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The rapid rise of digital wallets, while offering convenience to millions, is posing significant risks to consumers, the UK’s Financial Services Consumer Panel (FSCP) has told the country’s Financial Conduct Authority (FCA).
In a response to the FCA’s call for information on big tech and digital wallets, the FSCP has expressed concern over the growing influence of digital wallet providers such as Apple Pay and Google Pay.
The FSCP, which acts as an independent advisor to the FCA, said that digital wallet dominance may trigger widespread harm for consumers.
Frictionless payments = frivolous spending?
In its response, the FSCP said that digital wallets ease the impact of paying, allowing consumers to make purchases effortlessly, often without realising the financial impact.
When transactions feel seamless and almost invisible, users are encouraged to overspend without being fully conscious of their spending habits.
The FSCP warned that this form of payment could undermine trust in financial services, creating confusion over liability and money management, and potentially leading to financial missteps.
Digital wallets help ease the pain of paying “by making the act a passive, even involuntary one, rather than a deliberate and active one”, the FSCP cautioned.
It said it is concerned that this frictionless experience encourages consumers to lose sight of their financial commitments, contributing to poor money management and overspending.
Phone thefts
Another of the most direct harms linked to the use of digital wallets is the increase in phone theft, the FSCP said.
"The rise of digital wallets has accompanied a rise in the rates of phone theft — the latter being most immediately and directly harmful to consumers," the FSCP said in its response, pointing out that consumers are not just losing their phones but also their ability to pay, leaving them financially vulnerable.
The panel also noted that although consumers enjoy faster and more convenient transactions, the real benefits are disproportionately reaped by merchants, payment processors and wallet providers.
It said that merchants can sell more products quickly, while wallet providers typically extract fees or monetise consumer data without transparency.
Competition issues
The FSCP also raised concerns about the growing concentration of digital wallet providers and how it may reduce competition within the financial services sector.
The panel warned that digital wallets may soon become as “sticky” as current accounts, making it harder for consumers to switch between providers.
It added that as these technologies become more entrenched, smaller payment service providers may struggle to compete.
"Unchecked, it risks both leaving some consumers underserved (or even excluded) and undermining the sustainability of the underlying payment rails," the FSCP cautioned.
Financial exclusion
The panel also said that as payment firms introduce more services that depend on digital wallets, those without access to smartphones, or with older devices, could be left behind.
It stressed the importance of avoiding discrimination and warned that digital wallets may exacerbate inequality by excluding vulnerable populations from essential financial services.
The FSCP called for urgent regulatory oversight to ensure that digital wallets promote competition and protect consumers, adding that without such intervention, the risks could outweigh the benefits.
It suggested implementing technical standards to ensure portability, security and clear consumer rights across all wallet providers.
"It would seem clear that the current regulatory framework is not effective in regulating what is in effect becoming the means to making a payment," the FSCP concluded, urging regulators to prevent further concentration of power and protect the payment infrastructure.
The world view
Concerns about digital wallets are far from new for financial regulators and, if anything, the FCA was late to the party in its call for information.
For example, in a 2020 address to the Australian parliament, Reserve Bank of Australia governor Dr. Philip Lowe highlighted competition concerns with digital wallets, particularly access to Apple devices' near field communication (NFC) chips, data privacy in Google Pay transactions and Apple's fees to merchants.
In March 2021, the Australian Competition and Consumer Commission’s work on digital platform services raised issues related to Apple and Google’s market power, app marketplace access and self-regulation.
In 2023, meanwhile, the US Consumer Financial Protection Bureau (CFPB) proposed that it should supervise large non-bank companies, including those offering digital wallets and payment which handle more than 5m transactions annually.
This proposal, the CFPB said, was to ensure that such organisations follow the same rules as large banks and other financial institutions under CFPB oversight.
In the EU, regulatory proposals have set up a variety of ways of managing the growth of digital wallets.
For example, the EU’s digital identity framework means that providers will have to host the EU’s certified digital wallet on their platform for EU citizens, and the legislation for a digital euro also requires firms to make it possible for consumers to be able to pay via the future digital euro app.
Meanwhile, the incoming Payment Services Regulation (PSR), which is still being negotiated, states that consumers will need to be able to carry out strong customer authentication (SCA) without a smartphone.
