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Driving Value with Digital Wallets and In-Network Payments

In this journal, we take a closer look at stored-value digital wallets, including how some major companies are already using them successfully and how they can help unlock cash flow, increase customer retention, and improve margins for companies with established customer bases.

Koji Murase Product

Fintech business models that once found success have been upended in recent months. Lending and card-based business models aren’t as profitable, thanks to interest rates and competition in card payments. This means that software companies can no longer rely on the playbook of simply embedding a payment processing or BNPL capability into their product.

In this environment, one embedded payments model remains a winner: stored-value digital wallets. Digital wallets, like the successful Starbucks Card, allow end consumers to load in-app balances directly via bank transfers and to spend or transfer those balances without leaving an app. We’ve seen many examples of how this model can unlock cash flow, customer retention, and improved margins for companies with established customer bases.

The Upside

Digital wallets as a payment mechanism have major advantages:

  • Companies can reduce transaction costs by circumventing card networks and allowing users to make direct bank transfers into wallets.
  • In this interest rate environment, companies can find upfront cash flow because end users load digital wallets in advance of spending.
  • End users can make instant transfers and purchases in-app—doing so for free or even earning rewards—improving customer experience and loyalty.
  • Companies get control and visibility over transactions because all purchases happen in-network.

It’s no surprise, then, that many companies are exploring models that incorporate closed-loop payments or digital wallets. Some examples include:

  • The Starbucks Card, which allows customers to load funds directly into their Starbucks mobile app and pay for mobile orders.
  • The Target Red Card, which enables users to make bank payments directly through Target’s app and terminals.
  • Procore Pay, an embedded payments solution letting contractors and other construction companies transact within the app.
  • ClassPass credits, which users can subscribe to earn and spend on studio experiences.
  • Splitwise Pay, a digital wallet that allows users to split expenses and transfer funds to each other.

Components of a Digital Wallet

To implement a digital wallet, companies typically require programmatic bank payments and reliable subledgers.

Companies can work with a bank to power the payments bringing funds in and out of the network. The banking partner should be able to hold funds and support high transaction volumes. It’s also critical that reliable programmatic payments and payment operations workflows be part of the banking integration.

Companies also require a fast, easy-to-launch, and reliable ledgering system to subledger user funds. Holding onto cash brings advantages, but it also places the responsibility on the company to protect and account for these funds. A reliable ledgering system is essential, particularly for public companies or those aspiring to go public.

How Modern Treasury Can Help

In-network payments and stored value wallets provide a way for established companies to generate cash flow while delivering value to their users.

By leveraging an out-of-the-box ledger and bank payment system like Modern Treasury, companies can launch such digital wallets efficiently and securely without reinventing the wheel. Our platform enables seamless initiation and reconciliation of payments through your banking partner, and automates those transactions to a subledgering system. If you’re interested in learning more, reach out to us.

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