Financial Services
The impact of digital wallets on traditional retail banking
The future of banking may soon be entirely different from the traditional banking we experience today. By 2026, more than half the world's population will be using digital wallets, transforming how people save, spend, and send money across borders. Digital wallets are undeniably reshaping the retail banking sector, compelling traditional banks to rethink their strategies. As fintech disruption continues to evolve, retail banking institutions must navigate this shift to remain relevant and competitive.
This article explores the impact of fintech disruption and how retail banking institutions can be best positioned to thrive by adopting digital transformation strategies.
How digital wallets are disrupting retail banking
The adoption of digital wallets has introduced both opportunities and challenges for retail banks. Some key areas of disruption include:
Declining cash and card usage
Cash usage has declined significantly in developed markets, and even card payments are losing ground to digital wallets. This trend pressures banks to enhance their digital offerings and reconsider the economics of card issuance, ATM networks, and physical branches.
Interchange fee compression
Digital wallet providers increasingly control transaction flows, reducing the reliance on bank-issued cards. With transactions bypassing traditional card networks, banks face declining interchange fee revenues — a key income stream.
Threat from fintech and big tech companies
The entrance of tech giants into financial services has further intensified competition. By offering compelling financial products, these big players are eroding the traditional role of banks as intermediaries in payment transactions, pushing banks to innovate or risk disintermediation.
Retail banking's response to the digital wallet boom
While digital wallets pose a significant disruption, retail banks are not passive observers. Many financial institutions are embracing digital transformation strategies to stay competitive. Key responses include:
Enhancing mobile banking capabilities
To remain relevant in the mobile payments era, banks are heavily investing in their own digital wallets and mobile banking platforms. Solutions like Zelle, launched by leading U.S. banks, serve as direct competitors to third-party digital wallets, ensuring banks retain control over payment flows and customer relationships.
Strengthening security and trust
Retail banks are strengthening security and trust in digital wallets through advanced technologies. Passkeys provide a safer, password-free authentication method that resists phishing and fraud. AI-powered behavioural biometrics analyse unique user interactions—like swipes and taps — to detect suspicious activity. Step-up authentication adds extra protection for large transactions by requiring card tap approval via banking apps. These innovations enhance security while keeping the user experience smooth and convenient.
Building strategic partnerships
Partnering with fintechs for market infrastructure, generative AI, ESG, and capital markets technology is key to enhancing banks' digital capabilities. As companies seek fintechs for innovative solutions, banks leverage these collaborations to drive digital transformation. Fintechs offer agility, while banks provide global reach, stability, and a vast client base — creating a powerful foundation for impactful partnerships.
Exploring blockchain and CBDCs
Central Bank Digital Currencies (CBDCs) could help people without access to traditional banking use digital payments, serving as a first step toward joining the formal financial system. Built on blockchain or similar technologies, CBDCs offer unique benefits for financial inclusion, such as being a secure, transparent, and widely accepted form of digital money. They can also support offline transactions and may be more affordable and accessible.
Thriving in the digital wallet era: The future of retail Banking
By 2027, digital wallets are projected to account for 61% of eCommerce payments and 46% of in-store purchases globally. As digital wallets continue to redefine the retail banking ecosystem, financial institutions must embrace agility, innovation, and customer-centricity. The future of retail banking will likely be characterised by:
• AI-driven personalisation: Leveraging AI and big data analytics will allow banks to offer hyper-personalised financial services, predictive insights, and targeted recommendations.
• Enhanced financial literacy: Digital wallets will foster greater financial literacy by providing users with real-time spending analysis and tailored recommendations, helping consumers achieve their financial goals.
• Embedded finance and open banking: The rise of open banking frameworks will further blur the lines between traditional banking, fintech, and digital commerce, requiring banks to adopt new business models.
• Enhanced biometric security: As privacy and security remain key concerns, digital wallets are expected to adopt biometric authentication like fingerprint and facial recognition. These technologies offer stronger security while improving user convenience.
• IoT and smart device connectivity: As smart devices become more interconnected, digital wallets may integrate with IoT, enabling seamless payments across wearables, home appliances, and more.
• AR and VR shopping experiences: Digital wallets could incorporate augmented and virtual reality, allowing users to shop and complete transactions in immersive digital environments.
How can Infosys BPM help retail banks navigate the fintech disruption?
Whether enhancing operational efficiency, ensuring data security, or personalising customer experiences, Infosys BPM retail banking offers cutting-edge solutions to help you navigate the evolving challenges in retail banking. By leveraging advanced technologies like Gen AI, RPA, and advanced analytics, we help optimise costs and reduce risks.
