, such as MoMo in Vietnam.
Profitability remains a challenge in digital payments
Margins for digital payments providers are already wafer thin and are likely to be eroded further by competitive intensity and declining fees. In many cases, payments are more a means to cross-sell other products than a profit center in their own right. Some services, such as peer-to-peer (P2P) payments, are usually offered to users for free in most markets. In Brazil, for instance, Pix is pushing margins down by offering P2P payments for free and person-to-merchant (P2M) payments at low cost. One of the few providers charging for P2P payments is M-Pesa, but it is coming under increasing pressure to reduce its charges, especially after adjusting its fee structure as part of pandemic-relief efforts.17“M-Pesa tariff reduction,” press release, Safaricom, December 2020.
Not only do digital payments providers face squeezed margins, they also incur high acquisition and engagement costs because of the constant promotions needed to attract new customers and encourage more frequent use among the existing base. In addition, the cost of cash remains a challenge for wallets, though it is starting to come down as banking penetration improves. Globally, the majority of mobile wallets continue to post losses. However, they are exploring monetization paths to create profitable income streams and introducing innovative new features to broaden and deepen their customer base.
The 2022 McKinsey Global Payments Report
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Wallets are exploring several monetization paths
To create profitable income streams, wallets are entering other payment arenas, such as bill payment, merchant services, and remittances. They are offering a more comprehensive range of financial services, including investment and wealth management, lending, and insurance. And they are providing lifestyle services, including transport, e-commerce, and food delivery to become a one-stop shop for consumers (Exhibit 3).18“Mobile wallets: Southeast Asia’s new digital life hack,” McKinsey & Company, May 25, 2022.
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Extended payments. In extended payments, wallets are offering a range of services, including merchant services such as universal payments acceptance, business digitization, loyalty programs, inventory management, and reconciliation. For example, MoMo offers merchants a set of tools to improve discoverability, access a voucher marketplace, and integrate loyalty programs.
Financial services. Wallets’ offerings span several types of financial services:
- Investment and wealth management services include micro investments for mass and upper-mass markets, money-market funds, and linked high-interest bank accounts with easy onboarding. In the Philippines, for instance, GCash partnered with CIMB Bank to launch GSave, which allows users to open a savings account from inside the GCash app without an initial deposit or maintaining a balance. Launched in 2018, GSave had a reported 5.3 million digital deposit account holders by May 2022.19Darwin G. Amojelar, “GCash reports 5.3-million digital savings base,” Manila Standard, May 20, 2022. In 2019, GCash launched GInvest to offer users opportunities to invest in money-market funds and listed unit investment trust funds (UITFs) for a very low initial investment. By 2022, it reported having more than a million registered accounts, a 7 percent share of domestic UITFs, and 77 percent of UITF accounts.20Paul John Caña, “Investments for as low as P50: GCash democratizes investing with GInvest,” Esquire, April 8, 2021; “Financial services are experiencing massive adoption in the Philippines through GCash,” press release, GCash, September 28, 2021; “Mobile wallets,” May 25, 2022.
- Lending can take place through partnerships or by using the wallet’s own balance sheet. In Indonesia, OVO has bought a P2P license to overcome its lack of a lending license. In Africa, M-Pesa has taken advantage of its large subscriber base to pursue partnerships with banks to offer microlending and overdraft facilities. Wave, a wallet focused on Francophone West Africa, has recently received a regional e-money license that will enable it to extend its product portfolio by offering credit through partners.
- Insurance offerings include travel, health, personal accident, and other forms of coverage. In Brazil, for instance, PicPay has launched customizable insurance to protect users from unauthorized Pix transactions, money transfers, and purchases made using cards registered in users’ e-wallets.21“Brazil’s PicPay expands financial services with digital wallet insurance,” Latin America Business Stories, March 28, 2022.
As wallets extend their offerings into a wider range of payment solutions and financial services, some of them are transitioning into digital banks, a trend most advanced in Asia. In the Philippines, the recently launched Maya app integrates Maya Bank’s digital savings, credit, and other banking services with PayMaya’s wallet and other cryptocurrency, micro-investment, and insurance offerings. In India, Paytm obtained a bank license from RBI and transitioned into Paytm Payments Bank. Though becoming a bank subjects wallets to higher capital requirements and greater regulatory oversight, it also allows them to monetize their surplus balances and offer their customers a broad suite of lending products.
Consumer lifestyle services. Wallets are also expanding into consumer lifestyle services in areas such as transport, e-commerce, entertainment, travel, and discount vouchers. In addition, they provide data services that enable mini-app providers to personalize their advertising. Being part of a super app gives these mini-app players access to an extensive customer base in return for a share of the revenues generated.
Some wallets are generating large income streams from distributor licenses for prepaid phone airtime or vouchers for video games and other services. After its launch in 2014, MoMo’s mobile wallet gained most of its early revenues through airtime top-ups, having partnered with every telecommunications network in Vietnam. These relationships have since expanded to allow MoMo users to buy movie tickets, airline tickets, and online-gaming credit.22“How a fintech outgrew banks in the mobile wallet market in Vietnam,” Asian Banker, September 12, 2018.
In the future, some emerging-market wallets may wish to take advantage of their payment rails and credit-scoring systems by offering a platform-as-a-service solution, as global remittance player Wise has done with its Wise Platform. This would allow wallets to monetize their underlying technology and contribute to the development of other payments ecosystems.
Innovative features are being introduced to add more value for customers
From our conversations with industry leaders and experts and our work with payments providers globally, we have identified innovative features and functions that wallets are introducing to create added value. The following are a few examples:
- Green initiatives. Some wallets address customer and societal desire for action on environmental sustainability and climate change by supporting eco-friendly initiatives. For example, G-Forest offers GCash users green energy points for using cashless services or accessing their health app via GCash. By accumulating points, users can plant a virtual tree, which GCash matches by planting a real one. GCash reported that by January 2022, the scheme had attracted nine million registered users and “virtually planted” a million trees.23Richmond Mercurio, “GCash users plant milestone 1 million virtual trees in GForest,” Philippine Star, March 19, 2022. Some global apps are starting to include carbon-tracking features. ING, for example, is working with fintech Cogo to allow customers to measure the carbon footprint of their expenditures.24“ING trials carbon tracking app from Cogo,” Finextra, August 4, 2022. As consumers in emerging markets become more sensitive to sustainability issues, more wallets are likely to offer environmental features like these.
- Loyalty programs and rewards for meeting personal goals. To drive customer adoption and use, wallets offer loyalty programs or reward customers for meeting their own goals. For instance, users of the Toss app in Vietnam can set targets for the number of steps they will take each day. Those who hit their daily target receive loyalty points they can redeem for discounts.
- Products with social features. In China, WeChat and Alipay have extended the tradition of giving red packets of cash for Lunar New Year by offering a digital equivalent. Launched in 2014, the service grew to more than 800 million users by 2018. Similarly, MoMo’s “lucky money” program enables users to exchange digital gifts and win rewards redeemable at partner stores.
Meanwhile, some wallets are pursuing innovations in cross-border transfers, which have remained costly and slow. In Africa, Chipper Cash has targeted specific remittance corridors; other players, such as MFS Africa, are looking to take advantage of intracontinental switches. Still others are using blockchain applications to reduce fees, as seen in Flutterwave’s partnership with the Stellar network to power corridors between Africa and the European Union.
Digital payment services have become an attractive and dynamic feature of the payments landscape in emerging countries. In particular, some new fintechs providing payment solutions have been able to grow rapidly during an era of cheap funding. But in the absence of a clear path to profitability, they may lose out to banks and other incumbent payments providers over time unless they can build a successful ecosystem around their core business. In a tighter funding environment, new entrants would be well advised to give careful consideration to market structures, monetization paths, and opportunities for innovation before venturing in with offerings of their own.
Reet Chaudhuri is a partner in McKinsey’s Singapore office, Carolyne Gathinji is an associate partner in the Nairobi office, Gustavo Tayar is a partner in the São Paulo office, and Evan Williams is an associate partner in the Sydney office.
The authors wish to thank Krutika Dharmadhikary, Mohammed Ismaili, Nuno Madeira, Blessing Omene, and Priyanka Ralhan for their contributions to this article.
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