B2B payments: Are digital wallets for business here to stay?

Digital wallets have been popular in the consumer world for some time, enabling shopping online (e.g., PayPal), instant money transfer (e.g., Venmo) and payment at retail (e.g., Apple Pay). The aim is to store your credit and debit card numbers in the cloud and access them from your phone or laptop.

Over the last year, there has been a huge investment by the payments community to create digital wallets for business customers. PayPal, of course, has been in this space for some time. But emerging B2B payment companies see wallets as a revenue opportunity. When money goes into a wallet, there may be additional foreign exchange (FX) conversions and transfers to customer-owned bank accounts.

But the first thing to be aware of is that digital wallets are not the equivalent of a bank account in the eyes of regulators. That means they cannot bear interest, and the balance is not eligible for FDIC insurance. Digital wallets are really non-interest, non-insured storage accounts. Remember, these funds were once deposited into bank accounts. If any of these vendors storing your deposits failed, they are not covered by FDIC or equivalent deposit insurance. It is important for businesses to ask how funds stored in a wallet are protected.

Storing and moving money via wallets requires a license, and each country or region has different requirements. The U.S. federal government does not manage the licensing process for e-money businesses — individual state governments do. Digital wallet solution providers will need to hold a license, have insurance and have some agreed capital as part of that license. It’s also important for companies to understand what happens to their wallet funds if something goes wrong with the solution provider.

Business digital wallets certainly have applications and opportunities that can be segmented. Some examples include:

  • Small businesses that want to collect funds overseas to avoid bank fees and provide a way for their buyers to remit funds locally, say by ACH or SEPA. The business then can hold funds in the event they had local payment issues in the currency of trade or convert back to their home currency and, at the same time, push the funds to their house bank.
  • Subscription companies offering SaaS solutions entering new markets that can charge local customers local currency.
  • Merchants PSPs looking to extend their card offering by enabling their merchants to accept funds overseas using bank transfers in addition to cards.
  • Independent contractors and sole proprietors who get paid in one currency and then have bills or payments in another.
  • E-commerce companies that sell internationally.
  • Platforms like Shopify that allow their online merchants to hold balances from online sales in a wallet to pay bills.

Many B2B payment vendors have launched their own digital wallets. Just a few examples include:

  • Currencycloud’s product, called Spark, is an automated wallet to pay and receive money that their FX broker and fintech customers embed in their apps. See our Currencycloud PRO Vendor Analysis here.
  • OFX can transfer money to over 190 countries in 55 different currencies.
  • Payoneer has local currency accounts in USD, EUR, GBP, JPY, AUD, CAD and MXN.
  • Veem allows companies the option to store funds (USD) into a secure wallet and choose when they want to convert to their bank account, or they can use those funds to send payment. See our Veem PRO Vendor Analysis here.

Questions to ask vendors

In the B2B world, digital wallets are still in their early days, relatively. Vendors are continuing to prioritize the development of wallet-to-wallet communication infrastructure.

  • How are funds stored in a wallet protected? Digital wallets hold currency but are not a bank, or regulated like one. They don’t have the benefit of deposit insurance, count toward compensating balances, nor are they investable. It’s important to understand the license your provider has, and how wallet balances are protected in case of failure.
  • What are the transfer costs out of a wallet, both for same currency and to convert to local currency? Some vendors have started charging 0.5% for same currency bank transfers because they weren’t making enough money on the FX.
  • What additional product features do you plan to offer with wallet funds? Cash management, investments, payroll financing, FX, etc.

Digital wallets offer a cheaper, faster and transparent way to collect funds overseas than the use of wires.

Wallets could be used for intercompany payments if companies decided to use a digital wallet strategy to move money to legal entities as opposed to a virtual account structure — but beware that there are tax and other issues to be conscious of. (Read more here: Are intercompany payments the next frontier for B2B payments?)

Given the limitations of digital wallets to date, businesses will still want their money in bank accounts. But there are specific applications, and it has been a huge investment area on the part of B2B payment companies.

I know of several vendors developing capabilities here, so a space to further watch.

David Gustin runs Global Business Intelligence, a research and advisory practice focused on the intersection of payments, trade finance, trade credit and working capital. He can be reached at dgustin (at) globalbanking.com.

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